Works Contract- A New Challenge…. (Revised Model GST Law)

[Vatsalya Bhardwaj]

Levy of taxes in case of composite contracts is a complex phenomenon. Most specifically, levy of tax on works contract has witnessed a plethora of cases. Specifically the chargeability of tax on service vis-à-vis goods has always been a matter of discussion before the courts in the present indirect tax regime. The courts have also taken different-different views and always the matter is being subject matter of confusion / litigations.

However, with the introduction of GST it was expected that things will ease and long litigations under Works Contract will end and a definite law would be there. But the reality is far away from our expectations. Issues became more complicated, taxability is again under question and definitions are quite ambiguous. Let’s first recall how VAT and Service Tax Laws explained Works Contract in their respective laws.

Works Contract as per various State VAT laws

Works contract service (Declared service) as per Service Tax

As per Sec 2(1)(zo) “works contract includes any agreement for carrying out for cash or for deferred payment or for valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property.

As per Sec 65B(54) “works contract means a contract wherein transfer of property in goods is involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

In Model GST laws introduced in June, 2016, vide Section 2(107), the Works Contract was defined as under:-

“works contract” means an agreement for carrying out for cash, deferred payment or other valuable consideration, building, construction, fabrication, erection, installation, fitting out, improvement, modification, repair, renovation or commissioning of any moveable or immovable property;

In Revised Model GST Law vide, Section 2(110) works contract has been defined as under:-

“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.

On comparison of aforesaid definitions in GST Law it can be noted that word “movable property” is deleted from the definition of works contract under revised Model GST Law. However, it was covered under the Model GST Law. That shows it has been intentionally deleted. Can this be suggested that “movable property” are outside the purview of works contract now and thus repair and maintenance of any movable property will not be covered under the definition of works contract under revised Model GST Law? If such is not the case and it will still be covered under the definition, then what is the point of deleting or keeping the word in the definition of works contract?

Apart from the definition of works contract, there is one more term “composite supply” which leaves us in situation of dilemma. Definition of the term composite supply given in Sec 2(27) of Revised Model GST Law states that:

“Composite supply” means a supply made by a taxable person to a recipient comprising two or more supplies of goods or services, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. In such type of supply one needs to identify the principal supply and taxability will arise accordingly.

After analyzing the aforesaid definitions our question is where will repair or maintenance of movable and immovable property will be covered? Will it be a ‘composite supply’ of goods and services naturally bundled with each other i.e. to say in Repair and maintenance work, goods and services of labour are naturally bundled and supplied together for the purpose of execution of a contract and if not here, then will it be covered under the definition of works contract given under revised Model GST law, that covers “transfer in property in goods in execution of such contract” and ‘includes’ repair and maintenance of any immovable property. Now the word ‘includes’ also leaves the definition as an open vault that may include other terms as well as against the earlier definition of works contract under GST Law which started with “means” and ended after including both movable and immovable properties.

Now firstly it will be strenuous task for the tax professionals to advice their clients that whether it will be a composite supply or will it be covered under works contract. If it’s a composite supply then dispute will be there to decide the principal supply in the contract and if it will be considered as works contract then whole contract will be considered as supply of services (as per Schedule II Entry 5(f)).

In order to highlight the controversy, which may arise on account of definition of “composite supply” and “works contract” an example of a company entering into Annual Maintenance Contract for computers and laptop along with supply of parts can be taken.

Case 1 – Consideration as composite supply contract.

In view of definition of composite supply contract, it will be necessary to determine whether predominantly the contract is for supply of material or for supply of services. Considering the nature of AMC a dealer will consider these contracts as supply of services for the reason that it cannot be envisaged that how much material will be required. Considering the agreements as predominantly supply of services the dealer pay the necessary tax under GST on raising the invoice or receipt of payment. During the course of assessment proceedings the A.O. may call for details of material used in each of AMC and may take a view that in the cases where substantial material has been used same have to be considered as predominantly for supply of goods and not for services. For example, in case the company has entered into 100 contracts for AMC and has considered the same as contract for supply of services and subsequently the A.O. finds that in, say, 25 contracts the value of material used in rendering services was quite substantial as compared to price charged for AMC, he may take a view that these 25 contracts have to be considered as predominantly supply of material and on the same since rate of tax may be different the A.O. can raise additional demand. Accordingly, this will give a litigation and ambiguity in implementation of law.

Case 2- Consideration as works contract.

In case the dealer considers such contracts as works contract, which are to be considered as contract for supply and services and pay tax accordingly, again the AO can raise a plea that these contracts are not in the nature of works contract since contracts involved supply of material as well as services and same are in the nature of composite supply contract. On that basis, he may again raise additional demand in respect of contracts where he holds that predominantly there was material supplied as a part of AMC.

Such issues really need to be considered by the assessee before entering into contract with his clients under the GST regime i.e. where to cover such contracts, under which concept the valuation of goods and services will be done, other taxability issues, whether movable property will be considered under works contract, etc, etc.

In the light of above discussion, it may kindly be observed that revised Model GST law is also full of anomalies in regard to works contract and it will lead to litigation. Though, it can be expected that the Government is in the process of further amending the revised Model GST Law and coming out with relevant rules. It is believed that while making further amendments or while drafting rules they will take care of such issues.

Discussions to this article

[Ganeshan Kalyani]

Nice Article. In my view works contract is considered as service under GST. In such case why department should term it as composite supply. Composite supply is different from the term works contract service. Hence there should not be much differences.Thanks

[Vatsalya Bhardwaj]

Sir,

Thank you for your views and appreciation. The purpose of this article is to understand why the word 'movable property' has been deleted from the definition of 'works contract' under Revised Model GST Law and if it has been intentionally deleted then whether the work executed in relation to movable property will be covered under Works contract? Secondly, composite supply also talks about supplies of combination of goods and services both, then why a separate definition of works contract is required when such kind of contracts may be covered in the definition of composite contract. May be i would have taken a stretched view in my article, but still it needs some clarification.

[Debtosh Dey]

As I understood, definition of 'Works Contract' in Model GST Law coins services in relation to both movable and immovable properties where goods are transferred. This this is clear from the first part (operative part) of the definition. The second part (inclusive part) contains also immovable properties.

[Anuj Bansal]

I agree with above view of Mr. Dey. But a question remained unanswered is why the government has deleted the word 'movable' from the inclusive part of the definition of works contract and retained the work 'immovable'.