The Centre sought to levy the service tax on the services/labour involved in works contracts under the Finance Act 1994, by introducing section 65(105) (zzzza).
While both the enactments simultaneously taxed different aspects of works contract, there was definite overlapping as both had independent provisions and rules to determine the turnover and taxable turnover. This happened despite the Constitution Bench judgment of Godfrey Philips (139 STC 537 (SC)). Some of the writs are still pending before various Courts (for example Software – whether service or sale is still to be decided).
Prior to 1-7-2012, the taxable service under works contract service was defined in section 65(105)(zzzza). This definition excluded levy of tax on works contract in respect of road, airport, railways, transport terminals, dams. It excluded repairs and maintenance in respect of goods. Broadly the service tax was restricted to limited types of contract namely
a. Works contract for carrying out erection, commissioning or installation.
b. Works contract for commercial or industrial construction
c. Works contract for construction of complex
d. Works contracts for turnkey projects including engineering procurement and construction or commissioning project.
The definition of works contract in section 65B (54), of Finance Act 1994 reads as follows
“Works contract means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property for carrying out any other similar activity or part thereof in relation to such property.”
Both the service tax provision and the State Vat provision had their own rules for determining the value of service in various types of works contracts and for determining value of goods transferred in execution of works contract respectively.
Admittedly, there was no common rule pointing out that in a works contract of (for example) ₹ 1 lakh, if the value of goods is determined as ₹ 60 thousand under VAT Act, then the value of service for the purpose of service tax enactment should be accepted as ₹ 40 thousand only. The definitions of Works Contract under the Central Sales Tax Act and under the Finance Act 1994 were also different. Thus there was an unintentional overlapping of taxation which is sought to be remedied by the GST regime.
2. Works Contract – Under the Goods and Services Tax regime
Under GST, the levy is on supply of goods or services or both. The concept of transfer property in goods is given a go by.
Section 2(119) defines “works contract” to mean a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration on commissioning of any immovable property wherein the transfer of property in goods (whether as goods or in some other forms) is involved in execution of such contract.
The intention of the legislature which is abundantly clear from the above definition is that the works contract under the GST should mean only the contracts in relation to immovable property. The question therefore would be how would the contract involving supply and services both in relation to movable property be taxed under the GST regime. To understand this, we must refer to the definition of composite supply of section 2(30). This definition reads as follows:
“Composite supply means a supply made by a taxable person to a recipient consisting of 2 or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is principal supply.
Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.
The word composite supply should not be confused with mixed supply. Section 2(74) defines mixed supply as follows:
“Mixed Supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
Illustration: A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.”
The contracts involving supply of goods and services in relation to movable property would also fall in the definition of composite contracts.
The important aspects of composite supply are:
a) supply should be by a taxable person
b) to a recipient
c) two or more taxable supplies of goods or services or both
d) which are naturally bundled and
e) supplied in conjunction to each another
f) in the course of business
g) one of which is principal supply.
Each and every aspect is related to each other–each to be present in a transaction simultaneously. First (a) and (b) indicate presence of two parties. (c) and (d) indicate existence of two or more goods or services which are naturally bundled. The presence of “and” suggests presence of simultaneous conditions. Such supply should be in the course of business and of the two or more supply of goods or services or, one should be a principal supply. Whether supply is principal supply or not can be determined from the nature of transactions and circumstances of the case.
3. Construction Contracts – Deemed Service
In the Construction Contracts, the Builders and Developers find special place, be it litigation or relief. Schedule II of CGST Act of 2017 may please be referred to. Schedule II lists down certain transactions which will be deemed to be supply of goods or services. Clause 5 refers to the transactions of supply which would be deemed to be supply of services. In terms of clause 5(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 up to its first occupation, whichever is earlier. The expression competent authority is defined to include a registered architect, registered chartered engineer or a licensed surveyor of the respective local body of the city or the town etc.
Again clause 6(a) which refers to composite supply states that following composite supplies shall be treated as supply of services namely “Works contracts as defined in section 2(119)”.
Thus, the works contract under section 2(119) is a deemed service contract for the purpose of GST. The provision also confirms that although, clause 6(a) of Schedule II includes the contracts described in clause 5(b), the purpose of carving out clause 5(b) is to give separate treatment to building construction contract vis-à-vis other contracts relating to immovable property.
