A single tax structure is definitely a welcome move and the introduction of Goods and Services Tax (GST) seeks to do just that by way of amalgamating a large number of Central and State taxes into a single tax. GST will not only address the concerns of double taxation but will also help in reducing the overall tax burden on goods and services. Furthermore, it will also help in making Indian goods competitive internationally thus providing a much-needed boost to the economy.
The Real estate industry is one of the most pivotal sectors in India and has seen a phenomenal growth, not just in cities, but even small towns. GST is another development that will have a significant impact on this sector. Let’s take a look at the impact of GST on the construction industry and the real sector.
What is Work Contract?
Works Contract has been defined in Section 2 (119) of the CGST Act, 2017 as under:
'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.
Thus, the definition as adopted in GST is more influenced from VAT Laws than Service Tax. Accordingly, the definition does not provide for any generic definition but only includes 14 types of contracts as works contract, which are as follows:
- Fitting out
GST Schedule II clearly mentions that the following are supply of service–
- construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly,
- works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract
Thus GST with its 'One Nation One Tax' has removed the confusion regarding the tax treatment.
This means works contract will be treated as service and tax would be charged accordingly (not as goods or part goods/part services).
This treatment of works contract as service and not as supply of goods will bring in much needed clarification to the works contracts. Under the current regime, different states have different schemes for VAT. There are different composition schemes with different VAT rates. Service tax too is complex with 60% abatement on new works and 30% abatement on repair contracts. GST will solve such with a much simpler straightforward calculation.
Availability of input tax credit
As per Section 17(5)(c) & 17(5)(d) of CGST ACT input tax credit shall not be available where:
- works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;
- goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.
INPUT TAX CREDIT
Works Contract service to works contract services
Works Contract services to Immovable Prop. being Plant & Machinery
Works contract services to any other immovable property
Goods & Services for own immovable property being P&M
Goods & Services for own immovable property not being P&M
Hence input credit can not be availed by builders when he sells the flats which will be taxable under the category of construction services. Input credit will also not be available on construction of commercial complex by developer where income will be under the renting category.
Now, let us understand the different provisions applicable to a Works Contract Service Provider in the GS scenario:-
1. Registration:- Section 22 says that every supplier shall be liable to be registered under this Act in the State or Union territory , other than special Category states, from where he makes a taxable supply of Goods or Services or Both, if his aggregate turnover in a Financial Year exceeds Twenty Lakh rupees. Provided that where such person makes taxable supplies of goods or services or both from any of the special category states , he shall be liable to be registered if his aggregate turnover in a financial year exceeds ten lakh rupees.
Explanation:- The expression 'Special Category States' shall mean the states as specified in sub-clause (g) of clause (4) of Article 279A of the Constitution.
Construction sector over the years has got used to payment of taxes under simplified composition schemes on the total project value without any Input Tax Credit. Due to unorganized nature of this sector, there shall always be a class of contractors who may not be able to maintain records as per the prescribed norms. However under GST Regime there is no such scheme of taxation. Section 10(2)(a) of CGST Act further states that a person supplying services other than Restaurant services is not eligible to opt for composition scheme.
Hence, a Works contract Service provider whose turnover exceeds Twenty lakh rupees or Ten lakh rupees in case of specified states is required to get himself registered as a normal supplier( not eligible for composition). This will be a big blow to the small sub-contractors who cannot opt for composition scheme. They will be forced to register for normal taxation scheme increasing their compliances and costs.
Now the question arises in which state the Works Contract service provider has to take registration?
Let us understand this by way of an example, ABC Ltd. is engaged in construction of Residential Buildings in Delhi, Mumbai, Hyderabad and Punjab. In this case, the Company should obtain registration in all the states where it has a Project office.
2. Levy and collection
There shall be levied a tax called the CGST / SGST or IGST on all intra-state or inter-state supplies of goods or services or both . Hence, GST will be levied based on the place of supply on the rates of services.
3. Time of supply
Time of supply means the point in time when goods/services are deemed to be supplied/ rendered. It enables us to determine the rate of tax, value, and due dates for payment of taxes. The liability to pay CGST / SGST will arise at the time of supply as determined for goods and services.
Time of Supply shall be as under for the purpose of determining a regular works contract would be as under:
Section 12(2) says that the time of supply of services shall be the earliest of the following dates, namely:—
(a) the date of issue of invoice by the supplier, if the invoice is issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or
(b) the date of provision of service, if the invoice is not issued within the period prescribed under sub-section (2) of section 31 or the date of receipt of payment, whichever is earlier; or
(c) the date on which the recipient shows the receipt of services in his books of account, in a case where the provisions of clause (a) or clause (b) do not apply.
If the supplier receives an amount up to One Thousand Rupees in excess of the invoice amount, the time of supply for the extra amount shall be the date of issue of invoice (at the option of the supplier).
- Date of Invoice 25th May 2018
- Date of receipt of payment 12th July 2018
- Date when supplier recorded receipt in books 12th July 2018
Time of supply will be 25th May 2018
Time of Supply in case of continuous service
Time of supply in this case will be
1. Where the due date of payment is ascertainable from the contract, the date on which the payment is liable to be made by the recipient of service, whether or not any invoice is issued or any payment has been received by the supplier of service
2. Where the due date of payment is not ascertainable from the contract, each such time when the supplier of service receives the payment, or issues an invoice, whichever is earlier
3. Where payment is linked to the completion of an event, the time of completion of that event
Time of supply under Reverse charge
Reverse charge means the liability to pay tax is on the recipient of goods/services instead of the supplier. In case of reverse charge, time of supply shall be earliest of the following dates-
The date of payment OR
The date immediately after SIXTY (60) days from the date of issue of invoice by the supplier
Example for reverse charge:
- Date of Payment 15th July 2018
- Date of invoice 1st July 2018
- Date of entry in books of receiver 18th July 2018
Time of supply of service 15th July 2018.
If it is not possible to determine the time of supply under (a) or (b) , the time of supply shall be the date of entry in the books of account of the receiver of service.
For clause (a)- the date of payment shall be earlier of-
1. The date on which the recipient entered the payment in his books OR
2. The date on which the payment is debited from his bank account
4. Place of Supply:
Place of supply in case of WCT shall be governed by place of supply of service rules which are as follows:-
Location of the immovable property is used to determine the taxability of a transaction involving supply of service. i.e.in case, in case, the immovable property is situated in the same state as that of the place of registration, CGST and SGST shall be levied and in case, the immovable property is situated outside the state in which the registration is obtained, IGST will be levied.
No abatement has been prescribed for works contract service so far as was there in the earlier regimes (Pre- GST).
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