WORKS CONTRACT UNDER GST REGIME

(Term paper towards the fulfilment of assessment in the subject of Indirect Taxation)

Project

SUBMITTED BY: SUBMITTED TO:

SHACHI SINGH (1356) DR. MANOJ KUMAR SIGNH

ABHIJEET SINGH (1264) FACULTY OF LAW

National Law University, Jodhpur

Winter Session

(July 2019-November, 2019)

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 TABLE OF CONTENTS

1. INTRODUCTION ............................................................................................................. 3

2. TAXATION ON WORKS CONTRACT BEFORE GOODS AND SERVICES ACT,

2017 ............................................................................................................................................ 5

2.1. WHETHER BUILDING CONTRACTS INCLUDE “SALE OF GOODS”? ............................... 7

3. WORKS CONTRACT UNDER GOODS AND SERVICES TAX ACT, 2017 ........... 12

3.1. DIFFERENT PROVISIONS APPLICABLE TO THE WORKS CONTRACT:- .................... 13

3.2. RATE OF GST FOR WORK CONTRACT ..................................................................... 19

3.3. CASES IN PRE- GST REGIME .................................................................................... 20

3.4. LATEST CASE SUB JUDICE IN PATNA HIGH COURT ................................................. 21

4. CONCLUSION ................................................................................................................ 24

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 INTRODUCTION

The Indian Constitution has clearly laid down the powers of the Union and states in regard to
taxes under Schedule VII1. As per Entry 542 of the State List, States are authorized to collect and
levy taxes on the sale and purchase of goods other than newspapers within the state’s
jurisdiction, states were accordingly levying tax in the sale and purchase of goods in the states.
The ambiguity arose in the case of building contracts where the contract was not for the sale of
material but for the construction of building. The state governments were anyhow levying taxes
by bifurcating the contract and calculating tax on the basis of the material supplied in a contract
for construction of buildings. The high courts differed in their opinion on this ambiguity;
therefore both the stakeholders had judgements available for and against them on the issue.

Under the recently introduced Goods and Services Tax, the major indirect tax legislations will be
subsumed. The earlier Indirect Tax Regime was too complex due to wide array of taxes which
are service tax, excise duty, VAT, entry tax etc. further, credit of tax paid by the customer at one
stage was not available on the second stage which led to double taxation, also, there were
intricate compliance liabilities like different rates of taxes, documentation, complex invoice etc.
With the introduction of the new regime, expectation is that there will be an end to all these
complexities. Assesses will be taxed under GST on value addition on each stage. Further, GST
has been introduced in a dual model where CGST (Central Goods and Service Tax) and SGST
(State Goods and Services Tax) will be levied on Intra-State trade whereas IGST (Integrated
Goods and Services Tax) will be levied on inter-state supplies of goods and services.

Major reforms have been brought in the calculation of tax under GST for Construction Sector.
Infrastructure projects used to enjoy a lot of benefits in the past regime; therefore it is exigent to
assess the continuity of benefits under the GST regime. Over the last decade, works contract
have become a vital subject of discussion considering the large number of cases due to the
complexities in its valuation, eligibility credits etc. Works contracts were subject to different tax
for goods, services and in case something new is manufactured then a tax different from the
former taxes would be levied on the product so manufactured. The GST aims at removing these
complexities of taxation in work contracts. In the following paper the authors have researched
about the effect of GST on work contracts, as the new law has changed the taxation system in

1
CONSTITUTION OF INDIA, Schedule VII.
2
CONSTITUTION OF INDIA, Schedule VII, List-I, Entry-54.

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relation to work contracts all-together by including all goods and services under “supply of ser”

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 1. TAXATION ON WORKS CONTRACT BEFORE GOODS AND SERVICES ACT,
2017

States under entry 54 of state list were levying taxes on the material supplied for the construction
of buildings. Here, since the agreement for the construction of buildings was not for sale of
goods but for the construction of building, the ambiguity arose on the state’s power to levy taxes
on the same. There was a huge difference of opinion among the various courts of the country on
this issue, but the states were still levying taxes, finally the matter was settled by the apex court
in its judgment in the case of State of Madras v. Gannon Dunkerley & Co.3are a private
limited company incorporated under the Indian Companies Act and they carry on business as
Engineers and Contractors. Their business consists mainly of execution of contracts for
construction of buildings, bridges, dams, roads and structural contracts of all kinds.
The controversy started because “works contracts” were included within the ambit of the Madras
General Sales Tax Act and the Company was made subject to the levy of sales-tax within the
limitations provided in the said Act. Thus the amounts with respect to the materials transferred,
used in the execution of the contract, between the Government (the contracting party) and the
Company (the builder) were included in the annual turnover of the company and thus was taxed
under the Act aforementioned.