Clause 3 of this schedule (schedule II) under the title, treatment or process, refers to any treatment or process which is applied to another person’s goods as a supply of services. Thus the works contract involving supply of goods or services can be a contract of process or treatment on other’s property, say dyeing of cloth, painting of car, would be considered as falling in this type. Repairs of motor car – would it be a treatment or composite contract? The primary object is to repair the car, some supply of spares may be incidental. It is possible to argue that it’s a treatment to car. However the distinction gains importance if the tax liability differs in two types of contracts.
4. Treatment to incidental contracts
Under the MVAT Act the taxation of construction contract was governed by a notification where only specific types of construction contracts were included. This notification at the end specified that any contract incidental or ancillary to the construction contract defined in the said notification would also be a construction contract provided such contracts are awarded and commenced before the completion of the main contract. Thus, electrification, painting, interior, plumbing, fittings etc., were also treated as construction contracts if they were awarded and commenced before the completion of the main contract. Under the GST regime, the definition itself makes it abundantly clear that any contract in relation to immovable property would be a works contract. It necessarily follows that such incidental or ancillary contracts would also be a works contract falling under section 2(119). The better part of the GST regime is that such incidental contracts need not be before the completion of the original contracts. Therefore, the existing buildings renovation, improvement, modification, repairs etc., like plumbing, painting, restructuring would also be a works contract for immovable property. The inclusion of the word “fitting out” in the definition of works contract also implies that the contract like fixing of windows, window grills or erection of glass curtain walls would be a construction contract in relation to immovable property. Such contract can be in relation to old /existing property or new property.
5. What is immovable property
Hon’ble Bombay High Court had an occasion to decide the issue in the case of Permasteelisa India Ltd. (91 VST 129) (Bom.), as to whether fixing up a glass curtain walls would constitute a construction contract. Unfortunately, the Hon’ble Bombay High Court ruled against the applicant and held that such contract would not constitute contracts for construction of buildings. On facts, on the basis of the contract the High Court ruled that the transaction of the applicant comprises of design, fabrication, supply and installation of structural glazing works (curtain walls). These are typically designed and assembled aluminium frames filled with glass. The process involves fabrication and assembling of specially designed extruded powder coated aluminium sections into the frames, on which the glazed panels are bounded. These activities are done in the factories of the applicant and after transporting the same to the worksite they are erected on the buildings. The High Court refused to accept the alternative argument that the contract would get covered by the phrase incidental or ancillary activity to the construction of the buildings. This judgment would no more be applicable under the GST regime as any contract for construction, fabrication, installation, fitting out, improvement, modification etc., would cover installation of the glass walls to the immovable property.
Some area of doubt may be there or a second view is possible since the definition under section 2(119) refers to the contracts for any immovable property. To overcome this it would be ideal to define the contract in proper context as contract in relation to immovable property.
Another aspect which needs consideration is whether transfer of flats to the existing tenants, would amount to supply under GST Act? The definition of supply includes barter, however what about consideration? Section 2(31) includes monetary value for any act or forbearance. In case of transfer of flats to existing tenants, what the builder or developer is giving is something he is entitled to under the law as a matter of right and therefore should not be taxed under GST. Such transfer will not fall under Schedule 1. Thus in my opinion, such transfer of flat in lieu of surrendering the tenanted premises will be out of GST levy. One more point supporting my view is different treatment given under stamp duty. I am sure, the future litigation would be for such types of transaction.
If a tenant wishes to have additional place, qua that additional place value, the existence of works contract cannot be denied.
The expression “Plant and Machinery” as per section 17, for the purpose of chapter V (ITC) and chapter VI (Registration) means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes— (i) land, building or any other civil structures;
(ii) Telecommunication towers; and (iii) Pipelines laid outside the factory premises.
