IMPACT OF GST ON WORKS CONTRACT

Under GST regime, Section 3 read with Schedule II of Model GST Law provides that works contract including transfer of property in goods (whether in goods or in some other form) involved in the execution of a works contract shall be treated as “service” and tax would be charged accordingly. (not as goods or partly goods / partly services)

• No specific valuation provision (abatement or composition) has been prescribed for works contract service so far. In case no abatement/ composition is provided, it may lead to significant increase in tax burden, especially if such services are taxed at Standard GST rate (which is 18%) and even if such services are subjected to lower tax rate (12%).

• The Model GST law provides that the value of a supply would typically be the transaction value.

• Free of cost supplies by recipient to contractor would be added in value and liable to GST. Thereafter, the contractor may need to include value of such free supplies of goods / services in the value of his services.

GST Impact on ongoing divisible / non-divisible contracts in which:

(1) Rates are inclusive of VAT & Service tax

• In this case, agreements should ideally be re-drafted again from 01st April, 2017 to take care of increased tax burden.

• The standard rate of GST as approved by GST Council in its meeting held on 03rd November, 2016 is 12 % and 18 %. Most services would become expensive as these may be taxed at the standard rate of 18 % against the current tax rate of 15.5% (including SBC & KKC). Goods would however, become cheaper under the GST regime.

• Specific transition provision has been stipulated vide Section 159 and 160 for works contract/ periodic supplies as under:

‘159. The goods and/or services supplied on or after the appointed day in pursuance of a contract entered into prior to the appointed day shall be liable to tax under the provisions of this Act.

1. Notwithstanding anything contained in section 12 and 13, no tax shall be payable on the supply of goods and/or services made on or after the appointed day if the consideration for the said supply has been received prior to the appointed day and the duty or tax payable thereon has already been paid under the earlier law’

It appears that in case of periodic supply of goods/ services, GST Act would not apply on advances received prior to the GST law for goods/ services to be provided during the GST regime, provided tax has been paid on the same. This provision does not cater to the scenario where tax has not been paid, but is payable under earlier law post enactment of GST regime. Also, there is no provision for treatment of supplies prior to GST law where either the invoice has not been raised for the same, or payment has not been received, or tax has not been paid prior to enactment of GST law. This could result in dual taxation both, under the previous regime as well as under the GST regime.

• Eligibility to avail credit of goods held as service provider

Currently, a service provider is not eligible to avail credit of the tax paid on goods (specially VAT) Under GST, since all supplies would be liable to GST, there needs to be a provision to allow a service provider to avail credit of the inputs held on the date of enactment of GST. There should be a mechanism to make this possible. In the Model GST law; there is no specific transition provision to this effect.

(2) Rates are not inclusive of VAT & Service tax i.e., VAT & Service tax are paid extra

• GST Act would not apply on advances received prior to the GST law for goods/ services to be provided during the GST regime, provided tax has been paid on the same.

• For contracts after 01st April, 2017, standard GST rate would be applicable and invoicing shall be done accordingly subject to abatements and valuation rules, if any.