GST on Works Contracts: Taxability and Compliance

A "works contract" under the GST framework is a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property. It involves the transfer of property in goods during the execution of such contracts. As per Para 6(a) of Schedule II of the CGST Act, 2017, works contracts are categorized as a supply of services.

Major Changes Under GST

The GST regime has redefined works contracts, restricting their scope to immovable properties only. Previously, under VAT and Service Tax laws, work contracts were extended to movable properties as well. GST simplifies the taxation process by treating all works contracts as services, eliminating the ambiguity of whether they constitute goods or services.

Key entries of Schedule II relevant to works contracts include:

1. Entry 5(b): Construction of a building, complex, or civil structure for sale to a buyer is considered a supply of services.

2. Entry 6(a): Composite supplies like works contracts are also treated as a supply of services. 

Tax Rates on Works Contract Services

The GST rate on works contract services has undergone changes:

-As of July 18, 2022, works contract services provided to Central/State Government or local authorities, which earlier attracted a concessional GST rate of 12%, are now taxed at 18%.

-Specific tax rate applications depend on the time of supply, invoice issuance, and payment receipt, as detailed in the GST provisions. 

GST Rates Applicable to Works Contract Under GST

The Goods and Services Tax (GST) rates for works contracts are designed to streamline compliance and improve transparency. Different rates apply based on the type of contract, work nature, and specific categories such as affordable housing or government projects.

1. Standard GST Rates 

The general GST rate for most works contracts is 18%, applicable to:

-Construction, renovation, or repair of property

-Maintenance or upkeep services for premises

-Erection and installation of machinery

2. Reduced Rates for Specific Projects 

Certain works contracts enjoy reduced GST rates due to their economic or social importance:

-Affordable Housing Projects: GST is 12% for projects under government-approved schemes like the Pradhan Mantri Awas Yojana (PMAY).

-Government Contracts: Infrastructure projects, such as roads, railways, and dams, may attract GST at 12% or be fully exempt.

3. Changes in Rates and Impact on Ongoing Contracts 

GST rate revisions during long-term projects can affect:

-Pricing Agreements: Contracts may need adjustment for revised rates.

-Billing Adjustments: Partially completed contracts must reflect the updated rates.

-Compliance: Rate changes must be accounted for in GST return filings.

Place of Supply Rules

The place of supply for works contracts involving immovable properties is governed by:

-Section 12(3) of the IGST Act: For supplier and recipient located in India, the location of the immovable property is the place of supply.

-Section 13(4) of the IGST Act: If the immovable property is outside India, the place of supply remains the location of the property, provided either the supplier or recipient is based outside India. 

Valuation of Works Contract Services

The GST law does not prescribe specific valuation rules for works contracts but provides guidance:

-If the value of land/undivided land share is included, one-third of the total amount is deemed as land value.

-If the land value is excluded, the transaction value of the contract is used. 

Input Tax Credit (ITC) for Works Contract

ITC allows businesses to offset their GST liability by claiming credit for taxes paid on inputs. However, certain restrictions under Sections 17(5)(c) and 17(5)(d) of the GST Act apply.

1. Eligibility Conditions for ITC 

ITC can be claimed under the following conditions:

-Business Use: Inputs must be for business activities. ITC is allowed for resale or further taxable supply of services.

-Further Supply: ITC is permitted when works contract services are used to provide additional works contract services.

-GST Compliance: The supplier must have paid GST, and details should reflect in GSTR-2A.

2. Restrictions on Immovable Property 

ITC is disallowed for works contracts involving immovable property unless:

-Plant and Machinery: ITC is permitted for construction or installation of plant and machinery.

-Business Use: ITC is not allowed for personal use of immovable property.

3. ITC in Subcontracting

-Primary Contractors: Can claim ITC for GST paid to subcontractors if proper invoices are issued.

-Subcontractor Compliance: Subcontractors must ensure accurate GST filings to facilitate ITC claims. 

 Documentation Required for ITC Claims 

Compliance for Works Contract Service Providers

Adherence to GST regulations is essential for works contract service providers to avoid penalties. Key compliance areas include:

1. Registration Requirements

-Turnover Threshold: Registration is mandatory if annual turnover exceeds Rs. 20 lakhs (Rs.10 lakhs in special category states).

-Interstate Supplies: Providers engaged in interstate works contract services must register regardless of turnover.

2. Invoicing and GST Return Filing 

Invoices must include:

-Recipient's name, address, and GSTIN

-Description of services, HSN codes, and applicable GST rates

-Invoice number and date

3. Tax Deduction at Source (TDS)

-Applicability: TDS is deducted at 2% (1% CGST + 1% SGST or 2% IGST) for contracts above Rs. 2.5 lakhs.

-Who Deducts TDS: Government agencies and notified entities awarding works contracts.

-Contractor Compliance: Deducted TDS is claimable during GST return filing. 

Place of Supply and Valuation

-Place of Supply: Generally, the location of the immovable property where services are rendered. For international projects, the place of supply is outside India if the property is abroad.

-Valuation Rules: Taxable value excludes land value. In real estate projects, one-third of the total value is attributed to land and excluded from GST.

Special Provisions for Works Contract

-Composition Scheme: Available for contractors with turnover up to Rs. 50 lakhs. GST is charged at 6% but disallows ITC.

-Exclusions: Abatement provisions no longer apply under GST. Instead, GST excludes land value in real estate projects. 

Fraud Prevention and Compliance Measures

There are concerns about fraudulent ITC claims in works contracts, such as inflated claims through bogus invoices or disproportionate material usage. Authorities recommend thorough checks, including consumption norms, vehicle tracking, and machinery rentals.

Conclusion

The GST framework for works contract services brings clarity and consistency by categorizing these contracts as services. While simplifying compliance, it also places checks to prevent misuse of ITC provisions. Taxpayers involved in works contracts must ensure adherence to the GST rules to avoid penalties and ensure seamless input tax credit claims.

FAQs on Works Contract Services under GST

1. What is a works contract under GST? 

Ans. A works contract under GST is defined as a contract for activities like construction, installation, renovation, or repair of immovable properties, involving the transfer of goods during execution, categorized as a supply of services under Schedule II of the CGST Act, 2017.

2. What is the GST rate applicable to works contract services?

Ans. The standard GST rate for works contract services is 18%, effective July 18, 2022. Previously, specific contracts for government or local authorities were taxed at 12%. The applicable rate may vary based on the nature of the contract and recipient.

3. Can Input Tax Credit (ITC) be claimed on works contracts under GST?

Ans. ITC is restricted for works contracts involving construction of immovable property for personal or business use unless the services are for further supply of works contract services or plant and machinery.

4. What are the place of supply rules for works contract services under GST?

Ans. For immovable properties, the place of supply is determined by the property's location as per Section 12(3) (within India) or Section 13(4) (outside India) of the IGST Act.

5. How is the value of works contract services calculated under GST?

Ans. If the land value is included, one-third of the total value is deemed as the land's cost. Otherwise, the transaction value of the service is used for GST calculation.

6. What are the TDS provisions for works contracts under GST?

Ans. Under Section 51 of the CGST Act, government entities deduct 2% TDS on payments exceeding Rs. 2.5 Lakhs. The TDS amount is credited to the supplier’s electronic ledger once GSTR-7 is filed by the deductor.