The exclusion of pipeline outside the factory for the purpose of ITC is logical but for determining whether the contract is for immovable property, the true test would be practical application. The case laws governing what is immovable property would be applicable. Admittedly plant and machinery is treated as immovable property since it is not possible to move the entire plant and machinery as such. Moving or removing installed plant or machinery would involve damage to the property. It is possible that some of the items recovered after disintegration may be useful; however that would not alter the nature of the transaction as that being immovable. The famous case of Sirpur Paper Mills Ltd (JT-1997(10)-SC-82) often relied on by the Sales Tax authorities, is further distinguished by the Apex Court in the case of Duncan Industries Ltd. (JT-1999(9)-SC-421) where Supreme Court on facts held the plant & machinery to be immovable. Therefore whether a transaction is for immovable property or not is always a question of facts than of law. The Larger Bench of Supreme Court in a recent case of Voltas Limited (80 VST 12 (SC)) held that works contract for fabrication and installation of Water Chilling Plant at customer’s factory would fall under the description of ‘fabrication & installation of plant & machinery’ and not under the description of ‘installation of air conditioner and AC cooler’. The Supreme Court observed that any endeavour to drag the works contract in the framework of ‘installation of air conditioner and AC cooler’ would be repugnant to the basic interpretation of the statute and subordinate legislations. To exclude the work of fabrication from the works contract under the work order would render works contract truncated to a form not intended by the customer.
The case of Sirpur Paper Mills is further distinguished in the case of Triveni Engineering (120 ELT 273 (SC)) & Mittal Engineering (88 ELT 622 (SC)). In case of Triveni Engineering the Apex Court observes whether an article is permanently fastened to anything attached to the earth requires determination of both – the intention as well as the factum of fastening to anything attached to the Earth – The Supreme Court held that installation or erection of Turbo Alternator on the platform constructed on land would be immovable property and as such it cannot be excisable goods.
Elecon Engineering Company Limited decision by CEGAT New Delhi (107 ELT 337) was perhaps the first one after the Sirpur Paper Mills to distinguish the SC decision on facts. It was held that coal handling plant was a large assembly of machinery building structure spread over a vast area comprising of variety of machineries including switchgear, cables and transformers etc. The photograph confirmed that it cannot be bought or sold in the market. The Tribunal observed that there are civil structures to support the machinery spread over several hectares of land. It was not a case of merely attaching the machine to earth for vibration-free functioning (as in case of Sirpur Paper Mills). The plant was thus held as immovable property.
In case of TTG Industries Ltd. (167 ELT 501 (SC)) the Apex Court held that the drilling machines and mud guns are not equipment which are usually shifted from one place to another. Once they are erected and assembled they continue to operate from where they are positioned till such time as they are worn out or discarded. They really become components of the Plant & Machinery. Having regard to the manner in which these machines are erected and installed upon concrete structures, they do not answer the description of excisable goods.
The Bombay High Court’s judgment in case of Commissioner of Sales Tax v. Steel Plant Pvt. Ltd. (99 STC 532) is short but useful to determine the nature of transaction. In this case the construction of a slaughter house was held as contract for installation and erection of plant.
One may find few decisions in favour of the Revenue as well. However, the true test would be as observed by the Supreme Court in the cases cited above. The draftsman’s skill in drafting a contract would play a major role .
As for construction of building – immovable property the ultimate test, as settled by now is issuance of occupation certificate. There can be instances where the occupation certificate is received just before the introduction of GST, but payments are still to be received. Whether there would be a liability under GST? In my opinion on the day of introduction of GST, the construction contract was complete and for the payment to be received by the developer, (for the constructions where O.C is received prior to 1-7-2017), there is no liability to pay GST. This is despite clause 5(b) of schedule II, where it states that entire consideration should be received after receipt of OC. The last paragraph of K. Raheja is reconfirmed by the Larger Bench of Apex Court in L&T-(65 VST 1). This judgment is applicable under GST too. The reason is GST Act is not retroactive. If the property is such where OC is received as on 1-7-2017, no GST can be levied for any payment to be received later on.
Nonetheless, the rest of the works contract in relation to movable property would be a composite supply or supply for processor treatment. Be it tyre-retreading, car repairs, machine repairs, interior designing involving transfer of property in goods.
6. What is the taxable event for the Works Contract – Time of supply
Let us go to the provisions relating to time of supply of service. Section 13(2) of the CGST Act lays down the various possibilities as follows:
|Time of Supply of Services – Section 13
|Description of Event
|Time of Supply
|Normal Case – Thumb rule
|Earlier of the following:
1. Date of Issue of Invoice (if Invoice issued within 30 days of supply of services)
2. Date of Receipt of Payment or Date of Provision of Service (if Invoice not issued within 30 days)
3. The date on which recipient shows receipt of service in his book
|Liability under Reverse Charge basis
|1. Date of payment entered into books of account of Recipients or payment debited in bank account
2. Date Immediately following 60 days from date of Issue of Invoice or any other documents
|In any other case
|Date of receipt of service in the books of account of the Recipient
The works contract in relation to immovable property would also include construction of properties which need not be buildings, for example plant and machinery. One can refer to the case laws in relation to immovable property under the sales tax or excise laws to determine whether the contract is for movable or immovable property. The test is the contract must result into immovable property or should be for immovable property.
