Works Contract Under GST refers to a contract involving activities such as building, construction, fabrication, installation, repair, maintenance, renovation, or commissioning of an immovable property, where transfer of property in goods is involved during execution. Under GST, a works contract is treated as a supply of service and qualifies as a composite supply under Section 2(119) of the CGST Act.
Table of Contents
- ‘Works Contracts’ are ‘Composite Supplies’
- Analysis of Entry 5(b) Versus Entry 6
- Case Study
- Key Advance Ruling Pronounced Under GST
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1. ‘Works Contracts’ are ‘Composite Supplies’
The concept of ‘composite supplies’ and/or ‘mixed supplies’ is an innovation under GST with the legislative intent to prevent splitting of singular contracts into their constituent elements and thereby application of different rate to such constituent elements. This also accords with the legislative ideal of GST which seeks to prevent the proliferation of different rate of GST on different supplies. The Supreme Court in its decision in Union of India v. Mohit Minerals (2022) 10 SCC 700 has explained the idea behind the introduction of the concept of composite supplies under GST in the following terms:
“165. The provisions of composite supply in the CGST Act (and the IGST Act) play a specific role in the levy of GST. The idea of introducing ‘composite supply’ was to ensure that various elements of a transaction are not dissected and the levy is imposed on the bundle of supplies altogether. This finds specific mention in the illustration provided under Section 2(30) of CGST Act, where the principal supply is that of goods. Thus, the intent of the Parliament was that a transaction which includes different aspects of supply of goods or services and which are naturally bundled together, must be taxed as a composite supply.
A works contract is necessarily a composite supply since all the ingredients as follows are satisfied:
- A works contract involves taxable supply of goods and services;
- The goods and services (related to the fourteen types of activities mentioned therein) are generally naturally bundled in ordinary course of business and supplied in conjunction with each other.
Once it is established that the ‘works contract’ is a contract for ‘composite supply’ of goods and services, the next questions that come to the mind of the readers is:
- What would be the principal supply?
- Taxability of works contract – whether as goods or service?
The answer to the above lies in the Schedule II appended to the CGST Act. This schedule categorically specifies whether a particular supply is a supply of goods or service.
Two entries under this Schedule are relevant:
i. Entry 5(b) which states that “The following shall be treated as supply of services, namely:”
(b) “construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier”
Explanation.—For the purposes of this clause—
(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:
(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or
(ii) a chartered engineer registered with the Institution of Engineers (India); or
(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;
(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure
ii. Entry 6 – Composite supply
The following composite supplies shall be treated as a supply of services, namely:
(a) works contract as defined in clause (119) of section 2.
Therefore, a ‘Works Contract’ shall always be treated as a supply of service falling under entry 5(b) or entry 6, irrespective of whether the ‘principal supply’ therein is goods or services.
Now, admittedly, there is a bit of an anomaly here – entries 5 and 6 belong to Schedule II of the CGST Act which draws power from section 7(1)(d) of the CGST Act pertaining to “activities to be treated as supply of goods or supply of services” whereas it is section 8 which pertains to determination of ‘composite’ and ‘mixed’ supplies. Entry 6 in Schedule II, by starting with the words, “The following composite supplies….” is at best a drafting oversight and at worst, a vulnerability which can be used to contend that Entry 6 of Schedule II is ultra vires the CGST Act and thus ought to be struck down*.
2. Analysis of Entry 5(b) Versus Entry 6
Clause 5(b) of Schedule II to the CGST Act provides that construction of a complex, building, intended for sale to a buyer, except where the entire consideration is received after issuance of completion certificate, would be classified as a ‘supply of service’. In other words, under construction flats shall be covered by this Entry.
Under service tax laws, a separate class of services i.e. construction of complex services was defined in a similar fashion.
Similarly, Clause 6(a) of Schedule II provides that the ‘works contract service’ would also be classified as a ‘supply of service’. The term ‘works contract’ has been defined under Section 2(119) and is excerpted below once again for ease of reference:
‘(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract’
The definition of the term ‘works contract’ specifically includes within it the activity of construction of immovable property.
On the basis of the above provisions, it can be concluded that the activities of construction of immovable property can be classified as a supply of service either under entry 5(b) or under entry 6(a) of Schedule II to the CGST Act.
The larger bench of the Supreme Court interpreted the definition of the term ‘works contract’ in the case of Larsen & Toubro (2014) 1 SCC 708, to hold that even in case of real estate transactions of sale of under-construction flats, the developer is constructing the said flat(s) for the purchaser and not for himself and therefore, such contracts amount to ‘works contract’.