The amending Act added an inclusive definition of sale in the Madras General Sales Tax Act
under sec 2(h): “Includes also a transfer of property in goods involved in the execution of a
work contract.” The term “sale of goods” has been used in Entry 48 of the Government of India
Act, 1935 (now in entry 54 in the Constitution of India, 1950). Hence the argument put forth
was that this term has to be interpreted in a wider sense and thus include transfer of materials in
a works contract. But the Court was of the view that “the draftsmen and the Parliament must
have been well aware that the expression “sale of goods” had acquired a legal import by that
time, and it is legitimate therefore to presume that the expression was used in the sense in which
it was understood by English lawyers and also in India. The draftsmen must have intended to
define the power of the Legislature to tax only the transaction of sale of foods, which was
understood in law as meaning and as constituting those composite series of acts beginning with
an agreement of sale and ending with transfer of property for a price, which constitute sale of
goods.”

3
1959 SCR 379.
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In order to constitute a sale as defined in the English Sale of Goods Act, followed in the Indian
Sale of Goods Act, two things are necessary: (1) An agreement to sell, i.e, an agreement to
transfer the property in goods to the buyer for a price and (2) An actual sale by which the
property in the goods passes from the seller to the buyer. Sale of goods, therefore, means a
contract whereby the property in the goods is actually transferred by the seller to the buyer. It is
not an executory contract but an executed contract, and the transfer of the property in the goods
is for a price, i.e., for money consideration. For sale of goods, the Court held that there cannot be
an agreement to one kind of property or work and a sale regards another. For the true
interpretation of the term “sale of goods” there must be an agreement for the sale of the very
goods in which eventually property passes. Thus even the appellant’s contention that an express
agreement is not necessary with respect to the goods is also nullified. In a contract to construct
buildings according to specifications, there is no contract to sell materials used in construction.
Thus such a contract for sale of materials cannot be inferred from a building contract.

Thus the Court observed that the expression “sale of goods” has a well-defined meaning under
law even before the Government of India Act, 1935 had come into force and thus the meaning in
the Constitutional Act also has to be the same as understood by lawyers and Courts, viz., as
defined under the Sale of Goods Act. Under the Sale of Goods Act, “goods” means every kind
of moveable property other than actionable claims and money; and Includes stock and shares,
growing crops, grass and things attached to or forming part of the land, which are agreed to be
severed before sale or under the contract of sale. According to the definition in the English Act
“goods” include all chattels personal, other than things in action and money. Thus the Court held
that the power of the legislature could not extend to anything other than a transaction of sale as
understood in law. It does not mean that the Legislature has no power to enact provisions which
are intended and are necessary for the enjoyment and exercise of power, but the Legislature can
tax only on what constitutes a “sale of goods”. Under the guise of enacting a law in respect of a
field open to the Legislature, it is not entitled to transgress the limits and widen the field by
enacting an inclusive definition of sale of goods, to include what in law is not a transaction of
sale. If really the Legislature has no power to levy a tax upon transactions, which do not
constitute in law sales of goods, it purports to do something, which is forbidden. Thus it has
become clear that the Legislature has a power to determine taxable events, but has no power to
widen the field and change the definition of “sale of goods” as understood in law.

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 1.1. WHETHER BUILDING CONTRACTS INCLUDE “SALE OF GOODS”?

In this regard the Court observed that when the material is fixed to the corpus by the builder, the
property passes when the property in the larger corpus itself passes to the other party. This rule,
of course, is subject to any special stipulations in the contract to build. If the parties intended
that property in materials should pass at an earlier stage that of course governs the rights
between the parties. If the material is supplied by the other party to the contract, or if on his
account the builder purchases the materials, the contract in either event will be a mere contract
for labour and work and not for sale of the material.