The works contracts of immovable property are normally completed over months or may be years. There is a specific provision for continuous supply of goods and continuous supply of services.
Section 2(33) reads as follows
“Continuous supply of services” means a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such services as the Government may, subject to such conditions, as it may, by notification, specify.
The construction contract would be per se continuous supply because the contract normally continues over a period of time, at least for more than 3 months and there is normally condition to make periodic payment.
The time of supply provision that is section 13(2) refers to the period prescribed under section 31(2) for raising of invoice. Section 31(2) makes it mandatory for the registered person supplying taxable service to issue a tax invoice before or after the service but within a prescribed period. The time prescribed for raising of invoice in terms of Rule 47 is 30 days from the date of supply of service. Therefore, all the contracts of immovable property should ideally fix the time for raising the invoice. For example, in the contract for sale of under-construction flats, one would normally find the stages at which the payment has to be made by the buyer of the flat like completion of first slab, second slab, etc. therefore, no sooner as the work of the first slab is completed and is certified as completed by the architect the developer must send a notice to the persons from whom he has to recover the instalments.
Rule 31(5) reads as follows
“Subject to the provisions of clause (d) of sub-section (3), in case of continuous supply of services,–– (a) where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the due date of payment; (b) where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at the time when the supplier of service receives the payment; (c) where the payment is linked to the completion of an event, the invoice shall be issued on or before the date of completion of that event”.
The above provision makes it clear that it would be wise to define the due date of payment in the contract to avoid any litigation.
In case of the composite supply of goods and services, the time of supply is determined in terms of section 13. Normally, the contracts which are not in relation to immovable property are completed within 3 months and therefore such contract would fit in section 13(2). However, there may be contracts of repair of heavy machinery where the goods are sent for repairs and the repairs takes more than
3 months. In that case, such contract would also be continuous supply of service. However, an area of doubt can be whether such contract can be stated to be provided continuously or on a recurrent basis under a contract. Normally, in case of repair contracts the time period is not fixed. There is no provision for periodic payment obligations. Section 2(33) also refers to the notifications by the Central Government.
7. Rate of tax
|Chapter, Section or Heading
|Description of Service
|Heading 9954 (Construc-tion services)
|(i) 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. (Provisions of paragraph 2 of this notification shall apply for valuation of this service)
|(ii) Composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017.
|(iii) Construction services other than (i) and (ii) above.*
|“*” this is substituted as follows
|This notification is further amended on 22-8-2017. In the said notification, in the Table,- (i) against serial number 3, for item (iii) in column (3) and the entries relating thereto in columns (3), (4) and (5), the following shall be substituted, namely:-
|*“(iii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied to the Government, a local authority or a Governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, – (a) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); (b) canal, dam or other irrigation works; (c) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal.
|(iv) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and 6 – 2 Services Tax Act, 2017, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, – (a) a road, bridge, tunnel, or terminal for road transportation for use by general public; (b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awas Yojana; (c) a civil structure or any other original works pertaining to the “In-situ rehabilitation of existing slum dwellers using land as a resource through private participation” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers; (d) a civil structure or any other original works pertaining to the “Beneficiary led individual house construction/enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana; (e) a pollution control or effluent treatment plant, except located as a part of a factory; or (f) a structure meant for funeral, burial or cremation of deceased
|(v) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to,- (a) railways, excluding 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 per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India; (d) low cost houses up to a carpet area of 60 square metres per house in a housing project approved 6 – 3 by the competent authority under – (1) the “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana; (2) any housing scheme of a State Government; (e) post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes; or (f) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages
|(vi) Construction services other than (i), (ii), (iii), (iv) and (v) above.
Thus in less than one month of introduction of GST, there is partial roll back qua certain types of contract, of course they are all Government contracts.
There are two entries in Notification 12/2017 dt. 28th June, 2017, which exempts some of the services for immovable property. They are as follows.
|Chapter, Section or Heading
|Description of Service
|Services provided by way of pure labour contracts of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works pertaining to the beneficiary-led individual house construction or enhancement under the Housing for All (Urban) Mission or Pradhan Mantri As was Yojna.
|Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise that as a part of a residential complex.