It is pertinent to note that the 101st Constitution Amendment Act, 2016, whereby, the Centre and State Governments are empowered to make laws for levying GST, has not made any amendments in the Article 366(29A)(b) of the Constitution which provides tax on sale or purchase of Goods and was relied upon heavily by the Supreme Court in the Larsen & Toubro (supra) case. Article 366(29A)(b) reads as:
“a tax on the transfer of property in goods (whether as goods or in some other form) invoked in the execution of a works contract”
Thus, considering the fact that the nature of real estate transaction involved in the above cited case (i.e. L&T decision) remains unchanged even post GST, the law laid down by the aforementioned decision of the Hon’ble Supreme Court will continue to hold the ground and hence, the activity on construction of immovable property should undoubtedly qualify as a ‘works contract service’.
In other words, the mere fact that ‘construction of complex’ is mentioned separately does not mean that ‘construction of complex’ would not qualify as a ‘works contract’ as defined under Goods and Service Tax.
At this juncture, it is critical to understand the reason for existence of Schedule II to the CGST Act. Schedule II is envisaged under Section 7(d) of the CGST Act. Section 7 defines ‘supply’ which is the taxable event under GST. Sub-sections (a), (b) and (c) of Section 7 outline various aspects and inclusions to the definition of ‘Supply’. In a similar manner, Schedule II also specifically enumerates certain activities as ‘supply of goods’ or ‘supply of services’ – conceptually speaking, Schedule II is a successor to the ‘Declared Service’ concept under service tax law. As per the fifth bullet to para 1.4 of the Education Guide issued under Service Tax in 2012,
“To remove some ambiguities certain activities have been specifically defined by description as services and are referred as Declared Services”.
Schedule II also serves the same purpose – it puts together ‘supplies’ which could have led to ambiguities vis-a-vis levy of GST and clarifies certain ‘supplies’ to be ‘supply of services’ and certain others to be ‘supply of goods’. The entry 5(b) or entry 6(a) of Schedule II are thus not mutually exclusive, water-tight compartments – they are to be read conjointly to understand that construction contracts will qualify as ‘supply of services’.
Classification of services, including that of ‘construction contracts’ are covered separately under GST laws and is discussed in the next chapter. It is advisable that readers classify construction services appropriately since the rates of tax and the mechanism for determining the value of service may be different as we will study in the succeeding chapters. The specific context of real estate transactions would also be elaborated upon in a subsequent segment dealing with sector specific nuances.
3. Case Study
A company is in the process of constructing a residential complex with the intention to sell and transfer the units and car parking therein to purchaser together with rights to use and occupy the common areas and facilities. For the purposes of constructing such residential complex, the Company engages the construction services of a contractor and also procures manpower and intermediary services of real-estate brokers.
The company is the owner of the property on which the construction of the residential complex is to take place. The company has appointed the contractor for carrying out the construction of the residential complex wherein the contractor besides performing the activity of construction also supplies the goods for the same. Although the project is still under construction, the company has entered into sale and purchase agreement with individual buyers for the sale of residential units. Applying the ratio of L&T II decision of the Supreme Court (discussed supra) to the instant transaction, the sale of under construction flat units to prospective buyers will qualify as works contract service as per Section 2(119) of the CGST Act read with Clause 6(a) of Schedule II.
It is pertinent to mention here that Schedule II of the CGST Act clarifies that a construction service including a complex or building intended for sale to a buyer wholly or partly shall be treated as a supply of service. It also separately clarified that a works contract is also to be treated as a service under the GST regime. It is important to understand that Schedule II is only relevant for concluding whether a supply is a supply of service or supply of goods. It has no impact on availment of input tax credit. For determining the availability of input tax credit under Sections 16 and 17 of the CGST Act, the definition of works contract under Section 2(119) is only relevant.
The services provided by contractor for construction of residential complex are in the nature of works contract services as contractor is also supplying goods along with such services. Since the outward services of the company is also in the nature of work contract services, the company can take input tax credit of such services (to the extent of sale of under-construction flats).
4. Key Advance Ruling Pronounced Under GST
4.1 Vihan Enterprises – [2018] 97 taxmann.com 579 (AAR-Madhya Pradesh)
Questions Raised – What is the nature of the supply vis a vis construction of pooling sub-station along with associated transmission line and associated feeder bay work on total turnkey basis under World Bank Financing?
Held – The work involves both supply of goods and supply of services, which are naturally bundled. Accordingly, under this agreement, the applicant is providing a composite supply. The agreement involves construction of Pooling Sub-station on Turnkey Basis and falls under the definition of a “Works Contract” within the meaning of the CGST Act. The HSN Code would be 995423 under Group 99542 for the supply of composite service in the nature of works contract and is liable to GST at 18% rate.
It is pertinent to note here that the applicant’s contract was with Rewa Ultra Mega Solar Limited (“RUMS”) RUMS had taken a position that since the work is part of evacuation infrastructure being exclusively for solar power, for a solar park and is being developed by Solar Project Park Developer, the rate of 5% should be applicable. This was rightly rejected by the AAR by highlighting that the said concessional rate of 5% is applicable only for supply of goods and not for services.
