Posted on by Vinamar Gupta

Construction Services under GST

Meaning of Works Contract

As per Section 2(119) of CGST Act “works contract” means a contract for

  1. building,
  2. construction,
  3. fabrication,
  4. completion,
  5. erection,
  6. installation,
  7. fitting out,
  8. improvement,
  9. modification,
  10. repair,
  11. maintenance,
  12. renovation,
  13. alteration or
  14. commissioning

of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract

 

  1. The following composite supplies shall be treated as a supply of services, namely:—

(a)  works contract as defined in clause (119) of section 2

 

Note: Immovable Property Includes land, building, plant and machinery embedded to earth

 

  1. As per Para 5(b) of Schedule II

The following shall be treated as supply of services, namely:—

(b) 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, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

 

Explanation.—For the purposes of this clause—

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:— (i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or (ii) a chartered engineer registered with the Institution of Engineers (India); or (iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

 

Tax Rate on Construction Service

Notification 11/2017-CTR  as amended by Notification 20/2017- CTR is covered by heading 9954

Sl. No.3

(i) 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, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.  (Provisions of paragraph 2 of this notification shall apply for valuation of this service) is taxable @ 18%

 

In case of supply of service specified in column (3) of the entry at item (i) against serial no. 3  of the Table above, involving transfer of property in land or undivided share of land, as the case may be,

Ø the value of supply of service and goods portion in such supply shall be equivalent to the total amount charged for such supply less the value of land or undivided share of land, as the case may be,

Ø and the value of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply.

 

Explanation .– For the purposes of paragraph 2, “total amount” means the sum total of,-

(a) consideration charged for aforesaid service; and

(b) amount charged for transfer of land or undivided share of land, as the case may be

 

Hence effective tax rate shall be 12% in case of construction of complex service.
(ii) composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, 2017.is taxable @ 18%

 
(iii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied  to the Government, a local authority or a Governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, – [Note: Building,fabrication , Modification, Improvement is not covered]

 

(a) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

 

(b) canal, dam or other irrigation works;

 

(c) pipeline, conduit or plant for

(i) water supply

(ii) water treatment, or

(iii) sewerage treatment or disposal.

 

Is taxable @ 12% w.e.f. 22/08/2017. (From 01/07/2017 to 21/08/2017 It is taxable @ 18%)

 

Note:

1.     Concessional rate of 12% tax is not available for Construction service to Government, local authority or governmental authority for:

a)     a civil structure or  any other original works meant predominantly for  use  other than for commerce, industry, or any other business or profession

b)    a structure meant predominantly for use  as (i) an educational, (ii) a clinical, or  (iii) an art or cultural establishment

c)      a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act; (i.e. MPs, MLAs, MCs, Panchayat Members)

2.     It is similar to S.No. 12 of Notification 25/2012
(iv) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-

 

(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;

 

(b)  a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

 

(c) a civil structure or any other original works pertaining to the “In-situ rehabilitation of existing slum dwellers using land as a resource through private participation” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers;

 

(d) a civil structure or any other original works pertaining to the “Beneficiary led individual house construction / enhancement” under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;

 

(e) a pollution control or effluent treatment plant, except located as a part of a factory; or

 

 (f) a structure meant for funeral, burial or cremation of deceased.

 

Is taxable @ 12% w.e.f. 22/08/2017 (from 01-07-2017 to 21/08/2017. It is taxable @ 18%).

 

Note:

1.     It is similar to Sl No, 13 of 25/2012

2.     However Sl No, 13 of 25/2012 provided exemption for services  by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public

For which concessional tax is not available and hence shall be taxed at 18%.
(v) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied  by way of construction, erection, commissioning, or installation of original works pertaining to,- [Note : Repair, Alteration. Modification, Renovation, Completion, fitting out not covered by Concessional taxation]

 

(a) railways, excluding monorail and metro; [Note : Cosntruction service for Air port, port, monorail and metro shall be @ 18%]

 

(c)   a single residential unit otherwise than as a part of a residential complex;

 

[Para 2 (zzb) “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit;

 

[Note:

1.      Construction for Residential Complex is taxable @ 18%.

2.     Services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex is exempt as per Sl. No. No. 11 of Exemption Notification 12/2017]

 

(c) low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

 

(d) low cost houses up to a carpet area of 60 square metres per house in a housing project approved by the competent authority under-

 

(1) the “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;

 

(2) any housing scheme of a State Government

 

(e) post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes; or

 

(f) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages.

 

Is taxable @ 12% w.e.f. 22/08/2017 (from 01-07-2017 to 21/08/2017. It is taxable @ 18%)

 

Note: As per item no. 10 of Exemption Notification 12/2017 , Services provided by way of pure labour contracts of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works pertaining to the beneficiary-led individual house construction or enhancement under the Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana is exempt

 

 

Note :

1.     Para 2(zs) of 12/2017

“original works” means- all new constructions;

(i)                all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

 

(ii)              erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

 

2.     Hence Pure labor contracts of following nature for erection, commission or installation  in single residential unit should be exempt:

a)     Air Conditioning

b)    Security Systems

c)     Electrical Installations

d)    Sanitary Installation
(vi) Construction services other than (i), (ii), (iii), (iv) and (v) above is taxable @ 18%

 

Note : Construction Services shall cover pure labor service also

 

(zf) “governmental authority”  has the same meaning as  assigned to it in the Explanation to clause (16) of section 2 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017

As per Explanation to Section 2(16) of IGST Act:

Explanation.––For the purposes of this clause, the expression “governmental authority” means an authority or a board or any other body,–

(i) set up by an Act of Parliament or a State Legislature; or

(ii) established by any Government

[Note : Unlike definition of governmental authority in clause 2(s) of Notification 25/2012, there is no requirement of “90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution” to become governmental authority.

