Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.
ITC is blocked for own-use construction of immovable property.
GST rates are 5%, 12%, or 18% based on contract type.
TDS of 2% applies if contract value exceeds ₹2.5 lakh.
Place of supply is based on the immovable property's location.
A Works Contract under GST is a composite supply that involves both goods and services in the execution of a contract. Usually, it involves labour and material supply for construction, installation, fabrication, and maintenance activities. In terms of taxation, input tax credit, and compliance requirements, work contracts have changed significantly since the GST rate was implemented in India.
The GST regime eliminated any uncertainties from the prior tax rules by unambiguously defining employment contracts as a provision of services.
In this guide, we will focus on understanding a Works Contract, the tax rates applicable in this case, and other related details.
Works Contract Under GST in India
Section 2(119) of the CGST Act defines a 'work contract' as a contract related to different construction work in the country. It typically includes building work, construction services, production, installation, completion, setup of the civil structure, residential complex, or residential properties (residential projects); commercial construction; movement; maintenance; modification; and others, wherein there is a change of ownership in goods and services.
However, under Section 6(a) of the Second Schedule of the CGST Act, a works contract focuses more on the supply of services.
Input Tax Credit (ITC) for Works Contract Under GST
Under the Goods and Services Tax (GST) regime in India, input tax credit, or ITC, on works contracts presents a nuanced landscape. Generally, ITC is available on goods and provision of service used in the course or development of business. However, for works contracts, specifically those related to immovable property, there are certain restrictions.
ITC is not available when the works contract is for the construction of an immovable property, except when it is an input service for further supply of works contract service. Thismeans if a contractor uses the service contract of a sub-contractor, the main contractor can claim ITC.
On the other hand, if a business constructs a building for its own use, input tax credit on the works contract is generally blocked. Maintenance, repair, and renovation services not amounting to construction may be eligible for ITC. Eligibility, in this case, also depends on whether the works contract pertains to plant and machinery, where ITC is allowed, or to immovable property.
It is crucial to understand the specific nature of the works contract and its intended use to determine input tax credit eligibility accurately.
Maintaining Records for GST-Applicable Works Contracts
A registered person under GST, as per Rule 56(14) of the CGST Act, needs to have a separate works contract account that must include the following information:
● The name and address of the person for whom you are carrying out the works contract.
● Justification, amount of goods and services that you receive, and the value related to the performance of the work contract.
● The description, value, and volume of products and services that you use to perform works contract services.
● Details of payments in relation to the works contract.
● The name and address of the supplier who supplied goods and services.
● It needs to include the location of the supply.
● The place of supply, in accordance with the GST law, needs to be the immovable property. Further, under Section 12(3) of the IGST Act, both the addressee and the supplier should be from India. Notably, the location of supply needs to be the location of the immovable property.
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GST Valuation of Works Contracts
The valuation of a works contract service under GST is based on the total contract value, including both goods and supply of services, with adjustments for land value where applicable. Following are the ways you can determine the works contract value:
● Taxable Value of Works Contract = Total amount paid for the supply of goods and services - the market value of the share of land component or an undivided share of land
● The total amount includes the price of the transfer of property and the consideration charged to provide the service
● The value of the land should be one-third of the entire value that you charge for goods and services.
● For composite supply of works contract and goods, the GST rate is 18% and 12% based on whether the value of goods is 25% less than or more than the value of the works contract
Here are the factors to know pertaining to the place of supply under GST for works contract:
● Works contract does not include any movable property
● If the supplier and recipient are based in India, the location of the immovable property needs to be considered the place of supply.
● If the immovable property is located abroad while the supplier and the recipient are from India, the location of the recipient will be the place of supply.
● If the supplier or receiver is located abroad and the immovable property is in India, then the location of the immovable property should be the location of supply.
TDS Applicable on the Work Contract
If the value of the contract is more than ₹2.5 lakh, the applicable TDS (Tax Deducted at Source) rate is 2% for payment to suppliers of goods and services. Furthermore, if a single supply value does not exceed ₹2.5 lakh, but the work contract is more than ₹2.5 lakh, a 2% TDS applies.
For intra-state sales, 1% TDS is levied for CGST (Central Goods and Services Tax) and SGST (State Goods and Services Tax) each. On the flip side, for inter-state sales, the IGST (Integrated Goods and Services Tax) is levied with a 2% TDS.
The GST Council, in its 25th meeting, recommended reducing the GST rate for works contract services provided by subcontractors to main contractors. This applies when the main contractor is engaged in works contract services for the Central or State Government, Union Territories, local authorities, public authorities, or a government entity subject to a 12% GST rate.
Under the existing GST framework, works contracts are taxed at three different rates: 5%, 12%, and 18%. Initially, works contract services were subject to an 18% GST rate. However, various notifications have since specified different GST rates for work contracts based on specific conditions.
As per the GST Council's recommendation, when a subcontractor provides works contract services to a main contractor and the main contractor, in turn, delivers works contract services to government bodies or entities, the GST rate for the main contractor is reduced from 18% to 12%. Similarly, if the works contract is taxed at 5% GST, the subcontractor will also be subject to the same 5% GST on the construction work rate.
Conclusion
Overall, works contracts under GST are subject to different tax rates based on the type of contractor. Further, a TDS rate applies to the IGST and CGST/SGST based on the amount of contract and the value of the supply of goods and services.
Ensure you pay the applicable rates to comply with the GST laws of the Indian Finance ecosystem and taxation process while avoiding adverse legal consequences. This results in effective vendor management and timely vendor payments, leading to vendor delight.
💡If you want to streamline your payment and make GST payments via credit or debit card or UPI, consider using the PICE App. Explore the PICE App today and take your business to new heights.
FAQs
What is a Works Contract under GST?
A works contract under GST is defined as a contract involving both goods and services for construction, installation, fabrication, or maintenance of immovable property. It is treated as a supply of service under Section 2(119) of the CGST Act. Typical examples include building construction and infrastructure projects.
Can Input Tax Credit (ITC) be claimed on Works Contracts?
ITC is generally not available for works contracts involving construction of immovable property for self-use. However, ITC is allowed if the contract is used to further supply works contract services (e.g., a main contractor claiming ITC on sub-contractor services). ITC is also allowed on plant and machinery-related works contracts.
What is the GST rate applicable on Works Contracts?
GST on works contracts is usually 18%, but it may be 12% or 5% depending on the type of work and the recipient. Government-related works contracts often qualify for a lower 12% or 5% rate. Subcontractors working for main contractors on such projects also enjoy these reduced rates.
When is TDS applicable on Works Contracts under GST?
TDS at 2% is applicable if the total value of the contract exceeds ₹2.5 lakh. For intra-state transactions, it's split as 1% CGST and 1% SGST. For inter-state, 2% IGST is deducted. TDS helps track large-value transactions and ensure tax compliance by both parties.
How is the place of supply determined in a Works Contract?
For works contracts related to immovable property, the place of supply is always the property's location. If the property is in India, it's considered a domestic supply even if one party is abroad. This rule ensures proper tax jurisdiction based on the location of the property involved.
Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.
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