Notification 11/17 – Central Tax (Rate) dated 28th June, 2017 notifies different types of services. Some of the services in relation to movable properties are described in this Notification. Here also in the Notification No. 20/17 there is some amendment as far as the printing services are concerned. If the paper for printing is supplied by the employer then such printing of newspapers or books, journals or periodicals would be subject to 5% GST. But if the paper is not supplied by the publisher but only the content is supplied by the publisher, in that case the rate of tax will be 12%.
Under the Heading 9989 other manufacturing services; publishing, printing and reproduction of services, material recovery services, other than one subject to 12% to be liable to 18% GST.
Therefore, in general except where specifically provided the GST for providing movable service – works contract in relation to movable property would be liable to 18%.
8. Valuation of works contract
The consideration under section 2(31) refers to the monetary value/transaction value. The purpose of valuation of construction contract one must refer to Note 2 given under Notification 11/17 – Central Tax (Rate) dated 28th June, 2017 providing deduction of land cost recovery as follows:
“2. In case of supply of service specified in column (3) of the entry at item (i) against Serial No. 3 of the Table above, involving transfer of property in land or undivided share of land, as the case may be, the value of supply of service and goods portion in such supply shall be equivalent to the total amount charged for such supply less the value of land or undivided share of land, as the case may be, and the value of land or undivided share of land, as the case may be, in such supply shall be deemed to be one-third of the total amount charged for such supply. Explanation – For the purposes of paragraph 2, “total amount” means the sum total of, – (a) consideration charged for aforesaid service; and (b) amount charged for transfer of land or undivided share of land, as the case may be.”
Thus clear 33.33% deduction is allowed towards cost of land. This is deeming price. No scope for proving actual land cost. This probably explains the enhancement of rate from the promised rate of 12% to 18%. This note needs corresponding amendment after amendment to this entry on 22-8-2017.
As the construction contract would be composite contract of services, the rate as prescribed and amended hereinabove would apply. We would come little later on about the transitional position. As regards the works contract in relation to these notified services in Notification 11/17, rate as prescribed would apply subject to conditions, if any, specified therein. As the contracts in relation to movable properties would be a composite supply in terms of section 8(A), a composite supply comprising two or more supplies, one of which is principal supply, shall be treated as supply of such principal supply. For example, in case of repair of a car, the same should fall under maintenance repair and installation service (except construction services at Sr. No. 25 under Heading 9987).
9. Concept of naturally bundled
It would be interesting to discuss as to what is the concept of “Naturally bundled”. Only one recent judgment by Advance Ruling Authority New Delhi would be sufficient to understand what is meant by ‘naturally bundled’. One of the classic examples to understand ‘composite supply’ is given in the definition itself (reproduced hereinabove).
In the case of Godaddy India Website Pvt Ltd. the Authority for Advance Ruling (AAR) (Central Excise, Customs and Service Act) gave an elaborate ruling on 4th March, 2016 (Ruling No. AAR/ST/08/2016). The applicant wish to enter into service agreement with Godaddy.com.llc (Godaddy US) located in Arizona, USA. It proposed to provide a gamut of services to its client Godaddy USA like marketing and promotion services (direct marketing, branding activities, offline marketing), supervision of quality of third party customer care services, payment processing services, etc.
The question before the AAR was whether various support services proposed to be provided by the applicant to Godaddy USA are a bundle of services being ‘naturally bundled’ in the ordinary course of business and accordingly in a single service, being business support service. The AAR referred to section 66F of the Finance Act, 1994, which refers to principle of interpretation of specified description of services or bundled services.
“SECTION 66F. Principles of interpretation of specified descriptions of services or bundled services. — (1) Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service.
‘Illustration The services by the Reserve Bank of India, being the main service within the meaning of 12 clause (b) of section 66D, does not include any agency service provided or agreed to be provided by any bank to the Reserve Bank of India. Such agency service, being input service, used by the Reserve Bank of India for providing the main service, for which the consideration by way of fee or commission or any other amount is received by the agent bank, does not get excluded from the levy of service tax by virtue of inclusion of the main service in clause (b) of the negative list in section 66D and hence, such service is leviable to service tax.
(2) Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.
