Clarification regarding Taxation on Works Contract In GST Regime :

Works contract is one concept which shall be anxiously dealt with in the GST regime . in sharp contrast to its taxability in the existing VAT regime where the taxation was on the transfer of property in goods in the works contract , and the works contract services were separately taxed as services in the existing  Service Tax structure ,  the taxability in the GST regime shall be by treating the works contract as composite supply of service . To understand this it is significant to go through the definition  “Works Contract ” as has been provided in clause (119) of section 2 in the following manner :

“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 is involved in the execution of such contract;”

• Significantly Schedule-II to the CGST /SGST Act , 2017 clarifies at serial no. 6 that “works contract” is to be treated as “composite supply “. This entry at serial no. 6 of the aforesaid Schedule-II embodies following provisions :-

“6. 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

(b) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.”

• It is pertinent to note that clause (30) of section 2 defines composite supply in the following manner :

“(30) “composite supply” means a supply made by a taxable person to a recipient  consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.” 

• It is also significant to note that in Article 366 of the Constitution clause (29A) has been retained even after the Constitution ( One Hundred And First  Amendment ) Act , 2016 thus transfer of property in goods remains a taxable component even in the GST regime .

• Thus the combined study of the aforesaid legal provisions makes it quite evident that ‘works contract’ shall be treated as composite supply with principle supply being supply of services but it does not mean that the ancillary component of transfer of property in goods in the execution of works contract shall not be taxed . As a matter of fact the total amount comprising of component of services as well as component of transfer of property in goods shall be taxed treating it as the supply of services for the purposes of this Act .

• It is also pertinent to note that Schedule-II to the CGST Act /SGST Act , 2017 at serial number 5 (b) clarifies that following shall be treated as supply of services :

“(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.

Explanation.––For the purposes of this clause–– 

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:–

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972  ( Act No.20 of 1972); or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodeling of any existing civil structure.”

• It is also pertinent to note that clause (c) and clause (d) of sub-section (5) of section 17 embodies following provisions :

“(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;”

“(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 or furtherance of business.”

• Thus from the provisions embodied in clause (c) of sub-section (5) of section 17 following conclusions may be drawn –

(i) No ITC shall be admissible for works contract services if they have been supplied for construction of an immovable property(other than plant and machinery) when such immovable property has not been  constructed by  the builder for prospective buyers . Thus where a builder gets his building constructed for himself and subsequently sells such constructed property , such builder shall not be allowed any ITC in respect of the works contract services supplied to him because in this case there is no outward supply of works contract services by the builder in respect of the inward works contract services received by him .

Thus for example if A supplies works contract services to a builder  B for construction of a building and B after the completion of such construction sells such building to different buyers then the builder B shall not be allowed any ITC in respect of the inward works contract services received by him .

(ii) ITC shall be admissible in respect of works contract services where they have been supplied for construction of an immovable property ( other than plant and machinery) which is being constructed for the prospective buyers because in such cases the works contract services supplied , shall become input services for the builder for further outward supplies to the prospective buyers .

(iii) ITC shall be admissible in respect of works contract services when supplied for construction of an immovable property (other than plant and machinery) where it is an input service for further supply of works contract service.

Thus if A supplies works contract services for construction of an immovable property (other than plant and machinery) to B and B further supplies such services to C then B shall be allowed input tax credit in respect of the aforesaid services that he has received .

• Following conclusions may be drawn from the provisions embodied in clause (d) of sub-section (5) of section 17 –

(i) No ITC shall be admissible in respect of goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) when such property has been constructed in the account of the recipient even if such recipient has got such building constructed for business purposes .

Thus where a company or a firm or a proprietor of business gets his place of business constructed by a contractor who supplies requisite goods or services or both for this purpose , such company or firm or a proprietor of business shall not be allowed any input tax credit in respect of the goods or services or both supplied to him for the aforesaid construction .

(ii) Similarly if someone gets his building constructed in his own account with the motive of further renting it out for business purposes through a contractor who makes requisite supply of goods or services or both for such construction to such person , then such person shall not be allowed to claim any ITC in respect of the goods or services or both received by  him in respect of such construction .

(iii) It is pertinent to note that this clause (d) of sub-section (5) of section 17 does not debar the contractor to claim ITC in respect of the goods and services received by him for the construction to be carried out in the aforesaid cases mentioned in (i) and (ii) .

(iv) It is also pertinent to note that even in the case where someone gets his house or personal building constructed through a contractor who in turn makes requisite supply of goods and services i.e. supply of composite works contract services for such construction , then such contractor shall be allowed ITC in respect of such goods and services which he has acquired or received as inputs to execute outward supplies for aforesaid construction .

There should not be any confusion regarding entry no. 12 of the “List  of services at Nil Rate ” which reads as follows :

“(12) 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 a residential complex .”

A plain reading of this entry makes it quite evident that only pure labour services of the aforesaid description have been exempted by this entry if such services have been carried out in respect of the construction of a single residential unit otherwise than as a part of residential complex. This entry does not exempt composite works contract services .

• It is pertinent to note that Entry 7 of the List of Services At 12% Rate reads as follows :

“Construction of complex , building , civil construction 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 charges for such supplies ) ”

Also Entry 7 of the List of Services At 18% Rate reads as follows :

“Composite supply of Works Contract as defined in clause 119 of section 2 of the CGST/SGST Act, 2017 .”

• The basic difference of the aforesaid entries lie in their construction . Whereas in Entry no. 7 of the List of Services At 12% Rate , the all important requisite is – “the value of land is deemed to be one-third of the total amount charges for such supplies “, no such condition has been mentioned in Entry 7 of the List of Services At 18% Rate . Thus where the condition of “the value of land is deemed to be one-third of the total amount charges for such supplies” does not exist , the rate of tax on works contract services shall be 18% .

• The  Supply of Works Contract Services  For Construction of Immovable property – Continuous Supply :

It is quite evident form what has been envisaged by clause (32) and (33) of section 2 of the CGST / SGST Act , 2017 that usually the supply of works contract services for construction of immovable property is in the nature of continuous supply . It is pertinent to note that sub-section (4) of section 31 envisages that in the case of  continuous supply of goods , where successive statements of accounts or successive payments are involved , the tax invoice shall be issued before or at the time each such statement is issued or at the time each such payment is received .

It is quite evident from the provisions embodied in section 31 of the said Acts , that ITC is to be claimed on the basis of such tax invoice .

Sub-section (5) of section 31 envisages that subject to the provisions embodied in clause (d) of sub-section (3) , which embodies provisions regarding issuance of  receipt voucher on receipt of advance payment with respect to any supply of goods or services or both , in case of continuous supply of services the tax invoice shall be issued –

(a) before or on due date of payment , where due date of payment is ascertainable from the contract .

(b) before or at the time when the supplier receives the payment , where due date of payment is not ascertainable from the contract .

(c) before or on the date of completion of the event , where the payment is linked with the completion of that event .

It is quite evident from the provisions embodied in section 31 of the said Acts , that ITC is to be claimed on the basis of such tax invoice .