Works contract has been defined in section 2 of the Act as follows:
(107) ”works contract” means an agreement for carrying out for cash, deferred payment or other valuable consideration, building, construction, fabrication, erection, installation, fitting out, improvement, modification, repair, renovation or commissioning of any moveable or immovable property
Thus, the definition as adopted in GST is more influenced from VAT laws than Service tax. Accordingly, the definition does not provide for any generic definition but only includes 12 types of contract as works contract, which are as follows:
- fitting out,
- renovation or
- commissioning of any movable or immovable property
Thus, as per the present definition, there is no requirement of any transfer of property, nor any other contract can be classified as works contract.
Works Contract – Services
Model GST Law has classified many types of transactions which involved both supply of goods as well as services as either of them i.e. either supply of goods or of services. Accordingly, Clause 5(f) of Schedule II of Model GST Law classifies works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract as supply of services. Thus even when there is transfer of property in goods during execution of any works contract, such contract shall be classified as supply of services and the entire value shall be taxed accordingly and no more bifurcation of such contract is required in future. However, this treatment of works contract and unamended Article 366(29A) in the Constitution leaves us with one thought as to whether the said Article still determines the nature of works contract or not.
Place of supply in case of works contract
- Place of Supply of goods: Section 5(4) of Integrated GST Law provides that where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly. Accordingly, the location of supplier and recipient is not relevant in present case.
- Place of Supply of services: Section 6(4)(a) of Integrated GST Law provides that the place of supply of services, in relation to an immovable property, shall be the location at which the immovable property or boat or vessel is located or intended to be located.
Point of Taxation of works Contract
Section 12(2) provides for time of supply in case of goods to be originated out of a works contract as earlier of the following:
- the date on which the goods are made available to the recipient
- the date on which the supplier issues the invoice with respect to the supply; or
- the date on which the supplier receives the payment with respect to the supply; or
- the date on which the recipient shows the receipt of the goods in his books of account
Section 13(3) of Model GST Law provides that the time of supply shall be as under for the purpose of determining most of the works contracts (qualifying as continuous supply of services):
- where the due date of payment is ascertainable from the contract, the date on which the payment is liable to be made by the recipient of service, whether or not any invoice has been issued or any payment has been received by the supplier of service;
- where the due date of payment is not ascertainable from the contract, each such time when the supplier of service receives the payment, or issues an invoice, whichever is earlier;
- where the payment is linked to the completion of an event, the time of completion of that event
Section 2(31) of the Model GST Law defines “continuous supply of services” as “supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such service as the Central or a State Government may, whether or not subject to any condition, by notification, specify”
Input tax credit not available for works contract
Section 16(9) provides that Input tax credit shall not be available for the following in relation to works contract:
(c) goods and/or services acquired by the principal in the execution of works contract when such contract results in construction of immovable property, other than plant and machinery;
(d) goods acquired by a principal, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the construction of immovable property, other than plant and machinery;
Transitions – Certain important provisions
- Treatment of long term construction / works contracts
Section 159 of the Goods and Service Tax Act, 2016 provides that the goods and/or services supplied on or after the appointed day in pursuance of a contract entered into prior to the appointed day shall be liable to tax under the provisions of this Act.
The term “appointed date” as defined under section 2 means the date on which Goods and Service Tax Act, 2016 comes into force.
- Treatment of retention payments
Section 161 of the Goods and Service Tax Act, 2016 provides that irrespective of the provisions of section 12 and 13, no tax shall be payable on the supply of goods and/or services made before the appointed day where a part consideration for the said supply is received on or after the appointed day, but the full duty or tax payable on such supply has already been paid under the earlier law.