1. What is Works Contract?

Works contract, by definition, is an agreement to carry out for cash, deferred payment, or
other valuable consideration - building, construction, fabrication, completion, erection,
installation, fitting out, improvement, modification, repair, maintenance, renovation,
alteration or commissioning of any immovable property. Typically, it is a combination of
goods and services but is neither a composite nor a mixed supply as defined under the
CGST Act. It also includes transfer of property (whether as goods or in some other form),
which has happened for the purpose of execution of a works contract.

2. Works Contract in the Previous Regime

In the previous regime, works contract was treated as a combination of goods and services.
This meant that VAT was applicable on the goods component, and Service Tax on the
service component. If in the course of work contract, a new product would be manufactured,
and excise would also be applicable. The situation was complicated, as different states had
different VAT rates, as well as different composition schemes for different VAT rates. To
add to the complication, the abatement of Service Tax on new works contract was 60%,
whereas the same for repair contracts was 30%. It also required a great deal of
documentation, as under VAT specific records, such as, purchases, sales, stocks, VAT
account, works contract account, and so on. These records needed to be maintained and
retained for at least a period of 5 years from the end of the financial year in which they were
effected.

3. Works Contract under GST

Simpler Treatment
GST on works contract services has become much simpler. A major change is that the GST
Council has decided to consider works contract purely as a service. The works contract
GST rate has been fixed at 18%. It is to be noted, that the treatment of works contract under
GST will be applicable only for immovable properties.

Separate Works Contract Accounts

A registered taxable person executing a works contract should keep separate accounts for
works contract, which should contain information pertaining to name and address of
persons on behalf of whom works contract is executed as well as suppliers; description,
value and quantity of goods or services received and utilized for works contract; details of
payment etc.

Decentralised Service Registration

As per the GST law, every supplier shall be liable to register, provided his aggregate
turnover crosses the threshold limit of INR 20 lakh (INR 10 lakh in Special Category States).
The same rule will be applicable for a works contract service provider as well. However, the
catch is, that services in the previous regime had a centralized registration, whereas under
GST, the registration is decentralised. The fact that a works contractor will now need to
obtain registration in all the states where he has a project office could be a potential irritant.

No Composition Scheme
The construction sector in particular, over the years, has got habituated to pay taxes under
simplified composition schemes on the total project value, without any GST Regime Input
Tax Credit . Due to the unorganized nature of this sector, there has always been a class of
contractors, who may not be able to maintain records as per the prescribed norms. But
unfortunately, the composition scheme for services under GST is restricted only for persons
supplying restaurant services. This means that any works contracts service provider will
need to register as a normal supplier on crossing the threshold. This will be a big blow to
the small sub-contractors who cannot opt for composition scheme, and thus will be facing
an increase in compliance and associated costs.

Input Tax Credit

Under the GST Regime , input tax credit is not available for works contract services when
supplied for construction of immovable property (excluding plant and machinery), except
where it is an input service for the further supply of works contract service – which means
that contractor can avail the ITC in respect of services availed from the sub-contractor. Also,
ITC will not be available for all goods or services accepted by a taxable person for
constructing immovable property with his own account. This excludes plant and machinery,
even when used for use in the course or furtherance of business.

No Abatement
No Abatement has been prescribed for works contract service under GST. The previous
regime had an abatement of 60% for new works contract and 30% on repair works, as
mentioned earlier. Given that the rate for service tax was 15%, and the GST rate for works
contract is 18%, it is bound to create an extra burden of taxation in the GST era.

Long Term Construction / Works Contracts

In the case of constructions or contracts going on for a long period, there are bound to be
circumstances wherein the contract began in the previous regime and has extended into the
GST regime. The GST law provides that goods and/or services supplied on or after 1st of
July – i.e. the launch date of GST, in pursuance of a contract entered into prior to 1st of
July, shall be taxed as per GST norms. However, it also stipulates that in case the full duty
or tax payable for such supplies has already been paid under the earlier law, then no tax
shall be payable under GST, even if part consideration for the supply is made on or after 1st
July.
 CA Rockey

