GST Impact on Works Contract, How Will GST Impact Works Contract?: Detailed Guide for Works Contract under GST Regime..Works contracts are composite contracts involving material and labour. The material portion involving the supply of goods is taxable to Value Added Tax (VAT), while the service portion is liable to service tax. If a new commodity comes into existence, in the process of executing a works contract, then, Central Excise duty may be levied.
Under GST law, works contract could be taxed on gross value with
ITC on goods and services being available. It would be considered as a service. It could be at 18%. Credit in respect of Steel, cement, electrical items would more than offset the present net tax in most States. More clarity is expected.
Impact of GST on Work Contractors
In general GST would have impact on pricing, working capital, contract with vendors and customers, ERP systems, processes, accounting etc. Hence, GST would impact every aspect of the business.
Lesser Litigation
Works contract is always an area for litigation on different matters such as valuation, classification etc. GST since subsuming multiple taxes in to it would probably reduce litigation in this area.
Dual Taxation Would be History
Article 366 (29A) (b) enable to state government(s) to tax goods portion involved in the execution of works contract. Further, service portion of works contract is declared service under section 66E of Finance Act 1994.
Under GST, in terms of Schedule II of draft model law works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; is a
service
TDS ON WORKS CONTRACT TRANSACTION UNDER VAT
States laws generally include provision of
TDS under capture every works contract transaction. No such specific provision would be there for works contract. However, section 37 of draft model law need to be taken care of.
Further to avoid double TDS section 162E of draft model law also taken care of.
Rate Under GST for Work Contract
Rate of GST would be key for any Industry to analyze the true impact on its business. The VAT rate in various States is different. For Kerala the VAT rate of 7% is under composition or regular will be important as if not under composition then ITC is available. ST across India is as under:
- a. If VAT paid on actuals with ITC ( say material cost + margin = 73%) where the cost of material is determinable. Then STR can be paid on 27% x 15% presently. The Excise duty of 12.5 on the material in this case maybe ( 7%) is also a cost of IDT. Entry tax + procurement under CST could be a n additional cost in some cases. Therefore presently the total taxes borne could be almost 22%.
- b. If VAT is paid on Govt figures then VAT maybe paid on 70% ( 7%) and ST on 40%(6%) + CED ( 7%) + cascading as above. Also around 24%.
- c. If VAT paid under composition- composition rate +++ Maybe 22%.
If the rate is 18% then works contractors may save monies. However proper documented purchases maybe ensured. Whether the merit rate would be applied + whether composition under GST is available to the WC would also be relevant. GST certainly would bring benefit for the works contractor.
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FAQ's on Work Contract
Whether Works contracts and Catering services will be treated as supply of goods or supply of services? Why
Works contracts and catering services shall be treated as supply of services as both are specified under Sl. No. 6 (a) and (b) in Schedule-II of the model GST law.
What would be the time of supply in case of works contract?
In terms of sub-clause (f) to clause 5 of Schedule II, the works contract under the GST regime should be treated as supply of service. Accordingly, in terms of Section 13, the time of supply of services shall be the earliest of the following:
- (a) Date of issue of invoice;
- (b) Due date of issue of invoice under Section 28;
- (c) Date when the payment entry in relation to supply of services is recorded in the books of accounts;
- (d) Date on which the payment is credited to supplier’s bank account.
Whether VAT dealers claiming standard deductions towards labour and similar other charges in case of works contracts under the respective VAT laws be termed as composition tax payers?
The VAT dealers who are determining the labour and other similar charges portion of the works contract based on the standard deduction method (such as 30%, 25% etc.) cannot be termed as falling under the composition scheme. These are merely alternative statutorily recognised valuation provisions for determining the value of materials transferred in execution of works contract and cannot be considered as a scheme of tax payment ‘in lieu’ of a normal scheme.
What is the implication of GST on long term works contracts or construction contract?
Good or services supplied on or after the appointed day shall be taxable under the GST law. Goods and services chargeable to tax/duty under the earlier law shall continue to be taxable under the earlier law. For determining whether the taxable event has occurred (such as removal, point of taxation, sale, etc.) under the earlier law, it is important that the provisions of the earlier law are examined.
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