In December 2017, Central government vide notification 30/2017 Integrated Tax (rate) has provided a big relief to the works contractors making supplies to the Government by reducing the tax rate from 12% to 5% for supply of composite works contract constituting predominantly earthwork. Here is a detailed analysis of the said notification.
A works contract is essentially a contract of service which may also involve supply of goods in the execution of the contract. It is basically a composite supply of both services and goods, with the service element being dominant in the contract between parties. In a general sense, a contract of works, may relate to both immovable and immovable property. E.g. if a sub-contractor, undertakes a sub-contract for the building work, it would be a works contract in relation to immovable property. Similarly, if a composite supply in relation to movable property such as fabrication/painting/annual maintenance contracts etc. is undertaken, the same would come within the ambit of the broad definition of a works contract.
Under GST, a works contract is treated as supply of services. Under the previous indirect taxes dispensation, there were issues in tax treatment of works contract. Both the Central Government (on the services component of a works contract) & the State Governments (on the sale of goods portion involved in the execution of a works contract) used to levy tax. Thus the same contract was subject to taxation by both Central and State Government. GST put at rest the controversy by defining what will constitute a works contract (applicable for immovable property only), by stating that a works contract will constitute a supply of service under Para 6 (a) of Schedule II to the CGST Act, 2017.
The rate of GST for Works Contract service has been prescribed in serial number 3 of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 as amended by Notification No. 20/2017-Central Tax (Rate) dated 22.08.2017 & notification no.24/2017-Central Tax (Rate) dated 21.09.2017 as:
GST Rate for Works Contact
“Composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017” shall be taxable at 18%.
GST Rate for Works Contact supplied to Government
1. “Composite supply of works contract as defined in clause (119) of section 2 of the CGST Act, 2017, supplied to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, –
(a) A historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);
(b) Canal, dam or other irrigation works;
(c) Pipeline, conduit or plant for:
(i) Water supply
(ii) Water treatment, or
(iii) Sewerage treatment or disposal
shall be 12% (6% CGST and 6% SGST).”
2. “Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to,-
(a) Railways, excluding monorail and metro;
(b) A single residential unit otherwise than as a part of a residential complex;
(c) Low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;
(d) Low cost houses up to a carpet area of 60 square metres per house in a housing project approved by the competent authority under-
(1) The “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;
(2) Any housing scheme of a State Government;
(e) Post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes; or
(f) Mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages
Services provided to the Central Government, State Government, Union Territory, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –
(a) A civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;
(b) A structure meant predominantly for use as
(i) An educational,
(ii) A clinical, or
(iii) An art or cultural establishment; or
(c) A residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017.
Shall be taxable at 12%.
GST on works contract constituting predominantly earthwork
The Central Government, on recommendation of Council, and on being satisfied that it is necessary in the public interest so to do issued Notification 39/2017- Integrated Tax (Rate) dated 13th October 2017 as follows:
In case of Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, involving predominantly earth work (that is, constituting more than 75 per cent. of the value of the works contract) provided to the Central Government, State Government, Union territory, local authority, a Governmental Authority or a Government Entity, the rate of tax shall be 5%.
Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be.
The Notification 39/2017-Integrated Tax (Rate) has amended the previous notifications of the Government of India, in the Ministry of Finance (Department of Revenue), No. 8/2017- Integrated Tax (Rate), dated the 28th June, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R. 683(E), dated the 28th June, 2017
Analysis of the notification
1. The supply must be a composite supply works contact as defined u/s 2(119) of CGST Act, 2017-
Section 2(119) of the CGST Act, 2017 defines works contact as below:
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.
2. The composite supply of works contact must predominantly involve earth work i.e. Constitute more than 75 % of the value of works contact:
The term “Earth Work” has not been defined under any GST provisions. The Webster Dictionary defines Earth Work as “an embankment or construction made of earth specially one used as a field fortification”. The Collins dictionary defines Earth Work as “excavation of earth as in engineering construction; a fortification made of earth”. The Wikipedia defines Earth Work as “Earth work are engineering works through the processing of parts of earth surface involving quantities of soil or unformed rocks”.
After going through different definitions of earth work, the GST Authority for Advanced Ruling Jharkhand in the case of M/s. P.K.Agarwala found that Bulk earthworks include the removal, moving or adding of large quantities of soil or rock from a particular area to another. They are done in order to make an area of suitable height and level for a specific purpose.
3. The recipient of supply must be Central Government, State Government, Union territory, local authority, a Governmental Authority or a Government Entity.
Definition of Government Authority and Government entity-
“Governmental Authority” means an authority or a board or any other body, –
(i) Set up by an Act of Parliament or a State Legislature; or
(ii) Established by any Government,
With 90 percent. or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243 W of the Constitution or to a Panchayat under article 243 G of the Constitution.
“Government Entity” means an authority or a board or any other body including a society, trust, corporation,
(i) Set up by an Act of Parliament or State Legislature; or
(ii) Established by any Government,
With 90 percent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or local authority.”
However, where the recipient of supply is a Government Entity, then they should have been procured the supply in relation to a work entrusted to them by the Central Government, State Government, Union territory or local authority, as the case may be.
Disclaimer: While every effort has been taken to provide correct information, the authors/ publishers will not be liable for any loss, expense, liability, detriment or deprivation suffered arising out of any action based on the information provided above. The readers are expected to cross-check the facts and information with government circulars and notification.