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GST on Works Contract

The present article aims to clarify the treatment and taxability of works contract under GST.

Meaning of the term ‘works contract’ and coverage thereon-

The term ‘works contract’ is defined under section 2(119) of the Central Goods and Services Tax Act, 2017. Accordingly, works contract applies to the following fourteen types of contract, which involves the transfer of property in goods and which is to be executed for any immovable property-

1. Building,
2. Construction,
3. Fabrication,
4. Completion,
5. Erection,
6. Installation,
7. Improvement,
8. Fitting out,
9. Repair,
10. Modification,
11. Maintenance,
12. Alteration,
13. Renovation, and
14. Commissioning.

Summing up, in simple terms, a works contract means a service contract that involves the supply of goods to execute the contract.

Supply of service vis-à-vis works contract-

Works contract, under the erstwhile law, involved lots of confusion with regard to treatment and taxability. However, the present GST law has tried to clear up the confusion to some extent.

Referring to ‘Schedule II’ of the CGST Act which covers the activities/ transactions to be treated as supply of goods or supply of services. Accordingly, with regard to the works contract, Schedule II clearly mentions the following entries as ‘supply of services’-

1. Entry no. 5(b) which states as under-

Construction of a complex/ building/ civil structure or part thereof including a complex/ building intended for sale to a buyer will be treated as a supply of services.

2. Entry no. 6(a) which states as under-

Composite supply like works contract will be treated as ‘supply of service’.

Accordingly, the said Schedule II removes the confusion with regard to the tax treatment of works contract which will be taxable as a supply of service (and not a supply of goods) under GST.

Input tax credit vis-à-vis works contract-

Provisions of section 17(5) of the CGST Act deals with the circumstances when the input tax credit is not available. Referring to the provisions of section 17(5) in line with the works contract, weconclude as follows-

Provisions	Particulars	Availability of input tax credit
Section 17(5)(c) of the CGST Act	Works contract service when supplied for construction of immovable property.	Input tax credit not available
Section 17(5)(c) of the CGST Act	Works contract service when supplied for construction of a plant and machinery.	Input tax credit available
Section 17(5)(c) of the CGST Act	Works contract service when supplied for construction of an immovable property where it is input service for further supply of works contract service.	Input tax credit available
Section 17(5)(d) of the CGST Act	Goods/ services received by the taxable person for construction of an immovable property on his own account.	Input tax credit not available
Section 17(5)(d) of the CGST Act	Goods/ services received by the taxable person for construction of a plant and machinery on his own account.	Input tax credit available

It is important to note that explanation to section 17(5) clarifies that the word ‘construction’ includes all of the following to the extent the same is capitalized-

• Re-construction;
• Renovation;
• Addition/ alteration/ repairs.

Determination of place of supply under works contract service [Section 12(3)(a) and Section 13(4) of the IGST Act]-

The provisions of section 12(3)(a) of the IGST Act deals with the situation when both the service provider and service receiver is located in India. Accordingly, section 12(3)(d) states that the place of supply for the immovable property will be the location at which the immovable property is located/ intended to be located.

However, proviso states that the place of supply in case of immovable property will be the location of the service receiver, when immovable property is located/ intended to be located outside India.

Whereas, provisions of section 13(4) of the IGST Act deals with the situation when both the service provider and service receiver are located outside India. Accordingly, the place of supply will be the place where the immovable property is located/ intended to be located.

Determination of the time of supply under works contract service [Section 13 read with Section 31 of the CGST Act]-

As per provisions of section 13(2), time of supply will be earliest of the followings-

• Date of issue of invoice [when invoice is issued within the time limit prescribed under section 31 i.e., within 30 days from the date of supply of service],
• Date of receipt of payment or date of provision of service [when invoice is not issued within the time limit prescribed under section 31], or
• The date on which recipient reflects receipt of service in the books of accounts.

However, in case the period of works contract services extends to more than 3 months. Then, the time of supply will be determined as per provisions of section 31(5) of the CGST Act (i.e., continuous supply of service).

Determination of the value of supply under works contract service-

There is no specific valuation rule prescribed for works contract service. However, the following can be concluded by going through provisions of section 15 read with the CGST Rules-

Particulars	Value of supply
Works contract, wherein, the transfer of property includes the value of land/ undivided share of land.	Value of supply = total amount charged for such supply (-) value of a share of land/ undivided share of land. Notably, here, the value of a share of land/ undivided share of land will be deemed to be 1/3rd of the total value charged for such supply.
Works contract, wherein, the transfer of property doesn’t include the value of land/ undivided share of land.	Value of supply = transaction value

Maintenance of accounts and records by works contractor [Rule 56(14) of the CGST Rules]-

Provisions of rule 56(14), specifically, requires the works contractor to keep separate accounts showing the following-

• The name and address of the person on whose behalf the works contract is being executed,
• Description, value and quantity of goods/ services received for the execution of works contract,
• Description, value and quantity of goods/ services used for the execution of the works contract,
• Details of payment received against each works contract, and
• The name and address of the suppliers from whom the goods/ services are received.

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