A works contract is a form of service contract in which products are supplied to carry out the contract. As a result, job contracts incorporate both service and product transfer. Construction contracts cover both the building of a new structure and the erection and installation of equipment and machinery.
HSN Code for Works Contract Under GST: According to prior legislation, works contracts included three types of taxable activity. It included both the supply of goods and the offering of services. A taxable event occurred if a new product was developed while the works contract was in effect. Products were previously subject to VAT, whilst services were subject to service tax.
If a new product was produced while a labor contract was in effect, Central Excise duty was collected. As a result, multiple regulations taxed diverse components of the same operation. Due to the enormous amount of uncertainty this produced regarding treatment and taxability, there were numerous court cases involving employment contracts. GST attempts to remove uncertainty from the legislative process.
Work Contract Taxability Under GST
Any project performed for an “Immovable Property” is referred to as a “Works Contract” under the GST, in contrast to former VAT and Service Tax standards. If the property in goods is transferred as part of the contract’s execution, the agreement is referred to as a “works contract” for the construction, fabrication, completion, erection, installation, fit-out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property.
As a result, GST has cleared up any uncertainty about tax treatment. This means that the works contract will be taxed as a service rather than as objects or a combination of things and services.
GST Does Not Provide for Abatement
- There was no exception for work contract service under GST. Previously, the works contract as VAT-exempt. The service tax was gathered at a rate of 15% on either 40% (for new work) or 70% (for existing work) (on repair, and maintenance work).
- Because no abatement/composition was granted, the tax burden increased significantly, with the work contract being taxed at the ordinary GST rate (which is 18%) and even being subjected to a lower tax rate (12 percent ).
You can use our GST calculator to find out your outstanding GST before you register.
On Some Employment Contracts, Input Tax Credits Are Not Accessible
According to the GST Law, works contract services provided for the building of the immovable property, other than equipment and machinery, are not eligible for input tax credit unless they are an input service for the subsequent provision of works contract services.
Anything other than machinery and equipment that a taxable person receives for building an immovable property on his own dime, even if it is used to further his business.
When building machinery and plants, both the builder and the taxable person are eligible for an input tax credit. No taxable person who builds on their own dime is eligible for an input tax credit, even if the project is for commercial use. Only someone in the same industry as them who is using the services they have received to supply more works contract services is eligible to get ITC for works contracts.
A building developer, for instance, might employ a subcontractor to finish a particular project phase. GST will be included by the subcontractor in the tax invoice sent to the prime contractor.
- The principal contractor will be qualified to make an ITC claim on the tax invoice produced by his subcontractor because his output is a works contract service
- However, the IT firm won’t be qualified for the ITC or GST paid on the invoice generated by the works contractor if the primary contractor provides a service under a works contract to a business in the IT sector (other than plant and machinery)
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HSN Code for Works Contract Under GST
Builders’ joinery and carpentry, of wood, incl. Panels for finished flooring, cellular wood panels, wood shakes and shingles, and finished flooring panels (excluding plywood paneling, blocks, strips, and friezes for parquet flooring, not assembled, and prefabricated buildings)
Maintenance of Records by a Works Contractor
According to Section 56(14) of the Central Goods and Services Tax (CGST) Rules, a person executing works contracts must maintain separate accounts for works contracts showing
- The names and addresses of the individuals on whose behalf the works contract is carried out
- The items or services received for the execution of the works contract, including their description, value, and quantity (if appropriate)
- The description, value, and quantity (where relevant) of the items or services used to carry out the works contract
- The specifics of cash received for each employment contract
- Supplier names and addresses from whom they have obtained goods or services.
Supply of Construction Contracts
Whether or not the contract includes a land transfer determines the value of the works contract service. Value of a service supply that transfers land or an undivided piece of land is determined by subtracting the supply’s cost from the land’s value, whichever is larger.
One-third of the price paid for this supply is land or undivided land.
The Contracting Location for the Supply of Work
A GST works contract would necessitate a piece of real estate according to Section 12(3), the place where supply is made is decided in India, where both providers and beneficiaries are located. The supply would depend on where the immovable property was located.
As long as the immovable property is located outside of India, yet both the beneficiary and supplier are based in India, a provision in Section 12(3) of the IGST Act, 2017, establishes where the supply is made.
According to Section 13(4) of the IGST Act of 2017, the immovable property must be placed or scheduled to be located where the Supplier or Recipient is outside of Indian borders.
Composition Scheme Accessibility to Construction Contractors
From April 2019, works contractors with a turnover of up to Rs.50 lakhs are eligible for the composition plan. Suppliers of commodities were the only ones who had access to the composition scheme in the past. The tiny subcontractors who are unable to use the composition system were dealt a major blow by this decision. As a result, they were required to register for the standard taxation plan, which increased their compliance and expenditures. Services provided by small businesses will benefit from the composition scheme’s inclusion of these businesses.
Work Contract GST Rates
Below is a table that shows the HSN Code for Works Contract Under GST that pertain to various classes of works contracts.
| Description of Class | Rate of GST |
|
Providing the government with a works contract that primarily entails earthwork
|
5% |
|
Contract for oil exploration works that are related to construction
|
12% |
| A construction-related works contract that is carried out by a subcontractor on behalf of the principal contractor. In return, the government will receive services from the minor contractor. | 12% |
| the provision of construction services for a construction project dealing with low-cost housing | 12% |
| Contract for the composite supply of works, the supply of which takes place to the government in the form of the repair or building of monuments, dams, canals, government or disposal of sewage treatment, water supply, or pipeline schemes. | 12% |
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