WORKS CONTRACT IN GST REGIME IN INDIA
The Goods and Services Tax Act, 2017 came into
force in India with effect from 1.7.2017.
A house owner wants to paint the inner walls
and outer walls of his own old house. For that purpose the house owner invites a
mason and enquires about the same.
The mason tells the house owner what are the
materials needed and cost of the materials and also tells the amount of charges
for undertaking that work.
1.The
house owner purchases the materials needed for painting the house by purchasing
the goods at his own risk and money and asks the mason to complete the painting
work only with man power.
2.The
house owner instead of purchasing the materials asks the mason to purchase the
same and finish the work. The mason purchases the materials and completes the
work of painting with man power and receives money for all.
In the first example the house owner supplies
the goods and receives only man power service (which is called pure labour) from the
mason. This kind of transaction is
called pure labour contract.
In the second example the house owner asks the
mason to purchase the materials needed at the mason’s risk and money and after
completion of work with the man power of the mason, the
house owner pays the amount for goods utilized for painting the walls and
services rendered by the mason to paint the walls. In this case both goods and services are
supplied by the mason. The
mason undertakes the supply of goods which is called supply contract and also
undertakes the supply of services which is called supply of services which is
called services contract.
WHAT IS WORKS CONTRACT?
If the materials used for construction is
supplied by a taxpayer at his business premises, the same will come under
purview of supply of goods. (Example: Sale
of cement, sand, jelly, bricks, electrical goods and hardware items etc at the business premises by the building materials
sellers.)
If the materials used for construction is
supplied by a taxpayer and the same has been delivered by the taxpayer himself
at the work spot premises, the same will come under the purview of composite
supply. (Example: Sale of cement, sand, jelly, bricks, electrical goods and hardware items etc by the taxpayer (seller) and delivery of the same through vehicle
receiving freight charges, loading and unloading charges for services rendered from the recipient)
If another person other than the supplier of
goods undertakes the supply of building materials at the work spot and
receiving money for the goods supplied and for the services rendered the
supplier of goods and services will be treated as Supplier of Goods and
Services in other words “Contractor”. (Example: Purchases or procurement of
cement, sand, jelly, bricks, electrical goods and hardware items etc by a person and supply of the same at the work spot
through vehicle receiving cost of goods and supplied and transportation charges loading and unloading charges i.e. for the services rendered by him).
If the supplier of goods and services
undertakes the construction of a
house i.e. immovable property, the same will be
called composite supply of Goods and Services which is called “Works Contract”.
(Example: A person purchases or procures cement, sand, jelly, bricks, electrical goods and hardware items etc and taking to the work spot and delivers in other
form namely building, road, concrete mixture with utilization of labour for
laying, constructing, leveling etc. and making the supplies as immovable properties.)
In simple, Works contract is a mixture of goods
and services but it is neither a composite supply nor a mixed supply as it has
been defined as per Section 2(119) of the Central Goods and Services Tax Act,
2017.
Section 2 (119):
“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.
Section 10 (2) (a) The registered
person shall be eligible to opt under sub-section (1) if he is not engaged in
the supply of services other than supplies referred to in clause (b) of
Paragraph 6 of Schedule II (i.e. Restaurant services).
Section 17 (5) (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:
Section 17 (5) (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 of furtherance of business.
In the earlier tax regime Commercial Taxes
Departments or Sales Tax Departments were levying tax at compounded rates or on the deemed sale value of
goods utilized in works contract and the Central Government has levied Service
Tax with 60% abatement on new works and 30% abatement on repairs. The Commercial Taxes Department / Sales Tax
Department has levied and collected VAT by following two methods:
1.Compounding
Scheme at fixed percentage on total turnover; and
2.Non-compounding
Regular Scheme which is based on the deemed sale value of transfer of property
involved.
Under the Compounding Scheme the contractors
undertaking works contract should pay certain percentage of tax on the total
value of works contract and no input tax credit allowed.
Under non-compounding regular scheme the deemed
sale value of goods arrived (i.e. transfer of property involved) and tax levied at the rates mentioned for goods in the
schedules with input tax credit.
The verification of accounts and making
assessments on works contractors comes under the purview of State Government
for Goods and Central Government for Services in the earlier regime.
In the GST Regime, works contract comes under
Services and the assessing authority may be either Central Government or State
Government as the case may be based on the turnover and place of supply.
Under GST Regime there is no compounding scheme of
taxation.
