Introduction

Goods and Services Tax (GST) is the biggest indirect tax reform since the independence of India. GST, which is brought by the Government with the moto of ‘One Nation One Market One Tax’ is perceived with idea of seamless flow of credit to the ultimate consumption State. GST has consolidated number of indirect taxes into one tax, thereby removing duplicity of taxes on the same value of transaction and with further object of removing the cascading effect in the form of tax on tax.

In the present article, we have discussed the implications of GST on Works Contract.

Works Contract – Pre-GST

‘Works Contract’, the name is enough to have all kinds of litigation coming to one’s mind right from whether the transaction is works contract or not, till determining the value of material or service portion in a contract or determining whether it is an inter-state works contract or intra state works contract or determining the correct tax rate for works contract. Under GST, the biggest single change in works contract is that the entire works contract has been deemed to be a supply of service. Before we discuss further about the implications on works contract under GST, let us discuss in brief, the works contract scenario under the Pre-GST regime.

Under the Pre-GST regime, works contract was not separately defined. Clause (b) of Article 366(29A) of the Constitution of India deemed a tax on transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract to be a tax on sale or purchase of goods. The Courts on a number of occasions had judicially defined the term works contract as a contract which involves supply of material and labour and the property in material passes during the execution of contract. Thus, the States were empowered to levy VAT on value of material and the Centre was levying service tax on value of service in a Works Contract. The irony was that, if a dealer did not derive the value of material and labour involved in a works contract on actual basis, then both VAT and Service Tax were being levied on overlapping value of works contract resulting in levy of tax on up to 140% of the value of works contract. This led to cascading of taxes and ultimate increase in price to the customers.

Works Contract under the GST Regime

Works Contract under the Post-GST regime has been simplified. The Government has practically tried to remove the litigation under works contract, right from classification of a contract as a works contract to computing the value of material and labour and ending with rate of tax in case of works contract.

Meaning and Scope

“Works Contract” has been defined under section 2(119) of the CGST Act, 2017 as under:

“Works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer or property in goods (whether as goods or in some other form) is involved in the execution of such contract;”

For simplicity, any contract in relation to immovable property which involves supply of material and supply of service will be classified as a works contract. The language in definition is not very happy. However, the implications are that the work done for creating immovable property or in relating to immovable property will be works contract. It may so happen that, some works like, fitting out of furniture, may be movable by itself, but such work will be works contract as the definition is to be applied as per the specific instances given in the definition.

Though we presume that the interpretation of above definition will be simple and will not involve litigation, the issue cannot be considered to be so simple. There may be disputes about nature of contract, i.e., whether it is works contract or other then works contract.

Recently the Maharashtra Advance Ruling Authority has to deal with one such issue about installation of parking system in building in case of Precision Automotion and Robotics India Ltd. (GST-ARA-39/2017-18B-46 dated 13-6-2018). It is held to be works contract. In fact the argument from the revenue side was that such system is composite contract.

In the above AR the facts about actual work as mentioned in AR were as under:

“3. The Company is engaged in the business of design, manufacturing, procurement, erection and installation of various types of car parking system. Supply and installation of car parking system involves several components, out of which certain components are manufactured by the Company and remaining are bought out items. The Company undertakes the activity qua the following types of car parking systems;

• Stacker type parking system;

• Puzzle type parking system;

• Multi- level parking system;

– RCC type tower car parking system;

– Structure type tower car parking system;

– Level type parking system;

– CART type parking system;

– Stacker type parking system;

– Chess type parking system.”

After examining case laws and facts, learned AAR observed as under:

“The principles when seen in the light of the facts of the present case help us see thus-

• The impugned car parking system, be it installed on a vacant plot of land or in a building, does not result into supply as chattel. In fact, before installation, there can be no goods as such which could be called a ‘car parking system’.

• The system requires substantial work to be done at the site to be called as ‘car parking system’.

• Once made operational the ‘car parking system’ obtains a state of permanency. It is not such as can be easily removed from the existing place and put into place at some other location.

• The definition of ‘works contract’ under the GST Act is in relation to immovable property.

• We have already elaborately explained our opinion as to the facts at pages 6 and 7 order.

In view thereof, we are of the considered opinion that the transaction of supply and installation of a ‘car parking system’ would qualify as immovable property and thereby ‘works contract’ as defined in Section 2(119) of the CGST Act.”

Thus, the nature of transactions are to be decided considering the facts and the above definition. The work should either result in immovable property itself or it should be falling into instances mentioned in definition like fitting out, improvement etc. in relation to immovable property.

Thus, there will be transactions where caution will be required to be taken before classifying the transaction as works contract.

