FEBRUARY 15, 2017

By Chaitanya R Bhatt, CA

THE revised Model Goods and Services Tax (GST) law has clarifiedthat the activity of "works contract" shall be treated as a "service". In this regard, the relevant extract of Schedule II of the revised model law (which provides for "Matters to be treated as supply of goods or services") reads as under:

" 5. The following shall be treated as "supply of service"

…..

(f) works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract"

Further, Section 2(110) of the revised model law defines "works contract" as under:

"(110) "works contract" means a contract wherein transfer of property in goods is involved in the execution of such contract and includes contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property."

From the above, it is clear that works contract shall only be treated as a service inspite of the fact that the same also involves a transfer of property in goods.

Further, it also appears that the issues pertaining to valuation of works contract will come to an end under the GST regime on account of the following reasons.

Under the present service tax and VAT regime, there is a constant dispute going on between the Centre as well as the States as regards valuation of works contract transactions. The Centre is seeking to levy service tax on a higher percentage of the total amount charged for the works contract. Simultaneously, the State is also seeking to levy VAT on a higher percentage of such total amounts charged. This is ultimately resulting in the assessee paying tax (both service tax and VAT) on a value higher than the total amount charged for the works contract. This is contrary to the principle of mutual exclusivity laid down by the Hon'ble Courts that there can be no simultaneous levy of both service tax and VAT on the very same transaction.

Pursuant to introduction of the GST regime,since there will be a levy of both CGST as well as SGST (in case of intra-state works contract) and an IGST (in case of inter-state works contract), both the Centre as well as States will get their respective shares of taxes on one single transaction and on one amount charged for works contract. Therefore, the above problem of valuation will be resolved.

Apart from the above, since works contract is to be treated only as a service, the provisions of place of supply and time of supply pertaining to services would only be applicable. Thus, unlike the current regime, there would be no need to determine the place and point of taxation separately with respect to supply of goods and supply of services.

It may now be noted that all issues pertaining to "works contract" would have to come to an end under the GST regime provided there was one standard rate notified for the supply of all goods and services. However, the GST Council vide meeting dated 03.11.2016 provided for different slab rates (i.e. 0%, 5%, 12%, 18% and 28%) for the supply of different types of goods and services.

Further, it is possible that under the GST regime, the tax rate on supply of goods and the tax rate for supply of services may differ. Further, different tax rates may be prescribed for the supply of different types of goods and supply of different types of services.

Let us assume that the rate of tax for supply of goods is say,12% and the rate of tax for supply of services is say 18%. Let us also assume that an assessee M/s. A Ltd. has been engaged by his customer X Ltd. for say an activity of erection, installation and commissioning of some machinery which involves extensive work pertaining to laying of foundation, support structures etc. Further, let us also assume that M/s A Ltd. has entered into two separate contracts for the erection, installation activity namely (i) Supply of goods and (ii) Supply of services with X Ltd.

In the aforesaid scenario, the Department may contend that the activity carried out by A Ltd. for X Ltd. is a "works contract" and the tax rate for the entire activity should be 18%. However, considering the fact that a separate contract has been entered for the supply of goods and a separate contract has been entered for the supply of services, A Ltd. would contend that there are in fact, two separate supplies namely a supply of goods and a supply of services. In other words, A Ltd. would try to prove that it is not making a supply of works contract (which is taxable at 18%) but is engaged in making a supply of goods (taxable at 12%) and a supply of services (taxable at 18%).

This would lead to a considerable amount of ambiguity.

Assessees would try to re-structure their transactions in such a manner that the same would not amount to "works contract". In such a scenario, the asseeseeson one hand would try to contend that a particular transaction is not a works contract and there are two different supplies of goods and services. Whereas the department, on the other hand would argue that the very same transaction is a "works contract" and the bifurcation is only artificial; therefore, the entire transaction should be subject to higher rate of 18% (as in the above example).

In view of the above, the dispute as to whether any contract involving supply of goods and services by one registered taxable person to another registered taxable person is a composite works contract or whether there is in fact, a separate contract for supply of goods and a separate supply for services would reign under the GST regime. On the basis of the deciding factor as to whether a particular transaction is a "works contract" or not, the applicable provisions pertaining to valuation and rate of tax would consequently apply.

Does "Works contract", therefore, have a bright future under the GST regime?

(The Author is Principal Associate, Lakshmikumaran & Sridharan, Mumbai and the views expressed are strictly personal.)