GST on Works Contract

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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.

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:

  1. Input Tax Credit of GST paid on Works contract will be allowed if the output is also Works Contract, and;
  2. 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.

Conclusion

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.

 

18 COMMENTS

  1. Sir, you explained nicely… Can I know which software u r using for picture with editing option… I am in teaching line if you can help me sir.

    M : 9898404235

    Thank You

  2. I have one Question,,,,,,, I am contractor and I provide only Labour Work in my Works Contract,,,,, All the Materials like Iron Angle, Iron Channel ,Iron Rods provided by opposite Party to me,,, My work is to only Make a Structure from given Materials to me,,,, Then What will be my Tax Structure?

      • I have one Question,,,,,,, I am contractor and I provide only Labour Work in my Works Contract,, and Building constuction to my self ,,, All the Materials like Iron Angle, Iron Channel ,Iron Rods provided by opposite Party to me,,, My work is to only Make a Structure from given Materials to me,,,, Then What will be my Tax Structure?… so please i am eligible itc or not

  3. sir
    very clear one clarification I have a contract to construct school building for pwd (dept of education)
    earlier i was paying vat on 75% and service tax on 49% now i will pay 18 % gst
    earlier i was availing input tax credit on vat on materials purchased cement steel etc
    will i get this input in gst? or only itc on works contract
    you have mentioned
    “Apart from the above two, no Input Tax Credit will be available for works contracts for construction of immovable property.”
    but i am purchasing material for use in business–please clarify

    • Dear James! Thank you for appreciating the article.

      ITC restrictions on Works Contract is applicable for contractee i.e the person who is availing the works contract service and not the works contractor. Works contractor can avail ITC for his input on supply of Works Contract Service.

  4. Hi Sir,

    Nice article. Have also watched you video on youtube.

    I am a Works contractor registered in Jharkhand. If we want to start a work in Bihar (constructing a building for a college), do we need to take GST number for Bihar state also.
    Secondly, when raising a bill, earlier i was taking 40% of the total bill as service and charging 15% on that amount as ST ( effective rate being 6% on total). Now how we will do the billing? Please give an example.

    Thanks

  5. Thank you sir.
    Earlier if we were raising a bill for 100000, 60% of that amount was considered to be supply of goods and 40% as service. Hence, we were charging 15% Service Tax on 40,000 = 6000 as Service tax. For the same bill of 100000, how much will be the GST portion now?

  6. Sir,

    We have work as contractor different type of telecom company like Airtel, Voda fone, relince Jio, idea , and railway work (Civil, Electrical, Installation, Commissioning, fabrication ) we have supply goods and also services after issue of Work order by telecom company approx amount of civil and electrical work and after work completed we have put the invoice so kind request to you pls sagest me Input and RCM applicable or not and also share gst rate of item wise exps. further any queers pls call me 9771416872

  7. Sir,we doing work contract ,in municipalities, MESCOM,KPTCL etc .The concern authorities, though we claim GST in our tax invoice, they not agreeing to pay GST, WILL you plz guide, what can we do(in the S R RATE GST not included).

  8. I am contractor and I provide only Lab our Work in my Works Contract,, and Building construction to my self ,,, All the Materials purchase with gst paid .. like Iron Angle, Iron Channel ,Iron Rods provided by opposite Party to me. and our work is Building constructoin (govt. contract or private ) and road construction My work is to only Make a Structure from given Materials to me,Then What will be my Tax Structure?… so please i am eligible ITC claim or not yes to how ?

  9. Sir,
    I provide operation and maintenance service for sewarage treatment plants to Nagar Nigams in U.P. , which involves operation of pumps, and all other Machinery. To keep the plant in running conditios we have to remove the faults in eqipments and machinery including spare parts like electrical switch gears, rewinding of burnt out motors and various other equipments. In previous regim this service was exempted from service Tax. I am looking for an answer to my question:- 1. What kind of service it is?
    2. Is it work contract? 3. Is it pure service contract under exemption? 4. What will be the rate of tax?
    Sir I have written to Gst helpdesk many times, to twitter [email protected]_GoI, asked my CA, asked Deprtment people, but got no answer to my question. Please help me clarify these.
    After listing your U Tube explanation of work contract, I have a hope from you.
    Hoping an early reply from your side.
    Thanking you,
    Rakesh Tomar

  10. dear sir
    i am contractor of road and sewer lines of municipal corporation
    and contact value is rs 500000
    then municipal corporation can deduct gst on that amount
    or
    can i claim input credit
    or
    am i liable to pay gst to municipal corporation

  11. Dear Sir,

    our firm constructing road under government contract

    My question is

    Our contract income as under
    Contract Income 11293408
    Less :
    Lab Testing 146000
    Security Deposit 365000
    Income Tax @ 2% 225868
    Labour Cess 112934

    Cheque Amount 10443606

    We are given subcontract as per under mention details

    Contract Income 11293408
    Commission @ 3.10% 350096
    10943312

    Lab Testing 146000
    SD 365000
    IT @ 2% 218866
    LC 112934
    842800

    Cheque Amount 10100512
    Above both condition please clarify the taxable situation in details.

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