Meaning of Work-Contract:-
Clause 44 of section 65B of Finance Act, 1994, defines the Work-Contact as follows:
“works contract” means a contract wherein transfer of property in goods involved in the
execution of such contract is leviable to tax as sale of goods and such contract is for the
purpose of carrying out construction, erection, commissioning, installation, completion,
fitting out, repair, maintenance, renovation, alteration of any movable or immovable
property or for carrying out any other similar activity or a part thereof in relation to such
property.
Analysis of above definition
1. There is a transfer of property in goods involved in the execution of such contract,
and
2. Such transfer of property in goods is leviable to tax as sale of goods (such as sales
tax, VAT or WCT, etc.).
It must be noted that the words which are used here are “leviable to tax as sale of
goods’, therefore, it is not necessary that VAT has been actually paid on the transfer of
property involved in such contract. It is enough if transfer of property is leviable to tax as
sale of goods for determining whether such contract is a works contract or not.
3. Such contract is for the purpose of carrying out:
(a) Construction,
(b) Erection,
(c) Commissioning,
(d) Installation,
(e) Completion,
(f) Fitting out,
(g) Repair,
(h) Maintenance,
(i) Renovation,
(j) Alteration
The definition provided u/s 65B(44) is an exhaustive definition but simultaneously ends
with an inclusive limb i.e. “any other similar activity”. Hence, the last part of the definition
‘for carrying out any other similar activity or a part thereof in relation to such property’
has wide implication and prone to litigation.
It can concluded that work contract is the composite/single contract for providing:-
a) transfer of property in goods and
b) provision of service
Work contract is declared Service:-
Section 66E of Finance Act, 1994, provided clarity in respect of few services, which
shall be considered as service and hence liable to charge service tax unless they are
exempted anywhere else in service tax law. Clause (h) of this section stipulated that
Service portion in the execution of a Work Contract is a service, hence on this part
service tax is to be levy accordingly.
Reverse Charge Mechanism for Works Contract:-
Service provider is under obligation to discharge the Service tax liability on service
portion in execution of a work contract. However, in few case this obligation is partially
shifted to service recipient.
Notification No. 30/2012-ST, issued by CBEC on 20.06.2012, bring the concept of
partial reverse charge on service portion in execution of a work contract as follows:
This Notification provides that in case of taxable services provided or agreed to be
provided by way of service portion in execution of works contract by any:
a) individual,
b) Hindu Undivided Family or
c) partnership firm, whether registered or not, including association of persons,
Located in the taxable territory to
a) business entity registered as body corporate, located in the taxable territory,
The percentage of service tax payable by service provider and service receiver would
be as under:

Description of a service Percentage of service tax Percentage of service tax

payable by the person payable by the person
providing service receiving the service

In respect of services
provided or agreed to be 50% 50%
provided in service portion in
execution of works contract
Hence, the service provider is liable only to the extent of 50% of total service tax liability
to be deposited in the Government Treasury and balance 50% shall be deposited by the
service receiver on reverse charge basis directly in the Government Treasury subject to
below conditions.
1. The service receiver must be a business entity registered as body corporate:-
Business Entity: Clause (17) of Section 65B of the Act provides interpretation of term
“Business entity” and accordingly, it means any person such as
I a corporate,
II firm,
III limited liability partnership,
IV association of person
V an individual
ordinarily carrying out any activity relating to industry, commerce or any other business.
Note: Thus, a charitable organization not carrying any business or profession, even if it
is a body corporate would not be liable under reverse chare mechanism as it is not a
‘business entity’.
Body Corporate: Clause (11) of Section 2 of the Companies Act, 2013 which provides
that “body corporate” or “corporation” includes a company incorporated outside India,
but does not include—(i) a co-operative society registered under any law relating to co-
operative societies; and
(ii) any other body corporate (not being a company as defined in this Act), which the
Central Government may, by notification, specify in this behalf.
Therefore, it can be concluded that business entity registered as body corporate mean a
company ordinarily carrying out any activity relating to industry, commerce or any other
business.
2. The service provider must be –
a. an individual;
b. HUF;
c. proprietary firm;
d. partnership firm (whether registered or not);
e. limited liability partnership (as definition of partnership firm includes limited liability
partnership); or
f. AOP
3. Both service provider and service receiver must be located in taxable territory.
The reverse charge mechanism in relation to works contract services, are summarized
hereunder:

