ritwik asked 6 years ago
According to you FOC material would not be included in the valuation of supply. Is it not in dissonance with the definition of GST supply?
Ajay answered 6 years ago
Dear Ritwik,
Directly coming to your concern, First understand the situation of a works contract,
I have purchased cement and steel for Rs. 200000/- and paid proper GST on it. Then I entered into a contract with M/S XYZ for construction of a building for my company. Supply of sand is in scope of XYZ but cement & steel has already been purchased by me so I will use that cement and steel, I will issue cement and steel from my store as and when required in construction (It is called FOC material issued to contractor, nothing is charged for this.) . The contract value is Rs. 10 Lakh. (including labor cost incurred by XYZ, sand cost and profit of M/S XYZ but does not included cost of cement and steel). Now I am required to pay GST to Mr. XYZ on Rs. 10 Lakh against invoice raised by M/s XYZ. I am not required to pay GST on value of cement & steel again.
Now come to your point, In the GST law inclusive definition of supply is given as follows:
“SUPPLY includes all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business“
Now see following points:-
- transfer of cement & steel by me to contractor for use in construction of building as per my contract, which is not for a consideration, does not fall under definition of supply. This is not actually a transfer because ownership of material does not change, I am using material purchased by me in construction of my company. The value of material which is supplied by contractor i.e sand is already included in contract price. Hence value of material already purchased by me and used in construction is not a supply.
- Earlier in Service tax regime, value of FOC was added in value of works contract for calculation of service tax not because Service tax was to be collected on this material but to justify rebate of 30%/40%/60% which was given from value for works contract for material used in works contract.
Hence in GST regime, value of FOC material should not be added for calculation of GST.
I think, it is clear now, if not pleae feel free to write back to us.