Construction Service to :

  1. Educational Institutions
  2. Hospitals

Is not exempt.

 

Sub Contractor’s Service

As per clause 29(h) of 25/2012, sub-contractor providing services by way of works contract to another contractor providing  works contract services which are exempt was also exempt. However no such exemption has been provided to sub contractor.However except for contracts of the nature covered by Sl No. 3(iii), none of the type of contracts have been expressly stated to be not to enjoy concessional tax rate of 12% or enjoy exemption for pure labor service contracts for original works relating to single residential unit.

 

Reverse Charge:

Unlike Notification 30/2012, where reverse charge was applicable to works contract service by non corporate service provider to business entity registered as body corporate, there are no such provisions for reverse charge under GST.

However, if person providing construction services is unregistered, and he is rendering service to registered person, then tax on reverse charge is payable by registered person u/s 9(4). However, if unregistered contractor is providing service to unregistered person say an exempt educational institution or hospital, then no tax is required to be paid.

Input Tax Credit

As per Section 17(5)(c):

Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:—

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business

Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property;

Explanation.––For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes— (i) land, building or any other civil structures; (ii) telecommunication towers; and (iii) pipelines laid outside the factory premises

 

Note :

  1. Under Notification 24/2012, in respect of works contract services the and also for Cosntruction of Complex service under Notification 26/2012, credit for inputs was not available, however, the credit for input services and capital goods was available to the contractor. However as per 17(5)(c), where works contract service is an input service for further supply of works contract service, the prohibition on availment of ITC does not apply.
  2. A press release dated 15-06-2017 was issued on “Reduced Liability of Tax on complex, building, flat etc. under GST” as under:

 

The CBEC and States have received several complaints that in view of the works contract service tax rate under GST at 12% in respect of under construction flats, complex etc, the people who have booked flats and made part payment are being asked to make entire payment before 1st July 2017 or to face higher tax incidence for payment made after 1st July 2017. This is against the GST law. The issue is clarified as below:-

 

  1. Construction of flats, complex, buildings will have a lower incidence of GST as compared to a plethora of central and state indirect taxes suffered by them under the existing regime.

 

  1. Central Excise duty is payable on most construction material @12.5%. It is higher in case of cement. In addition, VAT is also payable on construction material @12.5% to 14.5% in most of the States. In addition, construction material also presently suffer Entry Tax levied by the States. Input Tax Credit of the above taxes is not currently allowed for payment of Service Tax. Credit of these taxes is also not available for payment of VAT on construction of flats etc. under composition scheme. Thus, there is cascading of input taxes on constructed flats, etc.

 

  1. As a result, incidence of Central Excise duty, VAT, Entry Tax, etc. on construction material is also currently borne by the builders, which they pass on to the customers as part of the price charged from them. This is not visible to the customer as it forms a part of the cost of the flat.

 

  1. The current headline rate of service tax on construction of flats, residences, offices etc. is 4.5%. Over and above this, VAT @1% under composition scheme is also charged. The buyer only looks at the headline rate of 5.5%. In other cities/states, where VAT is levied under the composition scheme @2% or above, the headline rate visible to the customer is above 6.5%. What the customer does not see is the embedded taxes on account of cascading and sticking of input taxes in the cost of the flat, etc.

 

  1. This will change under GST. Under GST, full input credit would be available for offsetting the headline rate of 12%. As a result, the input taxes embedded in the flat will not (& should not) form a part of the cost of the flat. The input credits should take care of the headline rate of 12% and it is for this reason that refund of overflow of input tax credits to the builder has been disallowed.

 

  1. The builders are expected to pass on the benefits of lower tax burden under the GST regime to the buyers of property by way of reduced prices/ installments. It is, therefore, advised to all builders / construction companies that in the flats under construction, they should not ask customers to pay higher tax rate on instalments to be received after imposition of GST.

 

  1. Despite this clarity on law position, if any builder resorts to such practice, the same can be deemed to be profiteering under section 171 of GST law.

 

Place of Supply

As per Section 12(3), where location of supplier and recipient is in India, place of supply of service

Ø directly in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or co-ordination of construction work

Ø any services ancillary to the above services

shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located

 

 

As per Section 13(4), where location of supplier or recipient is not in India, The place of supply of services supplied directly in relation to an immovable property, including services supplied in this regard by experts and estate agents, supply of accommodation by a hotel, inn, guest house, club or campsite, by whatever name called, grant of rights to use immovable property, services for carrying out or co-ordination of construction work, including that of architects or interior decorators, shall be the place where the immovable property is located or intended to be located.

 

State where Contractor required to be registered

Ø As per section 25, person liable to be registered shall apply for registration in each state which he is so liable

Ø As per section 22, supplier shall be liable to be registered in the state from where he makes taxable supply of goods or services.

 

Hence contractor shall be required to be registered from every state where he makes taxable supply of goods or services

 

No Refund of Unutilized Input Tax Credit in the case of Construction of Complex Services

As per Notification 15/2017 dtd. 28-06-2017, no refund of unutilised input tax credit shall be allowed under sub-section (3) of section 54 of the said Central Goods and Services Tax Act, in case of supply of services specified in sub-item (b) of item 5 of Schedule II of the Central Goods and Services Tax Act.