Works Contract Services under GST
By Yogesh Verma (CS/LLB) / 2 min read / GST Article
Overview of Works
Contract Services
Under Section 2(119)
of the Central Goods and Services Tax (CGST) Act, a "works contract"
is a specific type of construction service, traditionally treated as a “deemed
sale” in the Indian Constitution. Historically, works contracts have seen a
high volume of litigation because of the complexities around valuation, Tax
Deducted at Source (TDS), and reverse charges.
The arrival of GST
eliminated the traditional distinction between goods and services, thus
simplifying certain aspects of works contracts. Yet, works contracts still
require special treatment under GST, especially for construction-related
services. According to Schedule II of the CGST Act, 2017, any works contract
involving immovable property is categorized as a supply of services.
What is a Works
Contract?
A works contract is
any contract that involves building, constructing, fabricating, installing,
improving, modifying, repairing, or maintaining an immovable property, where
transferring materials or goods is integral to completing the project. Simply
put, works contracts are those where the transfer of goods is incidental to
performing the contract. For instance, a contract to construct a building,
where the contractor supplies both materials and labor, qualifies as a works
contract under GST.
GST Rates Applicable
to Works Contracts
Works contract
services generally fall under Heading 9954 (Construction Services) in GST
classification. The applicable rate depends on the nature of the construction
project. Here is an outline of the rates for certain types of works contracts:
- A
sub-contractor providing works contract services generally pays an 18% GST
rate because the contract value excludes the cost of land.
|
S. No.
|
Chapter, Section or Heading
|
Description of Service
|
CGST
|
SGST/UTGST
|
IGST
|
Condition
|
|
Rate(%)
|
Rate(%)
|
Rate(%)
|
|
3
|
Heading 9954 (Construction
services)
|
(vii) Composite supply of works
contract as defined in clause (119) of section 2 of the Central
Goods and Services Tax Act, 2017, involving predominantly earth work (that
is, constituting more than 75 per cent. of the value of the works
contract) provided to the Central Government, State Government, [Union
territory or a local authority]37.
|
6
|
6
|
12
|
|
|
3
|
Heading 9954 (Construction
services)
|
(viii) Composite supply of works
contract as defined in clause (119) of section 2 of the Central
Goods and Services Tax Act, 2017 and associated services, in respect of
offshore works contract relating to oil and gas exploration and
production (E&P) in the offshore area beyond 12 nautical miles from the
nearest point of the appropriate base line.
|
6
|
6
|
12
|
|
|
3
|
Heading 9954 (Construction
services)
|
(x) Composite supply of works
contract as defined in clause (119) of section 2 of the Central
Goods and Services Tax Act, 2017 provided by a sub-contractor to the main
contractor providing services specified in item (vii) above to the Central
Government, State Government, Union territory or a local authority
|
6
|
6
|
12
|
|
|
|
Chapter 99
|
Pure services (excluding works
contract service or other composite supplies involving supply of any
goods) provided to the Central Government, State Government or Union
territory or local authority by way of any activity in relation to any
function entrusted to a Panchayat under article 243G of the Constitution or
in relation to any function entrusted to a Municipality under article 243W of
the Constitution.
|
Nil
|
Nil
|
Nil
|
|
Differentiating Works
Contracts from Construction Services
Under GST, a clear
distinction exists between construction services and works contracts:
·
Works Contract Services: These involve a
direct contract between the customer (who owns or leases the land) and the
contractor for a custom construction or development project. The contractor
provides the construction materials and labor as per the customer’s
requirements. For example, if a society hires a contractor to build a
residential complex on its land, this qualifies as a “works contract.”
·
Construction of Complex: In this scenario, a
builder constructs properties, like apartments or offices, usually without
having specific customers in advance. Even if buyers are identified before
construction begins, the builder undertakes the project independently, without
entering a direct contract with the buyers. Here, the land on which the
construction takes place belongs to the builder, not the buyer.
Taxation of
Sub-Contractor Services
Sub-contractors
providing works contract services to main contractors in government projects
are taxed at 18% GST. Since the service provided by sub-contractors typically
excludes the value of land, a uniform rate applies. Projects such as public
infrastructure for government entities often qualify for reduced rates when
certain conditions are met.
To summarize, GST has
introduced a streamlined approach to works contract taxation by merging the
classifications for goods and services. However, variations in rates,
sub-contractor liabilities, and distinctions between construction and works
contract services mean that complexities still exist in determining GST
obligations for works contracts.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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