Works contracts background:

Works contracts were always been a debatable issue.It is expected that works contracts in GST will be simplified. Since its inception it has suffered a lot of litigation. More of the concepts in works contracts are developed through court cases rather than the provisions. In GST it is expected to make the provisions relating to works contracts more clear and precise. Initially it was fixed that there is no sale of Goods in a works contract in (The State Of Madras vs Gannon Dunkerley & Co). Then fourty sixth amendment in constitution a deeming fiction was created to include the sale of goods in works contract in definition of sales.

(Amendment  of  article 366.-In article 366 of  the  Constitution,
after clause (29), the following clause shall be inserted, namely:-

`(29A) “tax on the sale or purchase of goods” includes-

(b) a tax on the transfer of property in goods (whether as goods or in
some other form) involved in the execution of a works contract;)

Only relevant portion is provided here.

Definition of works contracts in GST:

Works contracts in GST:

Section 2( 110) of revised GST model draft defines the works contracts:

“works contract” means

-a contract wherein transfer of property in goods is involved in the execution of such contract

 -and includes contract for

 -building,

 -construction,

 -fabrication,

 -completion,

 -erection,

 -installation,

 -fitting out,

 -improvement,

 -modification,

 -repair,

 -maintenance,

 -renovation,

 -alteration or commissioning

-of any immovable property

This definition is more or less similer to the earlier definition in

Section 65(B)(54) of the Finance Act 1994 provide the defition of works contracts for service tax as:

“works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land;

After this definition central government also started to charge service tax on services part of a works contract.

After many years of litigation and fourty sixth amendment in constitution of India issues related to works contracts get a fix in previous law. It was expected in GST that all those issues will be taken care.

Works contracts will be considered as a service in GST:

Schedule II of revised GST model law fix the nature of some transactions for the purpose of GST. Works contracts will be considered as a service in GST irrespective of goods part of the whole contract.

Place of supply rules for services will apply to determine its place of supply:

Now let us see the implications of this deeming fiction of works contracts being services. Now to decide the place of supply of works contract services will be decided by place of supply for services covered in section 9 of IGST Act (for domestic supplies). This will again cause an issue because works contract services are not specifically covered there. We will have to derive their provisions from other relevant provisions. Like in case of immovable property place of supply for all supplies in relation to that immovable property will be the location of immovable property itself. In this case if works contract is for the construction of an immovable property place of supply for entire contract will be the location of immovable property. It will be the place where it is situated or intended to be situated.

In general cases following provision will apply:

For GSTIN to GSTIN supply :The place of supply will be the location of recipient of services.

For supply to a consumer i.e non registered person: His address in the books of supplier will be the place of supply.

When such address is not available: the location of supplier will become the place of supply.

Apart from these there are specific cases covered in section 9. If works contract services are in relation to those supplies. Place of supply will be construed accordingly.

Here it is important to understand that entire works contract has been considered as services in GST. Even if you make supply of some goods in a works contract provisions of place of supply for services will apply. We will have to see the entire contract as a whole. We will have to ignore the goods part in the contract.

Works contracts will be covered in continuous services for the purpose of GST:

The nature of works contract will cover it in definition of continuous services in most of the cases. The time of supply for continuous services will be the earlier of(Section 13 of CGST Act)

• The date of invoice or last date on which supplier is required to issue an invoice.
• the date on which the supplier receives the payment with respect to the supply

In continuous service the

The provisions for issuance of invoice for continuous services are covered by section 28(5).

Condition	Provisions
When the due date of payment is ascertainable form contract	before or after the payment is liable to be made by the recipient but within a period prescribed in this behalf whether or not any payment has been received by the supplier of the service
When the due date of payment is not ascertainable form contract	before or after each such time when the supplier of service receives the payment but within a period prescribed in this behalf
where the payment is linked to the completion of an event	before or after the time of completion of that event but within a period prescribed in this behalf
where the supply of services ceases under a contract before the completion of the supply	the invoice shall be issued at the time when the supply ceases and such invoice shall be issued to the extent of the supply effected before such cessation

 

Rules for isuance of invoice provided a 30 days’ time limit. These rules may be revised so we should keep it open till the final draft is there.

If works contract service is used for construction of immovable property no ITC will be available to the recipient:

Section 17 (c ) of CGST Act provide for restrictions on input tax credit. In case of works contracts the credit for the works contract services when supplied for construction of immovable property. Plant and machinery are an exception to it. Credit is allowed when the works contract services are an input service for further supply of works contract service.