Section 10(2)(a) of CGST Act further states that a
person supplying services other than Restaurant services is not eligible to opt
for composition scheme.
Compounding Scheme
option is allowed only to Restaurant Services at 5% under services and no other services allowed compounding scheme in GST Regime. Hence all works contractors will come under
regular taxpayer scheme and have to pay tax at the rates mentioned in the
schedules irrespective of turnover.
The
following categories are exempt from GST.
1. 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 Awas Yojana.
2. Services
by way of pure labour contracts of construction, erection, commissioning, or
installation of original works pertaining to a single residential unit
otherwise than as a part of residential complex.
The
following categories will attract 12% GST with no refund of accumulated input
tax credit:
1.
Construction
of a complex, building, civil structure or a part thereof, intended for sale to
a buyer, wholly or partly (the value of land is deemed to be one-third of the
total amount charged for such supplies).
The
following categories will attract 18% GST with full Input Tax Credit:
1.
Composite
supply of Works contract as defined in clause 119 of section 2 of CGST Act.
Reduction
of GST from 18% to 12% with full ITC in certain cases:
1. Works contract services provided to
Government, local authority or governmental authority and in respect of
post-harvest storage infrastructure for agricultural produce, mechanized food
grain handling system.
REGISTRATION
Under Goods and Services Tax Act, 2017,
separate registration in each State to be obtained.
Inter branch supply of goods / services are
taxable.
PLACE OF SUPPLY
In the GST Regime, place of supply will play an
important role.
Under Section 12 (2) (3) of the IGST Act, the
place of supply of services (a) directly in relation to an immovable property,
including services provided by architects, interior decoration, 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 or
co-ordination of construction work shall be the location at which the immovable
property or boat or vessels, as the case may be, is located or intended to be
located.
The place of supply for the supply
of services in respect of immovable property-related services will be the
location at which the immovable property is located. In such cases CGST and SGST will be applicable.
Where the immovable property or boat or vessel
is located in more than one State or Union territory, the supply of services
shall be treated as made in each of the respective States or Union territories,
in proportion to the value for services separately collected or determined in
terms of the contract or agreement entered into in this regard or, in the
absence of such contract or agreement, on such other basis as may be
prescribed.
No deduction shall be made if the
location of the supplier and the place of supply is in a State or Union
Territory which is different from the State or as the case may be, Union
territory of registration of the recipient as per section 51(1)(d) proviso of
the CGST Act,2017.
If the immovable property is located in more
than one State, the supply of service shall be treated as made in each of the
States in proportion to the value of the contract or agreement entered into in
this regard or, in the absence of such contract or agreement, on such other
reasonable basis as the case may be prescribed in this behalf as per the
explanation clause to section 12(3) of the IGST Act, for domestic supplies.
TIME OF SUPPLY
In GST Regime, time of supply will also play an
important role.
(a) the
date of issue of invoice by the supplier or the last date on which he is
required, under sub-section (1) of section 31, to issue the invoice with
respect to the supply; or
(b) the
date on which the supplier receives the payment with respect to the supply:
Provided that where the supplier of taxable
goods receives an amount up to one thousand rupees in excess of the amount
indicated in the tax invoice, the time of supply to the extent of such excess
amount shall, at the option of the said supplier, be the date of issue of
invoice in respect of such excess amount.
Explanation 1.––For the purposes of clauses (a)
and (b), “supply” shall be deemed to have been made to the extent it is covered
by the invoice or, as the case may be, the payment.
Explanation 2.––For the purposes of clause (b),
“the date on which the supplier receives the payment” shall be the date on
which the payment is entered in his books of account or the date on which the
payment is credited to his bank account, whichever is earlier.
Period within which invoice has to be issued in
a case involving continuous supply of services.
In case of continuous supply of services,
Where
the due date of payment is ascertainable from the contract, the invoice shall
be issued on or before the due date of payment,
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,
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.
TAX DEDUCTION AT SOURCE IN GST REGIME
In the earlier VAT regime, Government
Departments while making payments to the contractors for works done by them,
Income Tax and VAT will be deducted at compounding rates. There may exemption
to certain contractors who files monthly returns and paying tax on monthly
turnover basis.
