“Role of GST in Renewed Work Contracts and Rental Income + Correlating supply rules and work contracts under GST regime”

“Role of GST in Renewed Work Contracts and Rental Income + Correlating supply rules and work contracts under GST regime”

 

Works Contract- Definition

A works contract is termed as a combination of supply of services and transfer of goods.  A few such examples of works contract are fabrication, construction, erection, renovations and repairs, installation of plant and machinery so on and so forth.

 

What the Previous Law States?

As per the law pre-GST, there is no need of any transfer of property, nor any other contract to be termed as works contract. Moreover, it comprised of three kinds of taxable activities. However, if a new product is to be formed during the course of completion of a works contract, such creation would be classified as a taxable and accordingly Central Excise duty is levied.

This basically implies that a single activity has many facets attached to it which requires it to be taxed under various laws. Not only does this lead to confusions with regards to the treatment and taxability of the various aspects but also is one of the many reasons behind the development of several legal battles. This further resulted in a power struggle between the Centre and State wherein both tried to procure a greater proportion of tax to fall within their fold so as to reap maximum benefits. The ultimately also meant that the taxpayer was the unfortunate victim as he ended up paying taxes on a value which is much higher than that of the contract value.

This is where GST comes in as it attempts to finally put this confusion aside and lend clarity to the concept while further aiming to level the playing field for one and all.

 

Works Contract Under GST

Under Schedule II of the GST acts, the term “supply of service” broadly comprises of the following terms:

Any construction undertaken of a building, commercial/residential complex, a civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly. This also includes works contract which consists of any transfer of property in goods (whether as goods or in any other form) involved in the execution of a works contract.

Thus any confusion or dispute arising out of tax treatment on the works contract has now been given clarity thanks to the implementation of GST. This basically implies going forward, works contract will be acknowledged as a service and tax would be accordingly levied on it. (not as goods or part goods/part services). Schedule II has also clearly distinguished between works contract and construction of immovable property. Furthermore, the fact that Schedule II states that work contract can only be considered as a supply of services and that movable property has not been explicitly stated in the definition of works contract will help provide much-needed clarity and relief to the overall tax system.

The previous GST regime had various states across the nation having different VAT implications. Moreover, there was a varied combination of composition schemes with different VAT rates as well to add to it. The levy of Service tax on the same was also a complex and drawn out procedure especially with 60% abatement on new works and 30% abatement on repair contracts. With the implementation of GST, all these issues will be resolved owing to a much simpler and straightforward calculation.

 

To Summarise:

 

  1. GST is applicable on supply of Goods and/or Services

 

  1. Immovable property is not ‘goods’ as defined u/s 2(52) of CGST Act

 

  1. Service’ is defined u/s 2(102) of CGST Act to mean ‘anything other than goods, money and securities’

 

  1. Immovable property, therefore, will be a ‘service’ as defined u/s 2(102) of CGST Act

 

  1. As per Clause 5 of Schedule III to CGST Act following are neither supply of goods nor supply of service:
    • Sale of land
    • Sale of building (other than under construction sale of flats/unit)

 

  1. Sale of completed flats will not be taxable under GST.

 

  1. Composition scheme is not available to works contractors as it is treated as service under GST and is only available to suppliers of goods.

 

  1. Abatement has not been mentioned for works contract service so far.

 

  1. No provision for Input Tax Credit under GST. Furthermore, GST reveals that ITC is not available for:
  • Any Works contracts services when supplied in conjunction with construction of immovable property, other than plant and machinery, except in cases where it is used as an input service for the further supply of works contract service.
  • In course of construction of an immovable property on his own accord, other than plant and machinery, any supply of goods or services received by a taxable person is not eligible for ITC even if it is used in course of further development or betterment of the business.

 

Renting of Immovable Property

There are the following implications of renting of immovable property under GST:

  1. Renting of residential property for use as residence to be exempted under GST.
  2. Lease or letting out of building including commercial, industrial or residential complex for business or commerce is taxable at 18%.
  3. Reimbursement of expenses incidental to renting such as Municipal Taxes, Water charges, Electricity Charges & Other charges will be included in the value of renting services.
  4. Repairs to Building / Immovable property:
  • Input tax credit of GST paid on repairs to building / immovable property to the extent of capitalisation will not be allowed
  • Repairs to building / immovable property expensed out in financial statements will be eligible

 

  1. However, there lies the question of the Registration issue – whether to be registered in the state in which immovable property is located?

 

Conclusion

The GST law which basically says, “One Tax, One Nation”, will be solely responsible for shaping the future of our nation’s growth in years to come.  Hence, the quicker people comprehend this system and the further it lends transparency in law, the greater will be its impact on the country’s trade and commerce. This especially holds true to previously grey areas which created confusion such applies as the all-important works contract which has been riddled with controversy in the previous tax regime.

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