Works Contract in GST Regime

Taxation

Works Contract in GST Regime

As we all know, GST is going to be implemented w.e.f 01-07-2017, We have already explained “calculation of Service tax on Works Contract“. But w.e.f 01-07-2017, Service Tax along with other indirect taxes like Excise duty, CST, Sales Tax, CVD, SAD, Extry tax etc. are going to be  replaced by GST. We have received many queries regarding Calculation of GST on Works Contract Service.

W.e.f 01-07-2012, All services become taxable except services in negative list and exemption list. Now w.e.f 1-07-2017 i.e. Exactly Five year after works contract service was added in Partial reverse charge category Service tax is merged in GST.

Here in this blog, a short summary for calculation of GST on works contract is given.

 

What is Works Contract

Definition of Works Contract in Service Tax

As per sec.65(54)(zzzza) of Finance Act 1994,

Work Contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

This definition is changed in GST law,

Definition of Works Contract in GST

As per section 2(119) of CGST Act, “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.

 

In the new definition, Works contract in only for Immovable property, So modification, repair,maintenance, renovation, alteration etc. of movable property is out of scope of Works contract.

 

Points to be noted for GST on Works Contract

“Service portion in the Execution of a Works Contract” being a part of declared services is a taxable service. And goods part in execution of work contract is liable for Sales tax. Hence upto 30-06-2017, abatement was provided in works contract for the goods involved in execution of works contract. After abatement (30%/ 40%/ 60%) balance value of works contract was liable for service tax under partial reverse charge. But under GST regime both goods and services involved in execution of works contract are taxable under same law i.e. GST law.

Under GST regime following point are notable for calculation of GST on works contract (as per decision taken by GST council till date 20-06-2017):-

  1. Reverse charge is not applicable to Works Contract if Service provider is Registered under GST. But as per Sec. 9(4) of CGST Act, Reverse charge will be applicable in such case where Supply of taxable goods or services or both is done by a unregistered dealer  to a registered dealer. So if a works contract is executed by a person registered in GST law then Reverse charge is not applicable.
  2. No further abatement in Works Contacts for calculation of Tax. The reason behind this is that earlier goods involved in execution of works contract was not taxable under service tax. Hence service tax was charged on abated value. But GST is applicable on both goods and services, hence not abatement is available.
  3. No further WCT deduction against Works contact. The reason is that earlier WCT was deducted for goods involved in executed of Works contract.  Because sales tax was applicable to this part. But now GST is applicable for both part Service and Supply.
  4. Value of Free issue material is not required to be included in value of invoice to arrive at taxable value. The reason is that earlier FOC material value was added to Works contract value and after that an abatement was deducted in respect of this. Now no abatement is available hence no need to add value of Free of cost material in Works contract.
  5. As per GST law, the word “Supply” includes “Supply of goods” as well as “Supply of Services”. Earlier we used the word supply only in relation of goods. But now providing services is also called as Supply.

Valuation of Works contract for GST

In GST law, Valuation of works contract is not different from any other contract. Valuation is done as per GST-Valuation Rules. The summary of valuation in GST law, is given below:

For Related party:

As per Valuation Rules of GST, Consideration is not necessary for a transaction between related party being taxable. Even transaction without consideration shall also be taxable. Valuation shall be as per valuation rules. A brief of rules regarding this is given below:

  • Open market value of such supply; or
  • Value of supply of goods or services of like kind and quality; or
  • 110% of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services; or
  • Where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value of goods or services*

For Unrelated party:

As per Valuation Rules of GST, In case of Transaction between unrelated party, Transaction value shall be value on which GST will be applicable. Transaction value shall exclude any discount offered by service provider or goods supplier. But transaction value shall include followings:

  • Any taxes, duties, levies etc. other than GST, Cess, if charged by the supplier
  • Amount incurred by recipient on behalf of the supplier
  • Subsidies received from sources other than Government, if such subsidy is directly linked to supply
  • Incidental expenses, such as commission, packing, freight, OPEs, incurred before delivery of goods/ supply of services
  • Interest/late fee/penalty for delay in payment of consideration

Rate of GST on Works Contract

Process of determination of applicable rate of GST for Works contract is same as applicable for any other composite or mixed supply (of goods or services or both) contract. As we know, In GST law composite or mixed supply of goods and services only in relation of immovable property (not for movable property) is called as works contract. But process of determination of rate is same for any contract having composite or mixed supply of goods or service or both. (Note: In GST law, Supply include supply of goods as well as supply of Services)

Composite Supply / Naturally Bundled goods or services:

A composite supply is comprised of two or more supplies (of goods or of services or of both) which are naturally bundled, generally comes together and one of which is a principal supply (intention of Supply receiver was for principal supply and other supplies are naturally bundled with it so they comes together). In the case of Composite Supply which are naturally bundled, the whole shall be treated as a supply of such principal supply and tax shall be paid according to GST rate applicable on principal supply. It means Rate of Principal supply shall be applicable for whole supply.

Mixed Supply / Artificially Bundled goods or services:

A mixed supply is comprised of two or more individual supplies (of goods or of services or of both) which are not naturally bundled but artificially bundled. In the case of mixed supply, whole supply shall be treated as supply of that particular supply which attracts the highest rate of tax.

Note: To know about HSN and SAC for works contract in SAP Click Here

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CA Ashok Kumar