4.2 Dinesh Kumar Agrawal – [2018] 95 taxmann.com 295 (AAR-Maharashtra)
Questions Raised – The applicant was a prospective contractor undertaking different works for supply of goods and services. Scope of works included procurement and supply of goods, transportation of goods from vendor and assembly and erection and commissioning. The question raised was whether transportation charges received by the applicant are liable to tax under GST, especially when the applicant is not a goods transport agency (GTA).
Held – The AAR held that the applicant’s understanding that there is a standalone contract for transportation of equipment for which separate consideration is received, is incorrect. From the conjoint reading of the clauses of the agreement it could be safely concluded by the AAR that the contract was a single contract for engineering, procurement and construction of a solar power plant and thus constituted a composite supply in the nature of works contract. Accordingly, the transportation charges received by the applicant are also to be liable to GST as a works contract as per provisions of section 2(119) of the CGST Act.
4.3 EIFFEL Hills and Dales Developers Private Limited [2018] 100 taxmann.com 314 (AAR-Maharashtra)
Questions Raised – The applicant is a construction company engaged in the business of Mechanical, Electrical and Plumbing (MEP) turnkey project contracting & engineering. The MEP activities provided by the applicant include design, engineering, supply, installation and commissioning of plumbing, firefighting and electrical infrastructure systems to a wide range of commercial projects. The applicant was venturing into an agreement with a developer/builder to provide MEP services for an affordable housing project. The said housing project satisfies the definition of affordable housing described in Notification No. 13/6/2009 – INF dated 30th March, 2017 by Ministry of Finance, Department of Economic Affairs thereby enjoying the Infra status within the meaning of Central Tax (Rate) Notification No. 1/2018, dated 25th January 2018.
In this background the following question was raised:
Whether MEP activities (Mechanical, Electrical & Plumbing Works) undertaken by the Applicant falls within the definition of composite supply of works contract as defined under section 2(119) of CGST Act?
Held – The Authority for Advance Rulings, Maharashtra held as follows:
After a detailed scrutiny of the proposed contract of the applicant, the authority observed that the contract like the one of applicant which includes design, engineering, work laying of RCC Hume pipe/GI pipe etc. for storm waterline and construction of chambers involves more than two taxable supplies in the nature of resources, material and machinery.
It also observed that large number of service receivers of such bundle of services mostly expect plumbing work to be provided as a package in the ordinary course of business. Therefore, the plumbing contract constitute a composite supply as defined under section 2(30) of the CGST Act.
As a corollary to this finding it was also held that since:
(a) As per the scope of contract, the work order is for complete external plumbing work, laying of RCC Hume pipes/UPVC pipes for storm water lines, drainage line etc. including construction of chambers; and
(b) the plumbing system is either attached to earth or as the case may be, fastened to building which is attached to the earth.
Therefore, the contract for plumbing work is a composite supply of works contract as defined in section 2(119) of the CGST Act.
4.4 Vikram Sarabhai Space Centre [2019] 105 taxmann.com 239 (AAR-Kerala)
Questions Raised – Whether the services of design, procurement, fitment, etc. rendered by a contractor to the applicant for construction of wind tunnel and ejector system would qualify as ‘works contract’? If yes, what will be the applicable rate?
Held – The services being in connection with an immovable property, would qualify as ‘works contract services’. The AAR further held that the services rendered to the applicant were eligible for the reduced rate of 12% in as much as the said services were being rendered to the ‘Government’ and were not to be used for any commercial purpose by the applicant given that the applicant was engaged in research and development activities.
4.5 M/s Purple Distributors Pvt. Ltd. – AAR West Bengal
Questions Raised – The applicant, as a sub-contractor, undertakes the work for conversion of Short Welded Rails (“SWR”) to Long Welded Rails (“LWR”) by Flash Butt Welding process. The question before the AAR was whether this supply falls under the ambit of ‘works contract’.
It was contended by the applicant that only welding services are provided by them by using Flash Butt Welding Machine on railway tracks which can be easily detachable from the earth without any damage and no goods are transferred in the services involved. Accordingly, such services should not be treated as ‘works contract’ as defined in clause (119) of section 2 of the CGST Act. Further, they argued that as the treatment or process of welding has only been carried out on goods i.e., on railway tracks to convert from SWR to LWR and the said goods are the property of Indian Railways who is a registered person under the CGST Act, the services provided by them would fall under the ambit of job work in terms of definition laid down in section 2(68) of the CGST Act.
Held – The AAR disagreed with the applicant on the point of railway tracks being movable but agreed on the larger point that their supply would not qualify as ‘works contract’ since the supply didn’t involve transfer of property in goods.
The AAR held that the services of welding of railway track along with labour services are naturally bundled and supplied in conjunction in each other and therefore would fall under the ambit of ‘composite supply’ of services falling under Tariff 995429 (“General construction services of civil engineering works”) and shall be taxable at 18% vide serial number 3(xii) of Notification No. 11/2017-Central Tax (Rate) dated 28-06-2017, as amended from time to time.
* Reference in this regard can be made again to the article by Manish Sachdeva, Supra
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