GST On Works Contract and Input Tax Credit - Meteorio

GST On Works Contract and Input Tax Credit

| 7 years ago

construction

Work contract refers to a transaction in which both goods and services are supplied. This type of transaction is also known as a composite supply.

GST is levied only For:

  1. Supply of Goods, or
  2. Supply of Services

GST Law named this composite supply as a supply of service.

We will cover every aspect of works contract one-by-one! [Pay attention to immovable property]

Meaning of Works Contract 

As per GST law, 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”  [Section 2(119) CGST]

Under GST, works contract is considered to be a supply of services. [Point 6(a) of Schedule II]

Classic Example:

Public Works Department (PWD), a government department, gives tender of works contract to construct a building (immovable) on a government land for Rs.10,00,000/- plus cost. The builder provides goods like bricks, cement, iron bar and service of engineers, architects, skilled labors etc.

If the above contract is for movable property it will fall under composite supply. [Will be discussed later]

 

Input Tax Credit (ITC) of Works Contract 

Input tax credit of a work contract is available in respect of following two situations:

  1. Where works contract relates to Plant and machinery, or
  2. Where such work contract is an input service for the further supply of works contract service of an immovable property. [For the main Contractor]

Apart from the above two situations, Input tax credit (ITC) in respect of a works contract services supplied for construction of an immovable property is not available. [Section 17(5)(c) of CGST Act]

Example:

Larsen & Toubro (L&T), a Construction engineering company procures a tender to construct a building for the government.

They hire various sub-contractors for the above work. These sub-contractors charge GST on the supply of work contract services.

In this case, L&T [main contractor] can take input tax credit (ITC) of GST charged by Sub Contractors.

 

Construction on Own Account [Not a works Contract] 

Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer before issuance of completion certificate, will be considered as a supply of service. [Point no 5(b) of Schedule II]

However, It will be treated as a supply of goods if the entire sales consideration is received after issuance of completion certificate by the competent authority or after its first occupation, whichever is earlier.

Example:

DLF builds a cyber-city in Delhi. These complexes are sold to individual buyers before the issue of completion certificates.  This sale transaction will be considered as a supply of service.

 

Works Contract For Movable Property

GST law has defined work contract for immovable property only.

Just like immovable property, work contract for a movable property is also a composite supply.

However, it is not a supply of service.

Example:

Mr. Mishra contracted a carpenter to make a chair, Table and a whole set of movable furniture. In this case, the carpenter will supply goods like wood, nail, and color and labor services too.

The final product will be movable property. Therefore it will be considered as a composite supply rather than a works contract.

 

Difference between works contract and composite supply 

Ground for DifferenceWorks ContractComposite Supply
Nature of SupplySupply of ServiceDepends on the principal supply.
In the above example, the
carpenter’s principal supply is his service. Therefore the whole transaction will be considered as service.
GST RatesSpecific GST rates
are prescribed
GST rate will depend on principle supply.
GST rate of principle supply
apply to whole transaction value.
Input Tax Credit (ITC)
to the recipient of Supply
Not available
(Apart from specific Situation
discussed above)
Available

Also Read: GST on Rent

 

Happy Learning!

 

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Pravin Giri

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Pravin is a Qualified Chartered Accountant [CA]. Gives opinions on Income tax, GST, and finance.Find him on Twitter @Pravinkumargiri

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