Works contract under GST

1. Works Contract under GST- How
Will GST Impact Works Contract?
What is a works contract?
A works contract is a mixture of service and transfer of goods. Examples of
works contract are .
Current law
Works contracts consists of three kinds of taxable activities as per the current
law. It involves supply of goods as well as supply of services. If a new product is
created during the works contract, then such manufacture becomes a taxable
event.
Currently, the supply of goods is taxable in the form of VAT and the service is
taxable under service tax.
If a new product appears in the process of completing a works contract, Central
Excise duty is levied.
So, different aspects of one a single activity are taxed by different laws. This
causes a lot of confusion regarding treatment and taxability which is why there
are so many legal disputes in related to works contracts.
GST aims to put an end to the uncertainty for the legislature.
Works Contract Under GST
GST Schedule II clearly mentions that the following are
supply of service–
 construction of a complex, building, civil structure or a part thereof, including
a complex or building intended for sale to a buyer, wholly or partly,
 works contract including transfer of property in goods (whether as goods
or in some other form) involved in the execution of a works contract
Thus GST with its “One Nation One Tax” has removed the confusion regarding
the tax treatment.
This means works contract will be treated as service and tax would be charged
accordingly (not as goods or part goods/part services).

2. This treatment of works contract as service and not as supply of goods will bring
in much needed clarification to the works contracts. Under the current regime,
different states have different schemes for VAT.
There are different composition schemes with different VAT rates. Service
tax too is complex with 60% abatement on new works and 30% abatement on
repair contracts. GST will solve such with a much simpler straightforward
calculation
Input Tax Credit is NOT available
GST Law mentions that input tax credit is not available for-
 works contracts services when supplied for construction of immovable
property, other than plant and machinery, except where it is an input service
for further supply of works contract service
 Goods or services received by a taxable person for construction of an
immovable property on his own account, other than plant and machinery,
even when used in course or furtherance of business.
On analysis, one finds this provision is quite contradictory.
For example, any contractor/builder will not enjoy any input tax credit on the
input services if he constructs any building. But he will enjoy input tax credit on
input service for further supply of works contract service. These two sentences
are confusing and contradictory.
Input tax credit is available to a builder while constructing plant and machinery.
But input tax credit is not available to any taxable person who constructs on his
own account even if it is for business use.
Abatement is not mentioned
No abatement has been prescribed for works contract service so far. Currently
VAT is payable on the works contract. Service tax is paid @15% on either 40%
(on new work) or 70% (on repair, maintenance work).
In case no abatement/ composition is provided, it may lead to significant
increase in tax burden, especially if such works contract is taxed at Standard
GST rate which is 18%.
Composition scheme is not available
Composition scheme is not available to works contractors as it is treated as
service under GST. Composition scheme is only available to suppliers of goods.
This will be a big blow to the small sub-contractors who cannot opt for

3. composition scheme. They will be forced to register for normal taxation scheme
increasing their compliances and costs.