On the basis of decision in an English case, Seath v. Moore4 in which the bankers became
bankrupt before the completion of building of a ship due to which a large quantity of iron and
steel which was ordered by the builders was lying on the dockyard and house of lords held that
“building contracts are always considered in law as entire and indivisible contracts in the sense
that the complete fulfilment of the promise by one party is a condition precedent to the right of
the other to call for the fulfilment of any promise by the other” and therefore the materials were
not regarded as “sold” under the sale of goods act. The analogy used by the court was that
materials used by a builder in the building of a property became part of that property. Bricks
built into a wall become part of the house; thread stitched into a coat which is under repair or
planks and nails and pitch worked into a ship under repair become part of the coat or the ship and
therefore, generally, and in the absence of something to show a contrary intention, the bricklayer,
or tailor, or shipwright, is to be paid for the work and materials he has done and provided.
Here, the Court used an analogy, taking cue from another English case. It observed that the
materials which were used by the builder into the property of the other contracting party became
part of that property. Bricks built into a wall become part of the house; thread stitched into a
coat which is under repair or planks and nails and pitch worked into a ship under repair become
part of the coat or the ship; and therefore, generally, and in the absence of something to show a
contrary intention, the bricklayer, or tailor, or shipwright, is to be paid for the work and
materials he has done and provided.

There is, therefore, no element of sale of the materials in such a contract, as the contract in
substance is not a contract to sell materials as goods for a price stipulated between the parties as
explained under the Sale of Goods Act. The contract therefore does not become a contract
relating to sale of goods but is only a contract to build. There is no element of sale of goods

4
1904 AC 223 (L).
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either and the contract is one and indivisible. Unless the work is completed, the builder is not
entitled to the price fixed under the contract or ascertainable under the terms of the contract. It
does not imply or involve a contract of the sale of the materials for a price stipulated. The
property in the materials passes to the owner of the land because they are fixed in pursuance of
the contract to build, and along with the corpus, the materials also pass to the owner of the land.

In the present case, cement and other materials were provided by the Government. It is only the
non-controlled materials (meaning labour and workforce etc.) that the company had to find for
the purpose of the work. The company does not purport to sell the materials under the contract,
and it is not a contract for the sale of the materials. On the face of the contract, therefore, it is
difficult to come to the conclusion, that the contract involves any element of sale of goods to
justify the imposition of a tax upon the Respondent. It therefore, follows that the building
contracts, which the respondent entered into during the assessment year, on which the turnover
was calculated, do not involve any element of sale of the materials and are not in any sense
contracts for the sale of goods as understood in law. Having regard to the terms of particular
contracts, there may be an intention to pass the ownership in the materials for a price agreed
upon between the parties, in which case such contracts might contain an element of sale of
goods, but that is not the case here. The Court held that if the Legislature intends to bring under
the tax net contracts such as these, then the amendment is ultra vires of the legislature to that
extent as they had no power to tax transactions which are not “sale of goods”. Thus the levy of
tax in this case is not justified in law.

CONCLUSIONS:

 “Sale of Goods” in Entry 48 of the Government of India Act, 1935 (now in Entry 54 of
the Constitution of India, 1950) is a nomen juris (or a legal term or expression) and is to
be understood in the context of the law prevailing.

 Essential ingredients of sale are agreement to sell movables for a price and property
passing between the two competent parties therein pursuant to that agreement.

 A building contract is one and indivisible. There is no sale of goods and thus no tax can
be imposed as it amounts to treating a building contract as including sale of goods.

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  It is possible for parties to enter into two agreements, one for transfer of materials for
money consideration and other for payment of consideration for services and work done.
But here there are two separate agreements.

In the other case, there might also arise a situation wherein the parties agree to transfer
materials for a particular price in the building contract, but here also, there is an express
agreement.

But a works contract, without any of the express clauses or agreements, is only one
agreement and that is for the works and execution of contract and there is no agreement
for sale of goods. Thus it is one and indivisible.