(3) Subject to the provisions of sub-section (2), the taxability of a bundled service shall be determined in the following manner, namely :— (a) if various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character; (b) if various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of service tax. Explanation.— For the purposes of sub-section (3), the expression “bundled service” means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services.”
The AAR held that various support services proposed to be provided by the applicant to Godaddy USA are a bundle of services being naturally bundled in the ordinary course of business and accordingly a single service. This was based on the submission of the applicant that the main service by the appellant was business support service and processing payments and oversight of services of third party call centres are ancillary and incidental to the provision of main services. It is thus always a question of documentation which can assist the taxable person to find as to what is the main activity in the naturally bundled services or which is the principal supply. The tax liability of composite contract would be guided by the tax liability of the principal supply.
To find what is the principal supply, one must go to the intention behind the entering of the agreement which the Apex Court in the BSNL case (145 STC 91 (SC) (LB)) referred to as ‘dominant nature test’. It is true that in the context of works contract prior to 1-7-2017, dominant nature test was not be relevant, for GST, especially in view of the phrase ’Naturally Bundled and Principal Supply”, one will have to find the dominant intention behind a composite contract.
I am not discussing here the works contract in relation to textile as it would require a separate paper as the GST on textiles. Similarly I have not discussed the provisions of the job work.
10. The place of supply for works contract
The place of supply qua the immovable property is very clear. In terms of section 12(3) of IGST Act, 2017 the place of supply of services, directly in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out co-ordination of construction services and any services ancillary to the services referred to hereinabove shall
be the location at which immovable property is located or intended to be located.
The phrase ‘intended to be located’ is important for pre-construction services.
In terms of section 7(3) of IGST Act, 2017, supply of services, where the location of the supplier and the place of supply are in
(a) Two different States;
(b) Two different Union Territories; or
(c) A State and a Union Territory,
shall be treated as supply of services in the course of inter-State trade or commerce.
For example, if a contractor in Maharashtra is given a contract to construct a commercial building in Andhra Pradesh (AP), then all the supplies by the supplier who is in Maharashtra (unless he is registered in AP) would be subject to IGST.
The question therefore can be whether it is advisable for a contractor to register its site as a registered place in a State where he is not otherwise registered.
It is possible to argue that such person can register as casual taxable person. But this provision of casual taxable person is meant for specific situation. A construction contract which normally takes more than 3 months or almost a year to complete cannot be registered as a casual taxable person. Ideally therefore if the contract in the other State is likely to continue over a period of time, it would be wiser to take registration under the main section 22 rather than a casual taxable person.
Term casual taxable person is defined in section 2(20) which read as follows:
“Casual taxable person means a person who occasionally undertakes transactions involving supply of goods or services or both in the course of furtherance of business whether as principal, agent or in any other capacity in a State or a Union Territory where he has no fixed place of business.
Section 27 refers to specific provision related to casual taxable person or a non-resident taxable person.
A non-resident taxable person is defined in section 2(77) to mean any person who occasionally undertake transactions involving supply of goods or services or both, whether as principal or agent or in any other capacity, but who has no fixed place of business or residence in India.”
There are specific provisions for a casual taxable person; he has to deposit the estimated liability in advance. The registration shall be valid for 90 days and such person can make taxable supplies only after issuance of certificate of registration. In case of an extension of time beyond 90 days he shall be called upon to deposit additional amount of tax equivalent to estimated tax liability during the extension period.
Therefore in my opinion taking registration as casual taxable person would not be advisable. While taking the decision as to whether to take a separate registration for the construction site, one must consider the cost-benefit ratio, specifically the administrative cost as also the availability of other benefits like Input Tax Credit.
At times maintaining a separate office especially with the present GST regime requiring huge procedural formalities, would be a big economic decision. One must think twice before establishing a separate office, taking registration in a separate State. As you are aware, in terms of section 25(4) of CGST Act, 2017, a person who has obtained or is required to obtain more than one registration whether in one State or Union Territory or more than one State or Union Territory shall, in respect of each such registration, be treated as distinct person for the purpose of this Act. Therefore if a small works contract is to be done in another State, like fixing of grills windows etc., which would not take more than a month’s time to complete the works contract, it would be ideal to collect IGST and pay.
11. Input Tax Credit
The works contractor shall be entitled to take input tax credit under section 16 on all input and input services used in supply of services – works contract – construction contract. The only prohibition given is by way of block credits under sections 17(5)(c) and (d) which reads as follows:
“(c) the works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service.
