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Works Contract under GST
by
G.Viswanathan, A.C.A., A.C.S, Chennai
Associate Consultant – STVAT Consulting
“In this article CA Viswanathan lucidly explains the relevant provisions in Model GST Law relating to works contract transactions and also opines that the value of free supply of materials by the principal could not be included to the transaction value in a Works Contract for the purpose of GST levy”
The term Works Contract always brings with it a kind of mystical value and has been a subject matter of intense debates and also introspection by the Courts.
The Supreme Court in the case of Gannon and Dunkerlay (9 STC 353) ruled that the power to tax does not extend to the contract for construction of building even if there is a transfer of building materials during the course of construction and held such contracts are not sale of goods but for works. This resulted in a piquant situation with the state unable to levy a tax on the sale of goods involved in the execution of works resulting in the 46th amendment to the Constitution giving the powers to levy a tax on the sale of goods used in the execution of works.
Works Contract in a layman’s language would mean any contract were the intention of the parties are to combine both materials and labor with an objective to get an end product by combining both the elements.
Given the above background we shall try to examine how Works Contract is likely to be treated in GST.
Definition of Works Contract in GST
Sec 2 (110) of the Model GST laws defines a “works contract” means a contract wherein transfer of property in goods is involved in the execution of such contract and includes contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property;
To qualify to be categorized as a Works Contract under GST the main and only criteria is that there has to be a transfer of property in goods which is involved in the execution of the contract.
From the above definition what is clear is that works contract under GST will extend to contracts which may or may not result in the creation of an immovable property.
An illustrative list of such contracts are given below
1. Printing and Dyeing contracts
2. Fabrication and erection of Plant & Machinery
3. Fabrication and erection of truss works
4. Painting and White washing contracts
5. Comprehensive Annual maintenance Contracts for Equipment’s
6. Contracts for Body works for Light and Heavy Commercial Vehicles
7. Custom made items and furniture based on a contract
8. Interior Decoration Contracts
9. HVAC Contracts
10. Wedding Contractors
The law makers in their joint wisdom have while drafting the Model GST laws have made it explicitly clear that all Works Contract will be treated as Supply of Services and thus ending any confusion in the minds of the tax payer.
This is definitely a welcome move of removing the ambiguity whether to tax the Works Contract as a Supply of Goods or Services. The declaration that all Works Contract as Services will definitely hamper small contractors who used to opt for payment of VAT under composition scheme but cannot do so under the GST regime as services have been excluded from the ambit of Composition.
We shall now try to examine the relevant provisions relating to Time and Place of Supply under GST with specific reference to Works Contract.
Time of Supply
Sec 13 of the Model GST Laws states that the Time of Supply of Services shall be the earliest date of any of the events listed below
 The Date of issue of Invoice
The Date of receipt of the payment
In case of Reverse Charge the date of payment or a period of 60 days from the date of invoice by the Supplier.
However in case of continuous supply of services (means a service which is provided on a continuous or on a recurrent basis for a period exceeding three months) the time of supply shall be determined as under.
In case the due date of payment is ascertainable as per the contract the due date of payment whether or not such payment is received.
Where the due date of payment is not ascertainable as per the contract the date on which the payment is received by the Supplier of services.
In case the payment is linked to the completion of an event the date on which the event has been completed.
• In case of cessation of services before completion of the services the date on which the services ceased.
Place of Supply
Sec 9 of the Model IGST Laws deals with the Place of Supply of Services and the rules relating to place of Supply of Services are tabulated below
|
Location of the Service Provider |
Location of the Service
Recipient |
Place of Provision of Services |
|
Kerala |
Kerala |
Kerala (CGST + SGST will be
attracted) |
|
Assam |
Manipur |
Manipur (IGST will be attracted) |
|
Tamil Nadu |
Singapore |
Singapore (Will be treated as
Export of Services) |
|
|
|
|
|
Directly in relation to
immovable Property |
|
Gujarat |
Andhra Pradesh (property located
in Andhra Pradesh) |
Andhra Pradesh (IGST will be
attracted) |
|
Madhya Pradesh |
Madhya Pradesh (property located
in Jharkhand) |
Jharkhand (IGST will be
attracted) |
|
Odisha |
Dubai (property located in
Odisha) |
Odisha (CGST + SGST will be
attracted) |
|
Maharashtra |
Oman (property located in Oman) |
Oman (will be treated as Export
of Services) |
It should be noted that services which are indirectly related to immovable property will not attract the provision relating to the place of provision of services in relation to immovable property and will be governed by the general provisions contained in Sec 9 of the Model IGST laws.
The other contentious issue relates to Free Supplies in relation to Works Contract Services. While under the current laws the Courts have held that Free Supplies cannot be included for computing the value on which Service Tax is paid but the legislators have ensured that the value of Free Supplies is included for computing Service Tax liability for those who availed the permitted abatement prescribed under the Valuation rules.
Given the above background let us check if Free Supplies are to be included in the computation of Transaction Value under GST.
Taxability of Free Supplies
We need to first examine the definition of Supply contained in Sec 3 of the Model GST Laws
Supply includes—
(a) 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,
(b) ____________________________________________________________________and
(c) a supply specified in Schedule I, made or agreed to be made without a consideration.
As the term consideration has significance we now examine the definition of consideration under the Model GST laws
Section 2 (28) defines “consideration” in relation to the supply of goods or services includes
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of goods or services, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
PROVIDED that a deposit, whether refundable or not, given in respect of the supply of goods or services shall not be considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply
From a joint reading of the two definition the following points emerge
1. The supply could be made with or without a consideration
2. It should be in the course of furtherance of business.
3. Consideration in relation to the supply of goods / services should have been received in Monetary terms or otherwise.
In a contract entered into by the Principal with a Contractor where the Principal agrees to provide materials free of cost to the Contractor the consideration which the contractor is entitled to receive does not include the value of free supplies .
This being the position to include the value of free supplies as a part of consideration is difficult in my opinion . The Contractor works on the materials provided by the Principal and the materials supplied is not a part of the consideration which he is entitled to receive. Can the mischief in the wordings contained in Sec 2(28) extend to the term “ in response to “ contained in the definition to include Free Supplies the answer will have to be in the negative . If this analogy is followed then for all Job Work the value of materials will have to be included in the transaction value.
We need to examine if the Free Supplies can be included in the definition of Supply. The first limb of the definition contained in Section 3 does not permit the inclusion of such value . Further the third limb of the definition does not list such a instance to permit it to be included.
Given the above in my opinion it would be difficult to include the value of free supplies to the transaction value in a Works Contract for the purpose of taxation.
It is a different thing when materials are supplied free by the Principal whether the execution of the work by the contractor can be construed as a Works Contract.
Published : March 16, 2017
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