A dispute again arose in 2006 after the amendment when the instruments and infrastructure of

BSNL was taxed as per Art. 366(29A) (b)5 The court held that the 46th amendment overcame the
Ganonn Dunkerley case it further introduced a Dominant nature test which was to be applied in
composite transaction for determining the tax liability. As per the test, the Principal supply of the
contract would determine the tax liability. Principal supply her 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 and does not constitute for the
recipient an aim in itself but a means for better enjoyment of the principal supply.6 Since
composite contract under Art. 366(29A)(b) covered only 3 types of composite contracts, the
court said that in other contracts where it is not possible to split goods and services, the court will
look for the intention of the parties when they executed the contract, if it was for sale or purchase
of goods or for rendering services. Therefore, the test came to be known as Dominant Intention
test.

In 2014, in the case of Kone elevator v. State of Tamil Nadu7, where the appellants used to bring
various materials required to build a lift and would assemble them on the site, the court discarded
the dominant intention test and ruled that there the main objective is to avail the skill and labor
for the installation of a lift and therefore it is work contract. The court said that

“The works contract, though being an indivisible contract, for legal jurisprudence can be
construed into two parts i.e., for sale of goods and for supply of services. The concept of

5
BSNL v. Union of India, A.I.R .2006 S.C. 1383.
6
S Khaitan and Associates, Works Contract under GST available at
http://www.cakhaitan.com/resource/Resources/image/Works_Contract_under_GST.pdf S Khaitan and Associates.
7
(2014) 7 S.C.C. 1.
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 “dominant nature test” or, for that matter, the “degree of intention test” or “overwhelming
component test” for treating a contract as a works contract is not applicable; the term
“works contract” as used in Clause (29A) of Article 366 of the Constitution takes in its sweep
all genre of works contract and is not to be narrowly construed to cover one species of

contract to provide for labor and service alone.”10

Therefore, the dominant intention test was struck down and after all the developments the law
was finally settled and State started levying and collecting sales tax on the value of material used
in a works contract, hire purchase transactions, leasing transactions, sale by unincorporated clubs
to its members and sale of foods and beverages by hotels to its customers. Later on with the
introduction of VAT, all states formulated their own rules to levy and collect tax under works
contract.

The services part of the works contract was taxed by the Centre under service tax by the Centre
under the Finance Act 2007 and were subject to service tax w.e.f. 1/6/2007. Section 65(105)
(zzzza)8 of the Finance Act, 1994 defined works contract for this purpose.

The law before GST was thus that, the state used to charge tax on the supply of goods part of the
works contract whereas the centre would tax on the services supplied under the works contract.
This bifurcation of goods and services in the works contract created a lot of problems for the
assesse due to a heap of documents to be produced and being perplexed while filing returns.

8
“Works contract”, for the purposes of section 65(105)(zzzza), means a contract wherein,-
(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and
(ii) such contract is for the purposes of carrying out,—
(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or
otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for
transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet
metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape
staircases or elevators; or
(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the
purposes of commerce or industry; or
(c) construction of a new residential complex or a part thereof; or
(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation
to (b) and (c); or
(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;

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 Aspect in the Works Contract Tax Applicable

Provision of Services Service Tax

Transfer of Goods VAT

Goods manufactured in course of contract Central Excise

The provider of works contract faced several problems in the previous indirect tax regime, such
as:

 Different states had different VAT rates as it was a tax governed by state governments.
 The composition schemes offered to the taxpayers registered under VAT also varied from state
to state.
 Abatement rates on Service Tax for new works contract and repair works contract also varied.
 The taxpayers were required to maintain a large number of documents to be compliant with the
VAT laws.

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 2. WORKS CONTRACT UNDER GOODS AND SERVICES TAX ACT, 2017

Work Contract is defined under Section 2(119)9 of the Goods and Services Tax as “Work
Contract means a contract for building, construction, fabrication, completion, erection,
installation, fitting out, improvement, modification, repair, maintenance, revocation, alteration or
commissioning of any immoveable property wherein transfer of property in goods is involved in
the execution of such contract.

