GST AND WORKS CONTRACT TRANSACTIONS – DEMYSTIFICATION PRE GST AND POST GST IMPLICATIONS

Through Section 3 read with Schedule II, Model GST Law taxes works contract as “service” and tax would be payable accordingly.

Presently, under Section 66E(h) of Finance Act 1994, service portion of the works contract ( sans goods ) is treated as a declared service and accordingly taxed to service tax. Value of service portion in the execution of works contract as per the above Section is determined as per Rule given therein, of course, subject to Section 67.

(1) Value of service portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in the execution of the said works contract.

(2) If the value cannot be determined above, then Service tax shall be payable on 40 % (if its original works) and 70 % (on the remaining ones which includes repairs, renovations etc.).

(3) It is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004

What happens under proposed GST Law?

a) No differentiation between goods and service. It is now a “service” to be taxed as such on gross value.

b) No specific valuation provision for eg abatement or composition schemes available. Tax rate could be standard rate i.e. 18 percent or a lower rate of 12 percent for services of public importance. In both cases the rates go up substantially.

• The Model GST law provides that the value of a supply would typically be the transaction value.

• Free of cost supplies by recipient to contractor would be added in value and liable to GST. Thereafter, the contractor may need to include value of such free supplies of goods / services in the value of his services. Some clarification is coming when such free supply of goods may not be taxed. The changes are in the offing.

Impact of GST on Ongoing Contracts of all kinds- divisible or indivisible- suggested way forward

1. Make an attempt to amend the ongoing contract to factor in GST impact after carefully going through the Place of Supply Rules for Goods and Services strictly in accordance of Section 5 of the IGST Act read with Section 12 and 13 Model GST Law. This could be effective 1st April 2017 itself notwithstanding the GST notification date. Remember the standard GST rate will be 18 percent for services OR 12 percent. Services will be taxed at a much higher rate over all; whereas in case of goods taxes may or may not come down. My take is it must come down.

2. Examine the implications of Section 159 and Section 160 of Model GST (Transition Provisions) and understand the impact on your business.