What is Works Contract?
Works Contract is an activity where provision of service as well as transfer of goods is involved. In simple words it is a mix of service and transfer of goods.
Relevant law- Section 2(119) of CGST Act,2017.
Example:-
(a) Construction of a building. Here there is transfer of construction materials from constructor/builder to the customer.At the same time service in form of construction of building is provided.
(b)Repair – Here the repair person is not only repairing the item but also providing the spares for the item during repair.
Now there was different treatment given to Works Contract Service in the pre-GST regime as compared to that in GST period. We would see both the treatments so that it would be easier for you to relate. If you want to skip to the GST part directly kindly scroll down.
Pre-GST treatment of Works Contract.
In pre-GST Works Contract was considered as a service where service tax was charged under reverse charge mechanism (RCM). Notification 30/2012-ST dated 20.06.2012 contained the conditions for treatment of Works Contract under Reverse Charge Mechanism. Further under Rule 2A of Service Tax Rules (Determination of Value), 2006 gives the abatement for works contract. We would rather not go into details and make this a point of another discussion. Now you need to expend your fullest effort to understand the current law. So lets get started.
GST treatment of Works Contract.
Schedule II of CGST Act,2017 clearly specifies Works Contract as supply of service.
The law may be reproduced as follows:-
5)Supply of Service
…
(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.
…
- Composite supply
The following composite supplies shall be treated as a supply of services, namely:—
(a) works contract as defined in clause (119) of section 2; and…
This law has truly provided a great relief to the Works Contractors by sparing them the trouble of bifurcating the goods component and the service component of works contract as the case used to be in Service Tax regime. Now in Goods and Service Tax (GST) period works contract is treated as a pure supply of service. Further the abatements provided in the Service Tax regime has been done away with in the current taxation. This has made the calculation much simpler and straight forward. The tax has to be calculated on the total value of work. The details has been discussed further in the post.
No abatement for Works Contract in GST !
This is one point which may make the tax more burdensome for the works contractors. There is no abatement on works contract service unlike the previous taxation period.
Input Tax Credit not available.
Section 17(5)(c) of Central Goods and Service Tax Act, 2017(CGST Act,2017) clearly states that the input tax credit is not available for works contract related to construction of immovable property (other than plant and machinery) . Here credit can be availed only if the works contract service leads to further supply of works contract.
Section 17(5)(d) of Central Goods and Service Tax Act, 2017(CGST Act,2017) is also important in this discussion. Where goods and services are received by taxable person for construction of immovable property (other than plant and machinery) in his own account input tax credit is not available.
Let me reproduce the exact law for your reference.
Section 17 of CGST Act 2017: Apportionment of Credit and Blocked Credits
…
(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—
…
(c) 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 or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
…
This makes input tax credit on works contract unavailable for works contact for construction of immovable property(other than plant and machinery) except in case where the works contract leads to furtherance of same stream of business.
Let us understand this concept with examples.
1) Suppose a builder/construction of a residential building give a contract to build the residential building to another subcontractor. Here the input tax credit on the work contract service done by the subcontractor is available for the main builder (main contractor).
2) Another example- Suppose an IT company has to build a partition in its cabin. He calls another company who specializes in this kind of work. The credit on the tax paid on this works contract service is not available for the IT Company to take.
Point of Taxation for Works Contract
Section 13 of the CGST Act, 2017 determines the point of taxation based on time of supply. Time of supply is the earliest of the following
a)Date on which the invoice is issued by the supplier of service. The invoice is issued in terms of the provision of section 31 of the CGST Act, 2017 otherwise date of receipt of payment is considered whichever is earlier.
b)Date of provision of service if invoice is not issued within the date prescribed under section 31 of the CGST Act,2013 or the date of receipt ofpayment whichever is earlier.
In case the above two conditions does not apply the date on which the reciept of service is entered in the books of accounts of the recipient is taken for the same.
Place of supply of service
Relevant section– Section 12(3) and 13(4) of Integrated Goods and Service Tax Act, 2017 (IGST Act, 2017).
The place of supply for the provision of works contract service can be categories under two heads
- If the immovable property on which the service is provided is within India then place of supply would be the place where the immovable property is located
- If the immovable property is located outside India but both the provider and receipient of service is located within India, the address of receipient is considered as the place of supply of service.
Three cases of Valuation of works contract service for the calcuation of Goods and Service Tax
The valuation of the works contract service is the total amount charged for the work. However, if the same works contract service is provided by the builder where the total value may include value of the land what could be our valuation method. Well according to the prescribed law the value of land is deducted from the transaction value to arrive at the value for the purpose of work contract service. There are times where there is a single contract and the value of land/ undivided share of land cannot be bifurcated. At such times one- third of the value of the total transaction amount is the value of land/ undivided share of land. This value is to be deducted to arrive at the taxable value.
Maintain Separate Register for Works Contract
Rule 56(14) of Central Goods and Service Tax Rules, 2017 (CGST Rules, 2017) requires every registered works contract provider to maintain a separate register detailing the particulars of the services provided by him. The register should contain the following details
(a) The names and addresses of the persons on whose behalf the works contract is executed;
(b) Description, value and quantity (wherever applicable) of goods or services received for the execution of works contract.
(c) Description, value and quantity (wherever applicable) of goods or services utilized in the execution of works contract;
(d) The details of payment received in respect of each works contract and (e) the names and addresses of suppliers from whom he received goods or services.
Feel free to post Comments in the section below.
You may like to more about reverse charge mechanism. Kindly click here.
Check out the changed rate structure on construction of residential homes- click here