Contract for movable property

The next question which comes for consideration is whether any contract for movable property, which involves supply of material and labour, would be included in works contract. The answer is “no”. However, the said contract will qualify as a composite supply as defined under section 2(3) of CGST Act or a deemed supply of service as per entry 3 in Schedule II of CGST Act. The said entry reads as under:

“3. Treatment or process

Any treatment or process which is applied to another person’s goods is a supply of services.”

Under GST regime “works contract” has been deemed to be a supply of service. Thus any works contract in relation to an immovable property will attract the rate of tax applicable for supply of service.

With regard to Works Contract in relation to movable property, if it is any treatment or process which is applied to another person’s goods then it is again deemed to be a supply of service and rate of tax applicable to supply of service will be applicable.

Example: A mechanic carries out a treatment or process on a machinery of another person for repairs and painting. Such supply by the mechanic is deemed to be a supply of service. The entire consideration charged by the mechanic will be considered towards supply of service irrespective of the amount of goods involved in the supply.

Where a works contract does not relate to any treatment or a process as explained above, then the said works contract shall qualify as composite supply. A composite supply shall be classified as per principal supply comprised in such composite supply.

Example: A car manufacturing company contracts a design firm for designing a new car as well as manufacturing a prototype. The contract involves both supply of service of designing a car and supply of goods in the form of prototype car. Both the supplies are naturally bundled and are under one composite contract. However, here the principal supply would be of designing the car and hence the entire contract would be classifiable as supply of service.

Rate of Tax for a Works Contract

In case of works contract for immovable property, the Government has prescribed three rate structures as under:

• Notification No. 11/2017 Central Taxes (Rate) dated 28-6-2017provides for rate of CGST for Supply of Services. The said Notification has been amended from time-to-time.

• Initially there was only one rate of 18% GST for all kinds of Works Contracts covered under Section 2(119).

However, subsequently, various amendments have been made and the rate structure is broadly classifiable under two rate slabs: 12% and 18% respectively. Indicative rate schedule can be mentioned as under:

Entry 3 of Notification No.11/2017	Type of Works Contract	Rate of Tax (CGST + SGST)
Clause (ii)	Composite supply of works contract as defined in Section 2(119) of CGST Act, 2017.	9
Clause (iii)	Works Contract as defined in Section 2(119) supplied to Government, a local authority or a Governmental authority for road, bridge, tunnel etc.	6
Clause (iv)	Works Contract as defined in Section 2(119) supplied for a) road, bridge, tunnel, or terminal… b) a pollution control or effluent treatment plant, except located as a part of a factory… c) a structure meant for funeral, burial or cremation of deceased d) A civil structure for rehabilitation under the various schemes.	6
Clause (v)	Works Contract as defined in Section 2(119) supplied for: a) railways, including monorail and metro; b) a single residential unit otherwise than as a part of a residential complex; c) low-cost houses up to a carpet area of 60 square metres in Affordable Housing Projects. d) post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes; e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages.	6
Clause (vi)	Other Works contracts for Government other than for use for commerce, industry etc.	6
Clause (vii)	Predominant Earth work contract for Government.	2.5
Clause (viii)	Offshore works contracts.	6
Clause (ix)	Works Contract Service as defined in Section 2(119) provided by sub-contractor to the main contractor providing service to Works Contract Service as defined in Section 2(119) provided by sub-contractor to the main contractor providing services specified in (iii) or (vi) to the Government or Local Authority or Government Entity	6
Clause (x)	Works Contract Service as defined in Section 2(119) provided by sub-contractor to the main contractor providing services specified in (vii) to the Government or Local Authority or Government Entity	2.5
Clause (xi)	Housekeeping, like plumbing	2.5
Clause (xii)	Other contracts	9

(Please refer to full notification for correct position)

Valuation

GST shall be levied on transaction value which is the price paid or payable between two unrelated parties and price is the sole consideration. Works Contract would also be valued at the transaction value where transaction is between unrelated parties and price is the sole consideration.

Under Construction Flats/Premises

‘Sale of under Construction flats/premises’ is deemed to be service as per entry 5(b) in Schedule II which is reproduced below:

“5. Supply of services

The following shall be treated as supply of service, namely:—

(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Explanation.—For the purposes of this clause —

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in 
case of non-requirement of such certificate from such authority, from any of the following, namely:

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure.”

Therefore, the sale of such flat will amount to service and not works contract. 
However practically it is works contract and in rate schedule also they are referred to as Works Contract.

In respect of the sale of such under-construction flats, where the underlying land or undivided share in the land is also transferred along with supply of goods and services, the value of works contract shall be two third of the agreement value including the land value. Prior to notifying the rate of tax, the Government had proposed to levy 12% rate of tax on sale of under-construction flats including the land value with no refund of overflow ITC. This had led to several representations being made from the construction industry to exclude land value from agreement value for the purpose of levy of GST. Though the Government has now excluded the land value at a fixed percentage of 33.33% (land abatement), but simultaneously increased the rate of tax from 12% to 18%. Thus, effectively there may not be any change in the calculations even after the notified land abatement.

