What is a Works Contract?
Works Contract is a composite contract where there is transfer of property in goods along with supply of services which are interrelated with each other. An agreement of building, construction, manufacture, processing, fabrication, erection, installation, repair or commissioning of any movable or immovable property may be called a works contract.
- Also Read: Reverse Charge under GST
Taxability of Works Contract under previous tax regime
Before the GST Regime, a Works Contract was treated as a mixture of Suppy of Taxable Goods and Provision of Taxable Services.
Various provisions were in place to separately determine the value of taxable goods and taxable services in the total consideration of a works contract. VAT was charged on the value of sale of goods component and Service Tax was charged on the value of service component.
So one activity i.e. the works contract, was taxed under different tax laws and sometimes there was even cascading effect of different taxes. This resulted in confusions and legal disputes.
Works Contract under GST
Works Contract has been defined in Section 2(119) of CGST Act, which reads as follows:
“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 of property in goods (whether as goods or in some other form) is involved in the execution of such contract;
Analysis of the above definition
From the above definition, it is clear that contracts involving constructions of immovable properties are only kept within the purview of works contract under GST Law. A contract in relation to movable property, however, would be treated as a ‘composite supply’ of goods or services depending on the principal supply.
Composite Supplies are dealt with in Section 8 of CGST Act which reads as follows:
“The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:-
(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and
(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.”
Schedule II of the CGST Act, 2017
Schedule II of the CGST Act, 2017, deals with the classification of Activities into Supply of Goods and Services.
Entry number 5(b) of Schedule II mentions clearly that the “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…” will be treated as a Supply of Service.
Further, Entry number 6(a) of Schedule II reads as follows:
“The following composite supplies shall be treated as a supply of services, namely:—
(a) works contract as defined in clause (119) of section 2;”
Thus Schedule II has made it clear that under GST, a Works Contract would be treated as a Supply of Service and its taxability would also be governed on the same terms as of a supply of a taxable service.
The treatment of Works Contract as a Supply of Service will help eliminate all confusions relating to its taxability in the current GST regime.
Input Tax Credit on Works Contract Under GST
Input Tax Credit for Works Contract for construction of immovable property will be available under the following two scenarios:
- Input Tax Credit of GST paid on Works contract will be allowed if the output is also Works Contract, and;
- When the Works Contract is for construction of Plant and Machinery.
Apart from the above two, no Input Tax Credit will be available for works contracts for construction of immovable property.
Abatement and Composition Scheme
No abatement is till now available for works contracts under GST. The Works Contractors cannot opt for composition scheme as a works contract is treated as a supply of services. For supply of services, only people in restaurant business are allowed to be registered under Composition Scheme.
The expression ‘works contract’ in GST is limited to contracts which deal with immovable property, unlike the existing concept of the term which also included movable property. A contract will amount to a ‘works contract’ only where there is a transfer of property in goods which results in an immovable property.
All works contracts (as we called them till now) involving transfer of property in relation to movable goods will now be treated as composite supply of goods or services depending on the principal supply [Sec 8 of CGST Act].
All works contracts as per the definition given under GST Law [Sec 2(119)] will now be treated as supply of services and there will be no need to bifurcate the value of the contract into goods and services anymore.