Works contract is a mixture of both goods and services, but it is not categorized either under
mixed supply10 or composite supply11. Therefore, even when there is transfer of property, it will
come in the ambit of work contracts. Example of the same can be installation of lifts,
construction projects.

Entry 5(b) of Schedule II12 of the Goods and Services Tax states what is meant by ‘supply of
service’

“Supply of Service is 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 it’s after occupation, whichever is earlier.”

Further, Entry 6(a) of Schedule II states that the composite supply shall be treated as supply of
services namely Works Contract under Section 2(119).13

As discussed above, in the pre GST era there used to be different format of taxation for Works
Contract, but under GST woks contract will be treated as service and tax would be charged on it.
As a consequence of which the rules of time of supply, place of supply, valuation, rates as
applicable on services will apply in the case.

In the tax regime earlier the supply of goods was taxable in the form of VAT and Service tax on
the service component of a particular transaction. Different states had different VAT schemes,
different composition of schemes and different VAT rates. whereas in the present tax regime of

9
CENTRAL GOODS AND SERVICES ACT, 2017, Section- 2 (119).
10
CENTRAL GOODS AND SERVICES ACT, 2017, Section- 2 (74).
11
CENTRAL GOODS AND SERVICES ACT, 2017, Section- 2 (30).
12
CENTRAL GOODS AND SERVICES ACT, 2017, Schedule II, Entry 5(b).
13
CENTRAL GOODS AND SERVICES ACT, 2017, Section-2 (119).
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GST. Service tax was too complex with 60% abatement on new works and 30% abatement on
repair contracts. All these problems have been solved to a great extent in the present system.

.
2.1. DIFFERENT PROVISIONS APPLICABLE TO THE WORKS CONTRACT:-

2.1.1. Scope of Supply-

The ambiguity as has been discussed above is no more possible, now Schedule II14 of the Act
which specifies that works contract shall be treated as supply of service in the clause as
“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 before its first occupation, whichever is earlier.15”

Works contract will be treated as supply of service if buildings, complex or any other civil
structures are sold before the completion of the construction. Although, if the entire
consideration of the works contracts has been received after issuance of completion certificate,
as the case be that is where required by the competent authority or before its first occupation,
whichever is earlier. In both the cases, GST cannot be levied as the property will now become
immoveable property and GST is not leviable on sale of immovable property.

This entry covers works contract where transfer of property in goods is involve and also services
are involve in the execution of works contract. It is not necessary that goods should be transfer in
the same form; it may be transfer in some other form. E.g. in case of works contract of installation
of machinery require some material to fix the machinery and bring it into workable property of
this goods is transferred to factory owner. In both the clause works contract is treated as service
so now there will be no confusion remain about this; and thus will discuss provision only in
relation to service now.

14
CENTRAL GOODS AND SERVICES ACT, 2017, Schedule II.
15
CENTRAL GOODS AND SERVICES ACT, 2017, Schedule II, Section- 5 (b).
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 2.1.1.1 Levy and Collection-

Tax shall be levied under CGST / SGST or IGST on all inter-state and intra-state supply of
goods and services or both, hence the tax will be levied according to the place of supply.
2.1.1.2 Time of supply-

Time of supply is defined as ‘the point in time when goods/ services are deemed to be
supplied/rendered,” which helps in determining the rate of tax, value. Time of supply for goods
and services will be a determining factor for the liability to arise to pay CGST and SGST. For
determining the time of supply for a regular works contract will be as per Section 13(2).16
2.1.1.3 Place of supply-

Place of supply in cases of work contract is to be looked on upon by focusing on both movable
property and immovable property.

Place of service in cases of Immovable property

Section 12(3)17 of the IGST talks about the provision of place of supply with respect to the

16
CENTRAL GOODS AND SERVICES ACT, 2017, Section-13(2).
17
INTEGRATED GOODS AND SERVICES ACT, 2017, SECTION- 12(3).
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immovable property which includes services of Architects, interior decorators, surveyors,
engineers and other related experts or estate agents for carrying out or co-ordination of
construction work.

