Good and Services Tax (GST) is a comprehensive indirect Indian tax levied in the supply of goods and services. This tax has had a profound impact on the Indian economy since its launch in 2017. One area, in particular, that has been considerably affected by GST is the works contract.
Works contract can simply be defined as a type of service contract. For the execution of such a contract, there shall be involvement of the supply of goods. Examples of works contracts are plant and machinery installation, building constructions, oil exploration, etc.
Let us dig deep into this topic to understand the GST on works contracts in 2022. For your reference, we have also added tax rates for various classes of works contracts.
1. Works contracts prior to GST
Prior to GST, works contracts, in accordance with the previous law, consisted of three types of taxable activities. In works contracts, previously, there was an involvement of supply of services and also the supply of goods.
If the creation of a new product took place during the works contract, then it would be considered a taxable manufacturing event. Previously, the service tax governed the service. In contrast, the supply of goods was taxable in accordance with VAT.
Previously, whenever the appearance of a new product took place as part of completing a works contract, there would be the application of Central Excise Duty. Therefore, previously, the taxation of the different aspects of a single activity took place by different laws. As a consequence, there was significant confusion regarding taxability leading to many disputes. Thankfully, the GST on the works contracts has put an end to all that confusion.
2. Taxability Under GST
Unlike the previous Tax regulations, there was a restriction of the term “Works Contract” to any work whose performance takes place for an “Immovable Property” under GST. However, in GST, work contract relates to renovation, modification, construction, alteration, fabrication, repair, completion, erection, fitting out, improvement, installation, modification, maintenance, or commissioning of any immovable property. Moreover, such immovable property should be such in which the transfer of property in goods takes place.
The term work contract shall not apply to a fabrication or paint job that takes place in an automotive body shop. The treatment of such contracts would continue to take place as composite supply. However, for the purposes of GST, their consideration would not take place as a works contract. Therefore, the GST on works contracts shall not impact such contracts.
3. Removal of Confusion
Due to GST, the confusion regarding the various aspects of the tax treatment. This means that the treatment of the works contract shall take place as service has been resolved. Moreover, the charging of tax shall take place accordingly. This means that the charging of tax shall not take place as services or goods or part services or part goods.
Such a treatment of works contracts as service will bring highly desired clarification, as, under previous laws, there were different schemes for Value Added Tax for different States.
Non Availability of Input Tax Credit Pertaining to Some Works Contracts
ST Law mentions that there shall be non-availability of input tax credit for-
- Works contracts services whose supply takes place for the construction of the immovable property. Plants and machinery are not included here.
- Goods or services that are received by a taxable person for the purpose of construction of an immovable property, other than plant and machinery, even when their usage takes place in the course of business.
4. Lack of Abatement Under GST
There has been a prescription of no abatement for works contract service under the regulations of GST. Previously, Value Added Tax was payable on the works contract. Service tax was payable at the rate of 15% on either or 70% (on repair, maintenance work) or 40% (on new work).
Due to non-abatement, there has been a significant increase in tax burden. This is especially for the works contract whose taxation takes place as per the standard GST rate (18%). This happens in spite of the fact that it is subjected to a lower tax rate (12%).
Work Contract GST Rates
Below is a table that shows the GST rates for Works Contract that pertain to various classes of works contracts.
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Here are some important FAQs related to the GST on works contracts in 2022:
Q. What shall be the GST for composite supply by way of erection?
Ans. The GST on works contracts also covers erection contracts. The GST for composite supply by way of erection is 12%.
Q. Will the construction of the metro be included as part of railways construction when computing GST for works contracts?
Ans. No, metros shall be included as part of railways construction at the time of computing GST for works contracts. Besides the metro, monorails shall also not be considered for GST under the category of railways construction here.
Q. Do works contracts also cover movable property?
Ans. Works contracts, under GST, have nothing to do with movable property. It comes into effect only when the resultant is immovable property. Therefore, the GST on works contracts pertains only to immovable property.