Works contract has always been a debatable issue, be it whether a transaction qualifies as works contract or availing deduction from turnover or input tax credits under indirect tax laws. Under GST regime, lawmakers have made an effort to bring relief to this sector by deeming the entire works contract to be supply of service and clear-cut provisions on eligibility to avail input tax on works contract.
Provisions of GST Law
• As per Section 2 (119) of CGST Act, 2017 "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 16 of the CGST Act, 2017 delineates the eligibility and conditions for availing input tax credit. Accordingly, the credit of GST charged on the inward supply of goods or services can be claimed if it is used in the course or furtherance of business.
• However, Section 17 (5) of the CGST Act, 2017 restricts businesses to avail input tax on specified goods or services even when used in the course or furtherance of business. An excerpt of section 17(5), which prescribes the goods or services on which input tax credit shall not be available in respect of works contract is reproduced below:-
Section 17 (5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely: - inter-alia
(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for the further supply of works contract service;
(d) 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.
Explanation. - For the purposes of clauses (c) and (d), the expression “construction” includes reconstruction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;
On the basis of the above provisions, input tax credit on any works contract service or goods or services or both received on his own account is blocked, if the following conditions are satisfied-
- If they are used for the construction of an immovable property and
- To the extent of expense has been capitalized in the books
Further, input tax credit on inward supply of works contract or goods or services or both received on own account could be availed to the extent the same is not capitalized in the books of account.
Illustration to understand the input tax credit on works contract is provided hereunder:
1. A trader gives a building repair/ renovation contract for his shop to a contract wherein the contractor would be procuring the materials and would be paid a lump sum amount for services and materials. The aforesaid activity would qualify as a works contract since repair/renovation is in relation to the building i.e., immovable property. The input tax credit on the said supply can be availed to the extent that the repair/renovation expense has not been capitalized in the books.
2. Continuing with the above example if the trader bought the materials by himself and awarded only the labour activity to the contractor, it is a case of goods or service received on own account for construction (i.e. repair/ renovation) of an immovable property.The same can be claimed as input tax credit to the extent of material and labour not capitalized in the books.
Further, if a trader owing to compliance with income tax provisions capitalizes building repair/ renovation expenditure, since the benefit of the same accrues over the years, input tax credit under scenario 1 and 2 above would not be available since the same would be capitalized in books of account.
To summarise, it can be said that GST paid on inward supply being works contract can be availed as input tax credit, provided they are used for the construction of an immovable property and the same is not capitalized in the books of account. Further, one has to keep in mind the accounting treatment of the expenses incurred whether the same has to be capitalized or to be accounted as an expense as per the applicable Accounting Standards and income tax provisions.