However, in cases where the immovable property is located in more than one state, the supply of
service shall be treated as made in each of the States in proportion to the value for services
separately collected or determined, in terms of the contract or agreement entered into in this
regard or, in the absence of such contract or agreement, on such other reasonable basis as may be
prescribed in this behalf.18

Place of Service in case of moveable property

In cases where the provision of supply of services is applicable in respect of moveable property,
Section 12(2)19 of the IGST Act, 2017 lays down that when the supply of services is made to a
registered person, the place of supply shall be the location of that person.

In cases, where the supply of services is to a non-registered person in that case the location of the
recipient where the address on record exists20 and in other cases the location of supplier of
services.21

18
INTEGRATED GOODS AND SERVICES ACT, 2017, SECTION- 12(2)(B)(I).
19
INTEGRATED GOODS AND SERVICES ACT, 2017, SECTION- 12(2)(B)(II).
20
CENTRAL GOODS AND SERVICES ACT, 2017, CHAPTER-VI, SECTION-22.
21
CENTRAL GOODS AND SERVICES ACT, 2017, SECTION-15.
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 2.1.2. The process of the place of supply can be summarized in the following
manner:-

2.1.2.1 Registration-

In the old system of taxation, works contract as discussed above, covered both Service tax act
as well as VAT act. Thus, making registration necessary under both the acts, the situation
became more cumbersome when there used to be involvement of more than one state. In those
cases the registration was to be done for VAT Act in different states. This process was clumsy
and had unnecessary compliance cost of the works contractor. However in case of Service tax
registration only under one central act was sufficient.

Under the GST, registration is subject to an income of above 20 lakh rupees and the supplier is
liable to be registered in the state or union territory if he makes a taxable supply of goods and
services.22

22
CENTRAL GOODS AND SERVICES ACT, 2017, SECTION-17(5)(C).
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 2.1.2.2 Valuation-

Section 1523 discuss about the value of the taxable supply as value of supply of goods or
services shall be the transaction value which, which is price actually paid or payable when
Transaction has definite consideration i.e. it is not depend upon some future event, supplier and
recipient are not related person, price is sole consideration i.e. not a barter exchange
2.1.2.3 Input tax Credit-

Input tax credit is not available under the following conditions in cases of works contract
when:

i. Works contract services are 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.24
ii. goods or services received by a taxable person for construction of an immovable
property on his own account, other than plant and machinery, even when used in
course or furtherance of business.25

The point which requires further deliberation is that the input tax credit will not be given to the
contractor/builder on the input services, though he will enjoy input tax credit for any further
supply of works contract service. Similarly, input tax credit is available to the builder and a
taxable person while constructing plant and machinery, though ITC is not available to any
taxable person who constructs on his own account even if it is for business use. This entire
section is so confusing and creates a sense of contradiction.

23
CENTRAL GOODS AND SERVICES ACT, 2017, SECTION-17(5)(D).
24
CENTRAL GOODS AND SERVICES ACT, 2017, SECTION-17(5)(C).
25
CENTRAL GOODS AND SERVICES ACT, 2017, SECTION-17(5)(D).
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 2.1.2.4 Abatement-

No abatement has been prescribed in the earlier tax regime that is in the pre GST tax model.
In the GST model also, no abatement is provided to the tax payers in the works contract.

2.1.2.5 No applicability of composition Scheme-

Composition scheme is not available in this case because the works contracts is treated as
supply of services under GST. Composition scheme is only available to suppliers of goods.
This will be a big blow to the small sub-contractors who cannot opt for composition scheme.
They will be forced to register for normal taxation scheme increasing their compliances and
costs.

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 2.2. RATE OF GST FOR WORK CONTRACT

Two GST rates have been prescribed for services provided under Works contract i.e 18% and
12%.

2.2.1. GST @ 18%

Construction of 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. Composite supply of works contract

2.2.2. GST @ 12%

Composite supply of Works contract to the Government, local authority or a governmental

authority by way of construction, erection, commissioning, installation, completion, fitting out,
repair, maintenance, renovation, or alteration of:

 Historical monument, archaeological site or remains of national importance

 Canal, dam or other irrigation works
 Pipeline conduit or plant for Water treatment, Water supply and Sewerage
treatment/disposal
 a civil structure or any other original works meant predominantly for use other than
for commerce, industry, or any other business or profession
 a structure meant predominantly for use as an educational, a clinical, an art or cultural
establishment, a residential complex predominantly meant for self-use or the use of
their employees

Composite supply of works contract supplied by way of construction, erection,

commissioning, installation, completion, fitting out, repair, maintenance, renovation, or
alteration of: a road, bridge, tunnel, or terminal for road transportation for use by general
public.

