Taxation of Composite and works contract

under GST ACT, 2017

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1. The works contract (Including any transfer of property in goods in the execution of contract)
related to immovable property shall be treated as supply of service. Works contract as well as sale
of under construction apartment shall be subjected to GST. Currently service tax charge on 40% of
project value, thus the effective service tax rate is 6%, similarly effective vat rate around 1% charge
on project value in different state. In GST work contract service shall be taxable @ 18%.
2. The sale of under constructed property shall be liable to GST @ 12 %.( including value of land).
Presently tax effective tax rate is 4.5% (15% of 30% value of project including land).
3. On other hand full credit of input tax is allowed comparing to current regime where input credit is
not allowed, therefore it seem beneficial to real estate industries.
4. Now, question arises in mind what will be treatment of composite contract related to movable
property, the concept of composite supply and mix supply has been insert in GST Bill, 2017.
5. Once it is clear that work contract will be tax in GST as service, the distinction between goods and
service is relevant only for Place of supply and Point of Taxation.
6. The transaction of sale/ purchase of immovable property shall be constitutionally outside the
ambit of GST and shall be liable to stamp duty and property tax under state law.

A transaction of works contract, is now, sometimes, taxed twice; firstly as sale by the State
Government and secondly as service by the Central Government.
Works contracts can straddle two taxable activities as per the current law. There is of course supply
of goods. Then, due to the very nature of the contract, there is supply of services.
As of now, the supply of goods is taxable in the form of Value Added Tax (VAT), while the services
element is taxable as service tax.
In law, there have been differing views of the Supreme Court and the High Court’s on the
applicability of this theory. The final word of the Apex court in BSNL and Others Vs. Union of India
(SC 2006) was that the aspects doctrine pertains to legislative competence and not the application
of taxation on the same components of a transaction.
Recently the judgment of Delhi High Court Judgment in case of Suresh Kumar Bansal Vs UOI &
others in 2016 has come which struck down the levy of service tax on work contract where land is
also transfer, in lack of valuation provision and Supreme court of India in case of L&T, 2017 in
which it was held that that composite contract/ work contracts was not taxable prior to 01.06. 2007.
At present, State VAT laws have specific provisions for taxing works contracts. To avoid taxing the
services element, these laws and associated rules provide for either separation of labor and
materials or percentage deductions in transaction value. Another method is of prescription of a lower
rate of tax in a composition/ lump-sum scheme for works contracts. The service tax law has also
provided for similar treatment to avoid taxation of sale of goods as part of a works contract.
The overarching concept in a GST is one of supply which subsumes the concepts of sale of
goods, provision of services and manufacture. In GST Model, goods as well as services will
be taxed on a uniform rate. Therefore the dispute whether a transaction is subjected to VAT or
Service tax comes to end.
After article 246 of the Constitution, the following article shall be inserted, namely:—
“246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to
clause (2), the Legislature of every State, have power to make laws with respect to goods and
services tax imposed by the Union or by such State.
(2) Parliament has exclusive power to make laws with respect to goods and services tax where the
supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.
In article 366 of the Constitution,—
(i) after clause (12), the following clause shall be inserted, namely:—
‘(12A) “goods and services tax” means any tax on supply of goods, or services or both except taxes
on the supply of the alcoholic liquor for human consumption;’;
All supply of goods or services or both will attract CGST (to be levied by Centre) and SGST (to be
levied by State) unless kept out of purview of GST. GST will be applicable even when the
transaction involves supply of both (goods and services). In effect, woks contracts will also attract
GST. As GST will be applicable on supply ‘the erstwhile taxable events such as manufacture‘, sale‘,
provision of services etc. will lose their relevance.
For taxing a transaction in GST, two things are important one is supply and other is goods or service
or both
Section 7
Supply includes—
(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license,
rental, lease or disposal made or agreed to be made for a consideration by a person in the course or
furtherance of business,
(b) Importation of services, for a consideration whether or not in the course or furtherance of
business, and
(c) An activity specified in Schedule I, made or agreed to be made without a consideration and
(d) The activity is to be treated as a supply of goods or a supply of services as referred in schedule
II.
(2) Notwithstanding anything contained in sub-section (1),
(a) activities or transactions specified in schedule III; or
(b) activities or transactions undertaken by the Central Government, a State Government or any
local authority in which they are engaged as public authorities, shall be treated neither as a supply of
goods nor a supply of services.
(3) Subject to sub-section (1) and sub-section (2), the Central or a State Government may, upon
recommendation of the Council, specify, by notification, the transactions that are to be treated as—
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.
(a) a composite supply comprising two or more supplies, one of which is a principal supply,
shall be treated as a supply of such principal supply;
(b) a mixed supply comprising two or more supplies shall be treated as supply of that
particular supply which attracts the highest rate of tax.
Section 2(56)
“Goods” means every kind of movable property other than money and securities but includes
actionable claim, growing crops, grass and things attached to or forming part of the land
which are agreed to be severed before supply or under a contract of supply;
Section 2(102)
“Services’’ means anything other than goods, money and securities but Includes activity
relating to use of money/ conversion by cash/ any other mode from one form, currency or
denomination, to another form, currency or denomination for which a separate consideration
is charged.
GST Scheme in relation to Composite contracts as follow;

Section 2(30)
“Composite supply” means a supply made by a taxable person to a recipient consisting two or
more supplies of goods or services, or any combination thereof, which are naturally bundled and
supplied in conjunction with each other in the ordinary course of business, one of which is a
principal supply;
Section 2(90)
“Principal supply” means the supply of goods or services which constitutes the predominant
element of a composite supply and to which any other supply forming part of that composite supply

is ancillary. Example: Indian Airlines provides

passenger transportation service. They also supply food on board to passengers. Supply of
transportation services would be the principal supply and the service as a whole would qualify as
composite supply.
Section 2(74)
“Mixed supply” means two or more individual supplies of goods or services, or any combination
thereof, made in conjunction with each other by a taxable person for a single price where such
supply does not constitute a composite supply