If Service Provider is a If Service Receiver is a Service tax is payable by

 Service Service
Provider Receiver

Individual, Proprietary Firm, Body Corporate 50% 50%

Partnership Firm including
LLP Other than Body Corporate 100% 0%

Government or Local Any Person 0% 100%

Authority

Body Corporate Any Person 100% 0%

Services provided or agreed to be provided by any person who is located in a non-
taxable territory and received by any person located in the taxable territory, 100%
service tax would be payable by service receiver only.
Taxable value of service portion in execution of work contract:-
In general, the provisions of valuation of service are governed by Section 67 of the Act
read with Service Tax (Determination of Value) Rules, 2006. As a general rule, value of
taxable service is gross amount charged for a service whether in the form of money or
otherwise.
Vide Notification No. 24/2012 Dated 06.06.2012, CBEC provided a new Rule 2A
{Service Tax (Determination of Value) Rules, 2006}. According to new Rule 2A of
Service Tax (Determination of Value) Rules, 2006, subject to the provisions of section
67, the value of service portion in the execution of a works contract, referred to in clause
(h) of section 66E of the Act, shall be determined in the following manner, namely:-
(a) Regular Scheme [Rule 2A(i)]
(b) Standard Deduction Scheme [Rule 2A(ii)]
Regular Scheme:-
Rule 2A(i) of the said rules, provides that value of service portion in the execution of a
works contract shall be equivalent to the gross amount charged for the works contract
less the value of property in goods transferred in the execution of the said works
contract. However, such gross amount charged shall not include VAT/Sale Tax.
However, there may be a case that the service provider is paying VAT/Sales tax not on
the actual value of respective State VAT/sales tax law, then service element will consist
of following components as mentioned in Explanation (b) to the Rule 2A of said
Valuation Rules:
(a) labour charges for execution of the works;
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect’s fees;
(d) charges for obtaining on hire or otherwise, machinery and tools used for the
execution of the works contract;
(e) cost of consumables such as water, electricity, fuel used in the execution of the
works contract;
(f) cost of establishment of the contractor relatable to supply of labour and services;
(g) other similar expenses relatable to supply of labour and services; and
(h) profit earned by the service provider relatable to supply of labour and services;
Standard Deduction Scheme:-
Rule 2A(ii) provides that where value has not been determined under Rule 2A(i) as
above, the person liable to pay tax on the service portion involved in the execution of
the works contract shall determine the service tax payable in the following manner,
namely:-
Upto 30th, October, 2014.:

S. In case of works contracts entered into – ST shall be payable on ___

No. % of the total amount
charged for the works
contract

A For execution of Original Works 40%

B For maintenance or repair or reconditioning or 70%

restoration or servicing of any goods

For any other purpose not covered under (A) & (B)
C above, including maintenance, repair, completion and 60%
finishing services such as glazing, plastering, floor and
wall tiling, installation of electrical fittings of an
immovable property.
With effect from 1st October, 2014 [Notification No. 11/2014 Dated 11 July, 2014]:
In Rule 2A of the Service Tax (Determination of Value) Rules, 2006, category “B” and
“C” of works contracts are merged into one single category, with percentage of service
portion as 70%; this change has come into effect from 1 st October, 2014. This
rationalization by way of merger of categories has been made to avoid disputes of
classification between these two categories. The new provisions are as under:

S. In case of works contracts entered into – ST shall be payable on ___

No. % of the total amount
charged for the works
contract

A For execution of Original Works 40%

in case of works contract, not covered under sub-

clause (A), including works contract entered into for,-
B (i) maintenance or repair or reconditioning or 70%
restoration or servicing of any goods; or
 (ii) maintenance or repair or completion and finishing
services such as glazing or plastering or floor and wall
tiling or installation of electrical fittings of immovable
property
Original Work:- (1) “original works” means-
(i) all new constructions;
(ii) all types of additions and alterations to abandoned or damaged structures on land
that are required to make them workable;
(iii) erection, commissioning or installation of plant, machinery or equipment or
structures, whether pre-fabricated or otherwise;
Total amount:- “total amount” means –
the sum total of the gross amount charged for the works contract and the fair market
value of all goods and services supplied in or in relation to the execution of the works
contract, whether or not supplied under the same contract or any other contract, after
deducting-
(a) the amount charged for such goods or services, if any; and
(b) the value added tax or sales tax, if any, levied thereon.
(3) “Fair Market Value” –
The fair market value of goods and services so supplied may be determined in
accordance with the generally accepted accounting principles.
Note: it is to be noted that percentage scheme is not to be always referred. It is to be
referred only where value is not determinable as per the provisions of Rule 2A(i) of the
said Valuation Rule 2.
Cenvat Credit: –
1. As per Explanation 2 to Rule 2A of said Valuation Rules, the provider of taxable
service i.e. the works contract service shall not take CENVAT credit of duties or cess
paid on any inputs, used in or in relation to the said works contract, under the provisions
of CENVAT Credit Rules, 2004.
2. According to sub-rule (7) of Rule 4 of CENVAT Rules, the CENVAT credit in respect
of input service shall be allowed, on or after the day on which the invoice, bill or, as the
case may be, challan referred to in rule 9 of the said rules, is received.
3. First proviso to Rule 4(7) provides that in case of an input service where the whole of
the service tax is paid on reverse charge by the recipient of the service (i.e. u/s 68(2) of
Finance Act, 1994), the CENVAT credit in respect of such input service shall be allowed
after the service tax paid.
(Author can be contacted at M- 08287392720 or on Email: [email protected])
The Goods and Services Tax (GST) is both a challenge and an opportunity in effectively managing working capital.
ET helps you navigate its complexities and extract the maximum benefi ts that the new regime offers in managing
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“GST is a game-changing reform for the Indian economy. For businesses, GST has opened up avenues for
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