 A civil structure or any other original works pertaining to a scheme under Jawaharlal
Nehru National Urban Renewal Mission or Rajiv Awaas Yojana
 A pollution control or effluent treatment plant, except located as a part of a factory
 A structure meant for funeral, burial or cremation of deceased

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  Railways, excluding monorail and metro
 A single residential unit otherwise than as a part of a residential complex
 low-cost houses up to a carpet area of 60 square metres per house in a housing project
approved by competent authority empowered under the ‘Scheme of Affordable
Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty
Alleviation, Government of India
 Post-harvest storage infrastructure for agricultural produce including a cold storage for
such purposes
 Mechanised food grain handling system, machinery or equipment for units processing
agricultural produce as food stuff excluding alcoholic beverages

A works contract is treated as supply of services under GST. Under the previous regime, there
were issues in tax treatment of works contract. Both the Central Government (on the services
component of a works contract) & the State Governments (on the sale of goods portion involved
in the execution of a works contract) used to levy tax. Thus, the same contract was subject to
taxation by both Central and State Government. GST aims to put at rest the controversy by
defining what will constitute a works contract (applicable for immovable property only), by
stating that a works contract will constitute a supply of service and specifying a uniform rate of
tax applicable on same value across India. Thus, under GST, taxation of works contract will be
simpler and easier to administer.

2.3. CASES IN PRE- GST REGIME

Commissioner Vs. Daelim Industrial Co. Ltd., 2004 (170) ELTA181(SC); The Appellant
Tribunal in its order had held that works contract is not liable to Service Tax under consulting
engineer services as the contract cannot be vivisected and part of it (design and detailed
engineering, commissioning of the plant) subject to Service tax. The Tribunal further after going
the clauses of the contract, had held the contract to be works contract on turnkey basis and not a
consultancy contract to be liable to Service Tax under Consulting Engineer Services.

Commissioner Vs. Ballast Nedam International ,2015(40) STRJ, 160(SC); the Apex Court
held that, the turnkey projects cannot be vivisected.

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In previous tax regime, the Works Contract is required to be divided into two parts one for “Sale
of Goods and other for “Supply of Services. The one part attracts State Act and other part
Central Act. Since even after implementation of GST, the question of “Works Contract”, has not
simplified. The Judicial Pronouncements of the previous tax regime are relevant in GST regime
also.

State of Himanchal Pradesh Vs. Associates Hotels of India Limited, 2015 (330) ELT
3(SC); the Apex Court held that, for levy of VAT, there has to be separate contract or there has
to be passing of property in goods. Mere supply of goods in the execution of contract cannot be
said as “Sale of Goods”.

2.4. LATEST CASE SUB JUDICE IN PATNA HIGH COURT

The latest issue of July 2019 of the Patna High Court pertains to the Works Contract under GST
Regime and the latest guidelines issued by the administration of the Patna Government.26 The
key issue was to estimate the value of subsumed tax carefully and as accurately as possible. For
this purpose, an indicative Excel format is annexed for guidance. Model calculations are also
attached herewith and states may workout similarly for all the ongoing works. Excel sheet
indicates various project components which attract various types of taxes including ED, CST,
VAT/WCT and other taxes which were already in the contract price as per the original contract.
The same format can be used to compile the information for each ongoing project, taking into
consideration the GST input tax credit available for the project. The assessment of subsumed
shall be submitted by the contractor along with copies of invoices and statement of input taxes
duly certified by a Chartered Accountant. It is responsibility of the contractor to furnish correct
details of the subsumed taxes. This matter is again listed for hearing and the ruling is still
awaited.