(d) Goods or services or both received by a taxable person for construction of an immovable property (other than plant and machinery) on his own account including when such goods or services or both are used in the course of furtherance of business.“
The explanation under these clauses states that for the purpose of clauses (c) and (d) the expression ‘construction’ includes reconstruction, renovation, addition or alteration or repairs to the extent of capitalisation to the said immovable property. The definition of plant and machinery is already given by me hereinabove. Therefore if the owners of the land wish to construct a factory building then he is supplied works contract services for construction of immovable property. Then he would not be allowed the input tax credit qua the tax charged by the contractor on such supplies.
Whether the factory building is plant and machinery or not is another debatable issue. The State authorities have always treated the construction of factory building as other than plant and machinery although in a given case it may be possible to argue that it is a part of plant and machinery because it is a place which houses the plant and machinery. Under GST,
the factory building would be immovable property.
One further issue can be Factory shade whether it is immovable property? The issue becomes more complex when such shade is not made of bricks and sand but under newer technology where it can be erected within a day’s time by using materials or fabrications which are brought in CKD condition. Well such would be the issues under GST on account of change in
technology. The settled law is law must move with times.
Similarly if a taxable person purchases steel, cement, sand etc. and is charged the GST on invoices and if such goods are used for construction of the factory guest house, then he will not be allowed the input tax credit in terms of section 17(5)(d).
12. Transition provision for works contract
This need not be explained now. All the existing registered dealer under State VAT laws will have “seam less transition” (!) to the GST regime. The technological problems in this seam less process are manmade, one must admit.
B) Provisions related to Input Tax Credit
“140. (1) A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, the amount of CENVAT credit carried forward in the return relating to the period ending with the day immediately preceding the appointed day, furnished by him under the existing law in such manner as may be prescribed: Provided that the registered person shall not be allowed to take credit in the following circumstances, namely:—
(i) where the said amount of credit is not admissible as input tax credit under this Act; or
(ii) where he has not furnished all the returns required under the existing law for the period of six months immediately preceding the appointed date; or
(iii) where the said amount of credit relates to goods manufactured and cleared under such exemption notifications as are notified by the Government.
140(2): A registered person, other than a person opting to pay tax under section 10, shall be entitled to take, in his electronic credit ledger, credit of the unavailed CENVAT credit in respect of capital goods, not carried forward in a return, furnished under the existing law by him, for the period ending with the day immediately preceding the appointed day in such manner as may be prescribed:
Provided that the registered person shall not be allowed to take credit unless the said credit was admissible as CENVAT credit under the existing law and is also admissible as input tax credit under this Act.
Explanation.–– For the purposes of this sub-section, the expression “unavailed CENVAT credit” means the amount that remains after subtracting the amount of CENVAT credit already availed in respect of capital goods by the taxable person under the existing law from the aggregate amount of CENVAT credit to which the said person was entitled in respect of the said capital goods under the existing law.
140(6): A registered person, who was either paying tax at a fixed rate or paying a fixed amount in lieu of the tax payable under the existing law shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:––
(i) such inputs or goods are used or intended to be used for making taxable supplies under this Act;
(ii) the said registered person is not paying tax under section 10;
(iii) the said registered person is eligible for input tax credit on such inputs under this Act;
(iv) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of inputs; and
(v) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day.”
Therefore unlike the VAT regime a construction contractor under the GST regime would be eligible to claim full ITC for the taxes paid by him prior to 1-7-2017 for the goods in stock, semi-finished goods. The goods for the construction contract can be finished only when the final property is delivered or OC is obtained. Therefore till such time the entire material used can be claimed as unfinished goods in stock and the input tax credit for the tax paid on purchases made 12 months prior to 1-7-2017. This will be further affirmed by the fact that for the services to be provided after 1-7-2017 the contractor would be liable to pay GST to the extent the amount received after 1-7-2017.
An important aspect which needs to be considered is, if the contract/work order is completed prior to 1-7-2017 then they shall not be considered works contract for the purpose of GST. The same would apply where the occupation certificate is received for the construction contract prior to 1-7-2017. If that be the case, no tax under GST would be payable as such contracts are not works contracts for the purpose of GST.
