GST on Works Contract

As per section 2(119) of CGST Act, if there is a mixture of supply of goods and services at a single price and which results from the Immovable property then such supply shall be called the works contract. It includes the construction of a new building, erection, installation of plant and machinery.

gst on work contract

Before the application of GST, there was a very complicated law was drafted about the taxability of works contract and the bifurcation of the part to be considered as services and goods.

However, under the GST law, there is one provision has been defined under schedule II read with section 7of CGST Act, 2017, which states that whether the supply shall be treated as supply of service or supply of goods. As per this rule, works contract is a supply of services. It is a composite supply since in this contract 2 or more supplies are provided together which are naturally bundled in conjunction with each other.

One of the objectives of GST was to remove the confusion regarding the tax treatment and through this amendment, it can be easily said that the GST has fulfilled this objective.

In simple words, works contract shall be treated as supply of service and tax would be charged accordingly (and not on the goods or services part separately).

Blocked Credit under section 17(5) in works contract

As per section 17(5) of CGST Act, 2017, certain supplies has been defined under which input tax credit of such supplies shall not be available to the supplier. These supplies include works contract services. It means the input tax credit is not available for works contract services. However, there are the following exceptions to this provision:

  • Works contract services of plant and machinery, i.e., if the above works contract is being supplied in relation to plant and machinery then ITC shall be allowed.
  • Works contracts services for the construction of the immovable property is being provided where it is an input service for further supply of works contract service.

In simple words, Input Tax Credit would be available if the person is making works contract services of plant and machinery however input tax credit is not available to any person who constructs on his own account even such construction is for business use.

Composition Scheme is not available in case of works contract

As per section 10 of CGST Act, a person may opt for composition scheme if he is making a supply of goods and supply of restaurant service with certain conditions. That means a work contractor supplier is not eligible for opting the Composition scheme. Although as per the GST amendment act, 2019, composition scheme is now also available for supplier making the supply of services, however, they can go for this scheme only if they have satisfied certain conditions as specified in that section. 

Separate Accounts to be maintained (Rule 56)

Those persons who are engaged in the business of works contract has to maintain a separate record of books for each contract executed.

Under these books, they have to maintain the following records:

  • Name and address of the person on whose behalf contract was executed
  • Description, value, the quantity of the goods and services under the contract.
  • Details of payment received
  • Name and address of the person from whom such contract was executed.

GST Return Filing

Summary

Through this article, we come to know that under GST:

  • Works contract shall be treated as a supply of services.
  • ITC shall not be available in case of works contract services with certain conditions.
  • Works contract supplier cannot opt for composition scheme.
  • Works contractor shall have to maintain separate records for each contract executed.

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