In the GST regime, under Section 51 (1) the
Government may mandate (a) a department or establishment of Central Government
or State Government or (b) local authority; or (c) Governmental agencies; or
(d) such persons of category of persons as may be notified by the Government on
the recommendations of the Council (hereafter in this section referred to as
“the deductor”), to deduct tax at the rate of one per cent, from the payment
made or credited to the supplier (hereafter in this section referred to as “the
deductee”) of taxable goods or services or both, where the total value of such
supply, under a contract, exceeds two lakhs and fifty thousand rupees:
No deduction shall be made if the location of
the supplier and the place of supply is in a State or Union Territory which is
different from the State or as the case may be, Union territory of registration
of the recipient as per section 51(1)(d) proviso of the CGST Act,2017.
Explanation.––For the purpose of deduction of
tax specified above, the value of supply shall be taken as the amount excluding
the central tax, State tax, Union territory tax, integrated tax and cess
indicated in the invoice.
(2) The amount deducted as tax under
this section shall be paid to the Government by the deductor within ten days
after the end of the month in which such deduction is made, in such manner as
may be prescribed.
(3) The deductor shall furnish to
the deductee a certificate mentioning therein the contract value, rate of
deduction, amount deducted, amount paid to the Government and such other
particulars in such manner as may be prescribed.
(4) If any deductor fails to furnish
to the deductee the certificate, after deducting the tax at source, within five
days of crediting the amount so deducted to the Government, the deductor shall
pay, by way of a late fee, a sum of one hundred rupees per day from the day
after the expiry of such five days period until the failure is rectified,
subject to a maximum amount of five thousand rupees.
(5) The deductee shall claim credit,
in his electronic cash ledger, of the tax deducted and reflected in the return
of the deductor furnished under sub-section (3) of section 39, in such manner
as may be prescribed.
(6) If any deductor fails to pay to
the Government the amount deducted as tax under sub-section (1), he shall pay
interest in accordance with the provisions of sub-section (1) of section 50, in
addition to the amount of tax deducted.
(7) The determination of the amount
in default under this section shall be made in the manner specified in section
73 or section 74.
(8) The refund to the deductor or
the deductee arising on account of excess or erroneous deduction shall be dealt
with in accordance with the provisions of section 54:
Provided that no refund to the
deductor shall be granted, if the amount deducted has been credited to the
electronic cash ledger of the deductee.
As per
section 51, this provision is meant for Government and Government undertakings
and other notified entities making contractual payments where total value of
such supply under a contract exceeds Rs.2.5 Lakhs to suppliers. While making
any payments under such contracts, the concerned Government/authority shall
deduct 1% of the total payment made and remit it into the appropriate GST
account.
DETAILS
|
RATE OF TAX
AND
MODE OF PAYMENT
|
Rate
of tax for construction of a complex, building, civil structure or a part
thereof, intended for sale to a buyer, wholly or partly (the value of land is
deemed to be one-third of the total amount charged for such supplies).
|
12%
with no input
tax credit
|
Rate
of tax for composite supply of Works contract as defined in clause 119 of
section 2 of CGST Act
|
18%
with full Input
Tax Credit
|
Rate
of tax for works contract services provided to Government, local authority or
governmental authority and in respect of post-harvest storage infrastructure
for agricultural produce, mechanized food grain handling system
|
12%
with full Input
Tax Credit
in certain
cases.
|
Rate
of tax for 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 Awas Yojana
|
NIL
|
Rate
of tax for services by way of pure labour contracts of construction,
erection, commissioning, or installation of original works pertaining to a
single residential unit otherwise than as a part of residential complex
|
NIL
|
Compounding Scheme for Works
Contract
|
No compounding
scheme allowed for works contract
|
Disclosure of turnover
details to the Department
|
Monthly
|
Returns to be filed
|
GSTR-1 for outward supplies of goods and services
GSTR-2 for inward supplies of goods and services
GSTR-3 final return.
|
ITEM WISE RATE OF TAX FOR SERVICES UNDER GST
Click the link below to view
the rate of tax for services item-wise.
https://cbec-gst.gov.in/pdf/central-tax-rate/Notification11-CGST-Annexure.pdf
Click the link below to view the works contract method of assessment in VAT regime
https://abhivirthi.blogspot.com/2016/03/works-contract-methods-and-types-of_29.html
https://cbec-gst.gov.in/pdf/central-tax-rate/Notification11-CGST-Annexure.pdf
Click the link below to view the works contract method of assessment in VAT regime
https://abhivirthi.blogspot.com/2016/03/works-contract-methods-and-types-of_29.html
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