Works Contract Under GST
What is a Works Contract?
As per the U/S 2(119) of the CGST Act, a “work contract” is a contract for the building works, construction, production, completion, installation, setup, improvement, modification, maintenance, repairs, restoration, alteration, or designing of any immovable property in which the implement specifies the change of ownership in goods and services. Thus, the works contract under GST is relevant to fourteen different types of contracts involving immovable property.
The term “works contract under GST” means any work done on either fixed or movable property, as defined by the Goods and Services Tax (GST) Law. According to Section 6(a) of the Second Schedule of the CGST Act, a works contract is a “Supply.” As a result, GST has a clear distinction between works contracts and GST on supplies of services. It is essentially a composite supply of goods and services, with the service component predominating in the contractual agreement.
Works Contract under GST in India
Under GST laws, the concept “Works Contract” has been limited to all “immovable property” works compared to other existing VAT and Service Tax regulations. Work contracts have also been taken into consideration for moveable properties.
Input Tax Credit (ITC) for Works Contract under GST
As per the U/S 17(5)(c) of the CGST Act, the input tax credit (ITC) for works contract amenities and facilities is provided for the development of any immovable property except for equipment and machinery, excluding all the input service for further supply of GST contract works service. Any input tax credit (ITC) for contract services is thus feasible for an individual in the same business sector as the recipient and utilizes the services received for providing additional work services.
Maintaining Records for GST-Applicable Works Contracts
Under Rule 56(14) of the CGST Rules, each registered person executing the works contract under GST must have completely separate works contract accounts showing the following information:
- The address and name of the individual on whose behalf the work contract is being carried out;
- Justification, value, and amount of goods or services received in connection with the performance of the works contract;
- The description, value, and volume of products or services used in the performance of the contract’s work;
- The specifics of each payment received in connection with a Works contract;
- The address and name of the supplier from whom the goods or services were obtained;
- Under the GST regime, the location of supply falls under the category of works contracts.
- The place of supply, as per the GST law, should be immovable property. As per Section 12(3) of the IGST Act, both the supplier and addressee must be based in India. Location of supply should act as the location of immovable property.
GST Valuation of Works Contracts
The value of a works contract service is determined by the contract, which includes the transfer of ownership to a specified location. In the case of supplies of services and valuation of works contracts subject to GST that involve the transfer of property in the area or an undivided share, the value shall be as follows: –
- The Value of a Supply of Both Services and Goods = the Total Amounts Paid for Such a Supply (-) the market value of a land share or an undivided land stock
- The total amount includes the consideration charged for this service and the price charged for the transferring property.
- The land should be valued at one-third of the entire value charged for these goods and services.
Under The GST, the Place of Supply:-
Immovable property is associated and correlated with works contract under GST. When both parties (the supplier and the recipient) are located in India, the location of the immovable property should be the place of supply. If the immovable property is located outside India and the supplier or recipient of the services and goods is situated in India, the supply will be the recipient’s location. The supplier or receiver is based outside India; India’s immovable property should be the supply location.
TDS Applied to the Work Contract
TDS at a rate of 2% is mandated to be deducted from payments made to suppliers of taxable goods or services in cases where the contract value exceeds Rs. 2.5 lakh, and also in cases where a single supply is less than Rs. 2.5 lakh but the work contract is more than Rs. 2.5 lakh @2%.
If there are inter-state sales, 1 percent TDS is required to be deducted under both CGST and SGST, resulting in a total TDS of 2 percent. If there are inter-state sales, IGST will be levied, and TDS will be 2 percent.
How to find Works Contract rate under GST
GST Council recommended in its 25th meeting held on 18 January 2018 to reduce the works contract rate under GST provided by subcontractors to the main contractor who provides works contract services to the Central and State Government, Union territory, local authorities, public authorities, or a Government Entity that are subject to the 12% GST rate.
Under the current GST system, works contracts are levied at three different rates: 5%, 12%, and 18%. Initially, a GST rate of 18 percent was notified for works contract services. Various notifications have been issued announcing the various works contract rate under GST for different circumstances wherein work contract services are available.
According to the GST council’s recommendation on January 18, 2018, if a subcontractor provides works contract services to the main contractor, the main contractor provides works contract services to the Central and State Government, Union territories, a local government, a Govt. Jurisdiction, or a Government Entity, the main contractor’s tax rate should be reduced to 12% from 18%, offered the main contractor delivers the works contract service.
Likewise, if a works contract is subject to GST at a rate of 5%, the subcontractor’s GST rate on these works contracts shall be 5% too.
What does “immovable property” mean for a work contract?
The immovable property is not discussed in the GST Law. Under Section 3(26) of the General Clause Act 1897, the concept of “immovable property” shall be reproduced as “immovable property”, including the land, property benefits, and things attached to the planet’s surface or firmly fixed to anything that is associated to the earth.”
What does a work contract represent?
Before introducing the GST, both provisions relating to the sale of services and those relating to the sale of goods were considered separately. Both taxes, namely Service Tax and Value Added Tax, were imposed on a single Works Contract transaction. The GST regime includes provisions for Composite and Mixed Supply.
What is the difference between Composite and Mixed Supply?
Collection of multiple supplies tied together which are non-detachable are called composite. A primary supply is one of these. The tax rate on such composite supplies is the same as on the primary supply.
The term “Mixed Supply” means at least two different sources of services or goods and these are detachable as they are not bound together naturally. The tax rate on these supplies should be higher than that would apply to any of those supplies if they were sold at the same price.
What are the GST Rates for Works Contracts?
Two GST rates have been established for services provided under a Works contract: 18% and 12 percent.
Define Original Work?
As specified in paragraph 2 (zs) of Notification 12/2017 – Central Tax (Rate)
The term “original works” refers to all new constructions.
- Any modification or additions on land that is required to be made feasible to abandoned or damaged structures;
- The establishment, commissioning, or installation, either pre-fabricated or otherwise of plants, equipment and machinery or structures;