Safari Retreats Private Limited Vs Chief Commissioner of Central Goods & Service tax
(Orissa High Court)27:

Facts: M/s Safari Retreats Private Limited (“the Petitioner”) is engaged in carrying on
business activity of constructing shopping malls for the purpose of letting out of the same to

26
M/S. Jai Bhawani Construction vs The Union Of India And Ors on 5 July, 2019, IN THE HIGH COURT OF
JUDICATURE AT PATNA Civil Writ Jurisdiction Case No.1452 of 2019.
27
Appeal Number : W.P. (C) No. 20463 of 2018
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numerous tenant and lessees. The Petitioner purchased cement, steel, sand, aluminium, wires,
etc., in bulk. Additionally, it also availed services like consultancy service, architectural
services, legal and professional service etc. As these supplies were taxable, the Petitioner had
accumulated input tax credit in respect of purchases of inputs and input services. It applied for
availing credit, however, by applying section 17 (5) (d) of the CGST Act, the Revenue took a
view that input tax credit shall not be available in respect of goods and services or both received
by a taxable person for construction of an immovable property (other than plant and machinery)
on his own account including when such goods or services or both are used in the course of
furtherance of business. The benefit of input tax credit was denied to the Petitioner.

Where inputs are consumed in the construction of an immovable property which is meant
and intended to be for the provision of taxable output services, whether input tax credit
was available to the assessee?

Held: The Hon’ble Court read down section 17 (5) (d) of the CGST Act for the purpose of
interpretation in continuation to give benefit to the person who has paid GST and it has to be
interpreted in continuity of the transaction since rent income is arising out of the malls which are
constructed after paying GST on different items. If input tax credit is denied on building meant
and intended to be let out, it would amount to treating the transaction as identical to a building
meant and intended to be sold. Further, treatment of these two different types of transactions as
one for the purpose of GST, is contrary to the basic principles regarding classification of subject
matter of tax levy and, therefore, violative of Article 14 of the Constitution.

Hence, the interpretation adopted by the Revenue is frustrating the objective of the CGST and
other respective state GST Acts inasmuch as the Petitioner in that case has to pay huge amount
without any basis. Relying on (1999) 2 SCC 361, the very purpose of the credit is to give benefit
to the assessee. Therefore, if the Petitioner is required to pay GST on the rental income arising
out of the investment on which he had paid GST, it is required to have the input tax credit on the
GST.

Delhi High Court issues notice to Revenue in similar matter

On the same lines, the Delhi High Court issued notice to Revenue while hearing Petitioner’s
challenge to section 17 (5) (c) & (d) of the CGST Act pertaining to blocked credit for hotels.
The Revenue in this case denied input tax credit on procurement of goods and services including
works contract used for immovable property construction. This petition was filed seeking to

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declare section 17 (5) of the CGST Act, 2017 to be ultra-vires of Article 14 of the Constitution
of India, as same is violating its fundamental right. The Petitioner has also requested for
formation of High-Level Committee for addressing interpretational issues. The matter is listed
on August 21, 2019.

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 3. CONCLUSION

The Tax regime earlier was a complicated structure, with the coming of Goods and Services Tax
Act, 2017 the aim of which is to have ‘one nation one tax’. The Goods and Services Tax Act,
2017 has been divided into three parts CGST, SGST and IGST, which makes the incident of
taxation different from what used to be earlier.

Works Contract since beginning has been a very controversial issue wherein the division of
goods and service were bifurcated into two and the state and centre use to levy taxed as VAT and
Service tax. This problem continued for a long period of time which was settled by a number of
decisions given by the courts.

Other than the problem of the levy of tax by the different governments, the other practical
problem like registration in the different VAT acts of different states was also faced by the
parties. There were also issues like high payment of taxes by the parties as there was two
different taxed levied by the courts.

This problem has been more or less solved by treating the works contract as “supply of service”,
with the Goods and Services Act there in no bifurcation of the construction works to be done.
The entire construction work will now be treated as the ‘supply of service and the tax will be
levied by keeping into consideration the various provisions like time of supply, place of supply,
the valuation process.

Now, rather than doing registration in different VAT of various states, the assesse will only have
to register only in the state where there business has been carried on. But, the system is not that
radically changed as we think that it has been because of a complicated structure and the
definition of input tax credit for the works contract project and no elaborate discussion on the
composite supply.

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