GST on Construction and Works Contract Services
- Introduction : As per Section 2(119) of the CGST Act, 2017 as ‘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 GST Works contract is restricted to the work undertaken in respect of Immovable Property, hence it does not cover any work related to movable property. There is confusion in Taxpayer’s mind whether to treat works contract and construction as supply of goods or supply of service as both the supply includes supply of goods as well as supply of service. Under GST it has prescribe classification for certain supply that whether it will be treated as supply of service or supply of goods under schedule II of CGST Act, 2017; and it has been specifically stated that work contract will be treated as supply of service.
- Input Tax Credit on Works Contract Services:
As per section 17(5)(c) of CGST Act,2017; Input Tax Credit will not available in case of works contract services supplied for construction of Immovable property, however there are certain exceptions to this rule
- In case been construction of Plant and Machinery, Input tax credit relating work contract service will be available irrespective whether such asset is movable or immovable.
- Further if such expenditure is expensed off in profit and loss account then in that case also credit relating to such service will be available.
- Supplier will be eligible to take credit when works contract service is provided for further supply of works contract service.
As per section 17(5)(d) of CGST Act,2017; Input Tax Credit is not available when goods or services are received for construction of Immovable Property by taxable person on his own account, irrespective of whether such goods or services are used in his business or not; however there are certain exceptions to this rule
- In case been construction of Plant and Machinery, Input tax credit relating work contract service will be available irrespective whether such asset is movable or immovable.
- Further if such expenditure is expensed off in profit and loss account then in that case also credit relating to such service will be available.
Definition of plant and machinery for this purpose will be as follows:
Plant and Machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes—
(i) land, building or any other civil structures; (ii) telecommunication towers; and (iii) pipelines laid outside the factory premises.
Construction for the purpose of clause (c) and (d) of section 17(5) of CGST Act, 2017; will include reconstruction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.
Illustration : Suppose Mr. D wants to construct marriage hall for providing such on rental basis. For this purpose, he gives contract to Mr. Y. The contract is to construct marriage hall along with materials. This is what we call works contract, which is considered as service under GST (as per schedule II read with section 7). Now, if the contractor raises bill and charges GST, then Mr. D will not be able to take input tax credit due to the provisions u/s 17(5)(c); but in the same case if Mr. D is registered as a builder instead of a consultant, then he can take credit of such contract.
Further if Mr. ‘X’ purchase goods for construction and gives the contract of construction to contractor for construction only, then can he take credit of both- ITC on goods as well as on contract for construction?
In that case this transaction will attract section 17(5)(d) because it clearly restricts ITC on goods or services for such constructions even when such has been availed in course or furtherance of business.
- Important Factors in relation to Construction Service
- Place of Supply: As per section 12 and 13 of IGST Act, 2017; any service provided in relation to immovable property place of supply will be as follows:
Sr. No. | Particulars | Condition | Place of Supply |
1 | Directly in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or co-ordination of construction work. | Supplier of service and Recipient of service both are in India; and immovable property is situated in India. | Location of Immovable Property. |
In case Immovable Property is located outside India and Supplier as well as recipient both are located in India, then Place of supply would be the Location of Recipient. | Location of Recipient. | ||
Supplier of service or Recipient of service is located outside India. | Where Immovable Property is located or Intended to be located. |
3.2 Maintenance of records : As per Rule 56 (14) of the CGST Rules, 2017, every registered person executing works contract shall keep separate accounts for works contract showing –
(a) the names and addresses of the persons on whose behalf the works contract is executed;
(b) description, value and quantity (wherever applicable) of goods or services received for the execution of works contract;
(c) description, value and quantity (wherever applicable) of goods or services utilized in the execution of works contract;
(d) the details of payment received in respect of each works contract; and
(e) the names and addresses of suppliers from whom he received goods or services.
3.3 Value of Works Contract service
Generally, as per section 15 of CGST Act, 2017; in case of construction value will be transaction value provided buyer and seller are not related and price charged is sole consideration; However, in case were works contract service includes transfer of property in land or undivided share in land. Then value will be as follows
Value of Works Contract Service = Total amount charged for supply (-) Value of land or undivided share in land where value of land shall be deemed to be one third of total amount charged for such supply.
3.4 Rates on Works Contract Services :
Construction and Works Contract service is supply of service hence normally the rate of works contract service is fixed at 12%. But in some of the activities of works contract attract rate being 5%.
3.5 Time of Supply : Issue of Invoice:
Generally, works contract service is continuous supply of service and therefore time of supply will be as follows:
- Where due date of payment is ascertainable – Invoice shall be issued on or before the due date.
- Where due date of payment is not ascertainable – Invoice shall be issued before or at the time of receipt of payment.
- Further when payment is linked to the completion of an event- Invoice shall be issued on or before completion of an event.
However, if work contract service is not a continuous supply then in that case time of supply will earlier of the following:
If invoice is issued within the period prescribed (i.e. within 30 days after the provision of service except for bank and other financial institute)
- The date of issuing invoice OR The date of receipt of payment whichever is earlier
If invoice is NOT issued within the period prescribed
- The date of provision of service OR The date of receipt of payment whichever is earlier
Where the provisions of clause (a) or (b) are not possible then in that case time of supply will be
- The date on which the recipient shows the receipt of services in his books of account.
- Question that may arise:
Question : Mr. Ariya is builder and has procured goods and availed various services for his construction business whether he is eligible to avail the credit of same?
Answer : In such case though Mr. Ariya has availed such service in relation to his business still he will not be eligible to avail the input tax credit of goods and service procured by him.
Question : M/s Raj Traders has constructed an office for his own use whether they are eligible to take credit of goods procured for construction of said office or input service procured during the construction?
Answer : In this case it will fall under block credit and therefore M/s Raj traders will not be eligible to take credit of the same.
Question : M/s Devi Ltd. has constructed a solar plant, by availing various input service in relation to it. Whether he will be eligible to take credit of the same?
Answer : In this case he will be eligible to get the credit. As the said transaction falls under exception (i.e. construction of plant and machinery).
Question : Mr. Jaydeep has been appointed as contractor for office building, he sub-contracted the same to Mr. Ritesh. For fulfilment of said contract Mr. Ritesh has procured various goods and service for construction of office building. Whether Mr. Jaydeep will be eligible to get the credit in relation to such contract? Further whether Mr. Ritesh will be eligible to get credit for various goods and service procured by him in relation to fulfilment of contract?
Answer : In this case Mr. Jaydeep will be eligible to take the credit of GST charged by Mr. Ritesh; further Mr. Ritesh will be eligible to take the credit of goods and service procured by him; but the person who has given main contract to Mr. Jaydeep will not be eligible to take credit of GST charged by Mr. Jaydeep.
Question: Mr. Dipak is engaged in construction business whether he can opt for composition scheme? He does not have any turnover in preceding financial year.
Answer :Composition scheme is not applicable to supply of service (except restaurant service.) Construction and Works contract service is treated as Supply of Service as per GST Law; hence composition scheme is not applicable to Construction and Works Contract Service. However, government has notified composition scheme for supplier of service having a turnover of less than Rs. 50 lakhs in the previous financial year; then in current financial year dealer may avail composition scheme up to turnover of Rs. 50 lakhs Provide he is not engaged in supply of non-taxable goods or making inter-state supplies; or supply through e-commerce operator. Further the supplier should not be a casual taxable person or non-resident taxable person.