Works Contract under GST
1. What is Works Contract?
Works contract, by definition, is an agreement to carry out for cash, deferred payment, or other valuable consideration - building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property. Typically, it is a combination of goods and services but is neither a composite nor a mixed supply as defined under the CGST Act. It also includes transfer of property (whether as goods or in some other form), which has happened for the purpose of execution of a works contract.
2. Works Contract in the Previous Regime
In the previous regime, works contract was treated as a combination of goods and services. This meant that VAT was applicable on the goods component, and Service Tax on the service component. If in the course of work contract, a new product would be manufactured, and excise would also be applicable. The situation was complicated, as different states had different VAT rates, as well as different composition schemes for different VAT rates. To add to the complication, the abatement of Service Tax on new works contract was 60%, whereas the same for repair contracts was 30%. It also required a great deal of documentation, as under VAT specific records, such as, purchases, sales, stocks, VAT account, works contract account, and so on. These records needed to be maintained and retained for at least a period of 5 years from the end of the financial year in which they were effected.
3. Works Contract under GST
GST on works contract services has become much simpler. A major change is that the GST Council has decided to consider works contract purely as a service. The works contract GST rate has been fixed at 18%. It is to be noted, that the treatment of works contract under GST will be applicable only for immovable properties.
Separate Works Contract Accounts
A registered taxable person executing a works contract should keep separate accounts for works contract, which should contain information pertaining to name and address of persons on behalf of whom works contract is executed as well as suppliers; description, value and quantity of goods or services received and utilized for works contract; details of payment etc.
Decentralised Service Registration
As per the GST law, every supplier shall be liable to register, provided his aggregate turnover crosses the threshold limit of INR 20 lakh (INR 10 lakh in Special Category States). The same rule will be applicable for a works contract service provider as well. However, the catch is, that services in the previous regime had a centralized registration, whereas under GST, the registration is decentralised. The fact that a works contractor will now need to obtain registration in all the states where he has a project office could be a potential irritant.
No Composition Scheme
The construction sector in particular, over the years, has got habituated to pay taxes under simplified composition schemes on the total project value, without any GST Regime Input Tax Credit . Due to the unorganized nature of this sector, there has always been a class of contractors, who may not be able to maintain records as per the prescribed norms. But unfortunately, the composition scheme for services under GST is restricted only for persons supplying restaurant services. This means that any works contracts service provider will need to register as a normal supplier on crossing the threshold. This will be a big blow to the small sub-contractors who cannot opt for composition scheme, and thus will be facing an increase in compliance and associated costs.
Input Tax Credit
Under the GST Regime , input tax credit is not available for works contract services when supplied for construction of immovable property (excluding plant and machinery), except where it is an input service for the further supply of works contract service – which means that contractor can avail the ITC in respect of services availed from the sub-contractor. Also, ITC will not be available for all goods or services accepted by a taxable person for constructing immovable property with his own account. This excludes plant and machinery, even when used for use in the course or furtherance of business.
No Abatement has been prescribed for works contract service under GST. The previous regime had an abatement of 60% for new works contract and 30% on repair works, as mentioned earlier. Given that the rate for service tax was 15%, and the GST rate for works contract is 18%, it is bound to create an extra burden of taxation in the GST era.
Long Term Construction / Works Contracts
In the case of constructions or contracts going on for a long period, there are bound to be circumstances wherein the contract began in the previous regime and has extended into the GST regime. The GST law provides that goods and/or services supplied on or after 1st of July – i.e. the launch date of GST, in pursuance of a contract entered into prior to 1st of July, shall be taxed as per GST norms. However, it also stipulates that in case the full duty or tax payable for such supplies has already been paid under the earlier law, then no tax shall be payable under GST, even if part consideration for the supply is made on or after 1st July.