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Works Contract under GST

Since the time talks about GST has begun, works contract has become one of the hot issues to be discussed at various forums. Although Schedule 2 of the model GST Law has classified the Works Contract as Service, there are few points to be discussed before we reach at any conclusion.

At the very outset the big question is whether the composite contracts will be treated as services for the purpose of GST. Whether under a contract if supply of good and supply of services are made under different invoice, will that also are treated as services. It is also expected that the tax rates for the service/ goods will be different under GST. Will the concept of abatements come again under GST for arriving at the taxability of goods component and service component. The other which works contract is going to face is of Work Contract Tax which is levied by the local authorities. These are some of issues to be dealt with when we deliberate on Works Contract.

Works contract under GST has been defined as “an agreement for carrying out for cash, deferred payment or other valuable consideration, building, construction, fabrication, erection, installation, fitting out, improvement, modification, repair, renovation or commissioning of any moveable or immovable property” .

From the perusal of the definition it is very clear that the supply of goods along with supply of service is not the mandatory condition for classifying a particular activity as works contract. This means that contracts other than the composite contract can also form part of the works contract. Also going into the depth of the definition we can also arrive at the conclusion that if the supply of goods and services is made after issuing different invoices but under one contract, that too will also be treated as service. In such a case supply of goods made under that particular contract shall be chargeable to tax which will be charged on the services. Will this prove as a tool for tax planning, finality would come once the final law is enforced?

If it is proposed that the goods and services will be charged at different rates and also assessed by different authority, we should remain prepared to tackle the issues of abatement under GST. It would become impossible to determine the value of good/services supplied under a contract without the appropriate proportion defined by the law. Since GST will have dual concurrent structure both the revenue authorities, be it Centre or State will try to have higher proportion of the component they are going to assess.

Works contract Tax (WCT) is another major issue which the work contractors are going to face once GST Comes in. WCT is charged by the local authority on the works contract services provided by the contractor. Under GST it is likely so that this WCT might not get subsumed. Under these circumstances WCT would prove to be an additional cost for the works contractor. Also since WCT is ineligible for claiming Input Tax Credit, it is expected to have inflationary effect on the construction activities.

Also the works contracts are generally executed in more than one states in case of national highways and government projects. In such a scenario the contractor would be required to issue two different invoices for two different states. This might add on to the compliance costs.

by:
Keshav R Garg
(B.Com, FCA, CS, ISA(ICAI))
Faculty for GST: Indirect Tax Committee of ICAI
Author: Bharat's GST Ready Reckoner
            A Handbook on GST
Adviser for GST: Industries Association of Chandigarh 
Member: Indirect Tax Committee of CII, PHDCCI, MyGst.MyTax Foundation
Address: 3328, Sector 27 D, Chandigarh, India - 160 019
Phones: +91-172-461-3328, +91-98880-90008
Mails: mygst.mytax@gmail.com, keshavgarg@kdai.in


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