Further, under the pre-GST regime, the land value deduction was allowed on actual basis taking the Ready Reckoner Rate for Stamp Duty as the basis for calculating the land value. Under the GST regime, the land abatement has been given at a fixed rate with no option to claim the deduction as per the actual land component in an agreement. This may be completely disadvantageous to developers in metro cities where the land value in an agreement can be as high as 60% – 80% of the agreement value. Further, in a broader sense, this may also mean that GST is being levied on sale of land despite specifically excluding the same from either Supply of Goods or Supply of Service.

The Ministry of Finance vide a press release dated 15th June 2017 had clarified that the developers are eligible for full ITC which was not available in Pre-GST period. Hence the said benefit shall be passed on to the customer to avoid any action under the Anti-profiteering provisions. However, the said clarification is vague in the sense it has not given any example, as to how can there be profiteering in cases were GST is now being levied even on the land value and low rated goods are liable to GST at a higher rate under works contract. However there is now order from Anti-Profiteering Authority in case of Pyramid Infratech Pvt. Ltd., Haryana (2018-VIL-06-NAA dt.18-9-2018), where in order is made to pass on transitional ITC to customers. Thus the situation is to be seen with relation to the sufficiency of data generated to avoid Anti-Profiteering Provision.

Expansion of Scope of Works Contract

Another important thing to understand under GST is that there were many kinds of works contract transactions which were not liable to VAT in pre-GST era for the sole reason that the consideration for such works contract was in kind, e.g., FSI, TDR, Development rights etc. In post GST regime, even these kind of works contract would be liable for GST. The value shall be arrived as per the valuation rules which is the open market value. For example, the redevelopment of old building will be liable to GST even when reconstructed flats are allotted to existing flat owners. The value shall be arrived at as per the open market value of such flats allotted free of cost.

Place of Supply

The place of supply is relevant to identify whether a transaction is intra-state supply or inter-state supply. In case of works contract for immovable property, the place of supply is governed by the specific rule which is location of the immovable property itself. If the location of the supplier and the place of supply are within same states, it will qualify as intra state supply and liable for CGST + SGST. On the other hand if the location of the supplier and the place of supply are in different states, it will qualify as inter-state supply and liable for IGST.

In case of treatment or process of goods belonging to other person, it will be governed by the general rule for place of supply of service i.e., the place of supply shall be the location of recipient of service.

Time of Supply

Time of supply means the point in time when goods/services are deemed to be supplied and accordingly tax needs to be discharged in that month. Once works contract is deemed to be supply of service, all the provisions for determining the time of supply for a service shall be applicable for works contract.

It is also relevant to note that works contract is one such service which majority of times will extend beyond a period of three months. Thus works contract service which is provided for more than three months under contract will fall under the category of continuous supply of service.

Time of supply for service of works contract (both continuous and non-continuous) service can be explained as under:

(A) Non-continuous supply of works contract service.

Situation	Time of Supply
(1) Invoice is issued in time	Earliest of the following, namely:- • Date of invoice • Date of payment receipt
(2) Invoice is not issued in time	Earliest of the following, namely:- • Date of completion of service • Date of payment receipt
(3) Sr. No. 1 & 2 not applicable	Date of receipt of services in receiver’s books of account

The time limit for issuing invoice in case of supply of non-continuous service is 30 days.

(B) Continuous supply of works contract service.

Situation	Time of Supply
(1) Date of payment ascertainable from contract	Due date of payment by the receiver, irrespective of date of invoice and payment receipt.
(2) Date of payment not ascertainable from contract	Earliest of the following, namely:- • Date of invoice • Date of payment receipt
(3) Payment linked to completion of event (milestone payments)	Time of completion of each milestone

The above provisions of time of supply will be equally applicable to any treatment or a process on the goods of other which is deemed to be a supply of service.

Input Tax Credit

The Input Tax Credit (ITC) under GST regime is available on all inputs and input services use in furtherance or course of business subject to certain conditions and restrictions.

In case of works contract, the works contractor shall be entitled to take ITC on all inputs and input service used in supplying the works contract service. For a business entity, the works contract service received for construction of immovable property shall not be available as ITC unless it is used for plant and machinery or for further supply of works contract service.

Conclusion

The issue of Works contract has somewhat become more simple for understanding. However till certain boundary line cases will arise where deciding nature of transaction will be 
necessary. It is expected that the taxation of works contract will be smooth as compared to earlier regime.

[Source : Article printed in Paper Book of National Tax Conference, Thane, held on 6th & 7th October, 2018