C) Ongoing Works Contracts
This is one of the biggest challenges and a dispute may arise under the transitional provision. The major issue was sorted out by the State of Maharashtra for at least the Government contracts. You would appreciate that the Government contracts although may continue over a period of time, the taxation aspect would not be allowed to alter by the employer i.e. the Government, be it Central Government or State Government. On 19th August, 2017 the State of Maharashtra has issued an internal circular as regards how to deal with the Government contract and applicability of the GST thereon. The directions given therein clarify all issues of ongoing works contracts.
(i) The contracts awarded after 1st July, 2017 would be taxed as per GST provisions. (Kindly refer to the latest amendment of 22nd August given in the beginning of this article)
(ii) The tender of works contract accepted prior to 22nd August, 2017 but work order not given – presuming that such tenders would not have considered the GST applicability, all the tenders would be cancelled and a short tender notice would be given for fresh tenders. The contracts requiring immediate order like repairing of road etc., would be given priority
and the GST provisions would be taken care of.
(iii) The tender accepted prior to 1st July, 2017 but work order given after 1st July, 2017. The work order would not be cancelled but the necessary amendment in the price of the works contract, as an impact of GST, should be considered.
(iv) Tender issued between 1st July, 2017 and 21st August 2017 – if work order is not given the procedure as per (ii) should be followed.
(v) Work order issued prior to 1st July, 2017 and the work commenced prior to 1st July, 2017 and to be continued after 1st July, 2017 (on-going contract) –
(a) For the work completed prior to 1st July, 2017 and bill received prior to 1st July, 2017, the tax applicable as per VAT should be paid.
(b) The work completed prior to 1st July 2017, and the bill issued after 1st July, 2017, tax to be paid as per VAT provisions.
(c) Part of the work done after 1st July, 2017, tax to be paid as per GST. The Law and Judiciary Dept. should look into the amendment required in future bills.
D) Ongoing construction contracts
The State of Maharashtra has made an amendment to the composition scheme adopted by the builders/developers. In terms of the original composition scheme under the MVAT Act announced in 2010 the builders/developers selling under-construction flats along with the interest in the land were allowed to pay 1% composition towards VAT on the total consideration for sale of flats. The time for collection of this 1% composition was fixed as at the time of registration of agreements to sell flat. Normally such registrations were made on receiving about 20% of the consideration and for majority of the under-construction buildings the MVAT was paid at 1%. By an amendment made on 30th May, 2017 the provision is made to the effect that, irrespective of the Notification of 2010 and irrespective of the payment made by the developers at 1% on the total consideration, any amount received for such registered document after 1st June, 2017 composition at 1% would again be payable. For any payment towards consideration received by the developer after 1st July, 2017, the applicable GST should be paid. The only solace given was, that the developers would be allowed to carry forward the credit of tax paid at 1% at the time of registration. The developers in Maharashtra therefore will have to claim the credit for such 1% paid prior to 1st July, 2017 and for the said contracts part of the consideration would be received after 1st July, 2017. Such credits will have to be taken in the last return to be filed under the MVAT Act i.e. for the month of June, 2017.
E) Anti-profiteering provision
Section 171 of the CGST Act reads as follows:
“171. (1) Any reduction in rate of tax on any supply of goods or services or the benefit of input tax credit shall be passed on to the recipient by way of commensurate reduction in prices.
(2) The Central Government may, on recommendations of the Council, by notification, constitute an Authority, or empower an existing Authority constituted under any law for the time being in force, to examine whether input tax credits availed by any registered person or the reduction in the tax rate have actually resulted in a commensurate reduction in the price of the goods or services or both supplied by him.
(3) The Authority referred to in sub-section (2) shall exercise such powers and discharge such functions as may be prescribed.”
The result of this provision should be positive on ongoing construction contracts. The Union Finance Minister has in the initial stage warned the construction contractors that the Input Tax Credit which they would be getting on account of the GST provisions and the transition provisions must be passed on to the customer. As stated earlier, if the partly constructed building and the material used therein which is purchased in last one year is to be treated as semi-finished goods in stock, huge input tax credit will be available to the construction contractors. It is also true that by citing uncertainty or ambiguity in the law the contractors may not be willing to pass on the benefits to the customers. However, the awareness in the customers can now be seen on account of wide media publicity. I hope the poor customer who has agreed to pay the lifetime earnings to buy a shelter for himself and family would be benefitted.
With this I end my Article. I have tried to pen down my thoughts on the subject. I am sure more discussion and debate will help us in arriving at proper conclusions.