The Works Contract has been defined in Section 2(119) of the CGST Act, 2017 as
“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 term “works contract” has a limited scope under the GST regime and is applicable only to contracts related to the construction, fabrication, or similar activities for immovable properties. Any composite supply involving goods, such as a paint job or fabrication work carried out in an automotive body shop, does not fall under the purview of a works contract for GST purposes. While such contracts would still be considered as composite supplies, they would not be classified as works contracts under GST. This clarification provides greater clarity on the definition of works contracts under the GST regime and helps businesses to accurately categorize their supplies.
As per Para 6 (a) of Schedule II to the CGST Act, 2017, works contracts as defined in section 2(119) of the CGST Act, 2017 shall be treated as a supply of services.
As per section 17(5) (c) of the CGST Act, 2017 (Blocked Credit), input tax credit shall not be available in respect of the works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service.
ITC on Works Contract
Under the GST regime, Input Tax Credit (ITC) is available on work contracts when the services are utilized for further supply of services. Moreover, ITC on such contracts is also available when the services are utilized for the construction of plant and machinery.
To understand this better, let’s consider an example. A building developer may engage the services of a sub-contractor for a specific portion of the whole work. The sub-contractor will charge GST in the tax invoice raised on the main contractor. The main contractor, being the output service provider of works contracts, will be able to claim ITC on the tax invoice raised by his subcontractor. However, if the main contractor provides works contracts services (other than for plant and machinery) to a company, let’s say in the software business, the ITC of GST paid on the invoice raised by the works contractor will not be available to the software company.
In other words, ITC on these contracts is not available under the following circumstances:
- Services are not utilized for further supply of services
- Services are utilized for the construction of immovable property, other than plant and machinery.
It is essential to understand these nuances of ITC on works contracts under GST to ensure accurate and compliant tax reporting for businesses.
Place of Supply for Works Contract
As mentioned earlier, works contracts under GST are specifically related to immovable property. Therefore, the place of supply is determined based on the location of the property involved in the contract. When both the supplier and recipient of the service are located in India, the place of supply will be where the immovable property is situated.
However, if the immovable property is situated outside India, and the supplier and recipient are both located in India, the place of supply will be the location of the recipient. On the other hand, if either the supplier or recipient is located outside India, the place of supply will be where the immovable property is located or intended to be located.
It is essential to correctly determine the place of supply for works contracts to avoid any potential compliance issues. Businesses should ensure that their invoices accurately reflect the place of supply and the applicable GST rates to maintain compliance with the GST regulations.
Maintenance of records for Woks Contract Under GST
As per Rule 56 (14) of the CGST Rules, 2017, every registered person executing works contract shall keep separate accounts for works contract showing –
(a) the names and addresses of the persons on whose behalf the works contract is executed;
(b) description, value and quantity (wherever applicable) of goods or services received for the execution of works contract;
(c) description, value and quantity (wherever applicable) of goods or services utilized in the execution of works contract;
(d) the details of payment received in respect of each works contract; and
(e) the names and addresses of suppliers from whom he received goods or services.