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Published on:
February 25, 2023
By
Harshini

Works Contract under GST- How Will GST Impact Works Contract?

As the Goods and Services Tax (GST) has been implemented in India, it has brought a significant change in the taxation system. The GST has replaced multiple indirect taxes and brought them under one umbrella making it simpler and more transparent. The GST has been introduced with a notion of one nation, one tax, which aims to streamline the entire taxation system in India. In this article, we will discuss how GST impacts the works contract and whether the composition scheme is available to works contractors.

Works Contract under GST

A “Works Contract” is an agreement between two parties for the execution of construction, installation, erection, commissioning, repair, renovation, alteration, or maintenance of any building or structure, wherein either party supplies goods or services or both, including goods, and services, or any combination thereof.

Under the old tax regime, works contracts were taxed under VAT, Service Tax, or Excise Duty, depending on the nature of the contract. With the introduction of GST, the works contract is now taxed under a single tax regime, which is GST.

Under GST, works contract is treated as a supply of services, and the tax rate applicable is 18%. However, the GST Council has provided a composition scheme for works contractors, which enables them to pay a lower tax rate on their works contracts.

Composition scheme for Works Contractors

The composition scheme is a simplified tax scheme under GST, which enables small taxpayers to pay tax at a lower rate and comply with the GST law easily. Under the composition scheme, a taxpayer is required to pay a fixed percentage of his turnover as tax, and he is not required to maintain detailed records and file regular returns.

The composition scheme is available to works contractors whose aggregate turnover is less than Rs. 50 lakhs in a financial year. However, works contractors engaged in the construction of complex buildings, infrastructure projects, or works contracts in which the value of goods exceeds 10% of the total contract value, are not eligible for the composition scheme.

Under the composition scheme for works contractors, the tax rate applicable is 6% (3% CGST and 3% SGST/UTGST) on the total turnover of works contracts. However, the works contractor is not allowed to avail input tax credit (ITC) on the goods and services used in the execution of works contracts.

Impact of GST on Works Contract

The introduction of GST has brought a significant impact on the works contract. As works contract is now treated as a supply of services under GST, it has brought clarity and uniformity in the taxation of works contracts across the country.

Under the old tax regime, works contract was taxed differently in different states, which led to confusion and disputes. With the introduction of GST, works contractors can now comply with a single tax regime, which has made the entire process simpler and more transparent.

However, the tax rate applicable to works contractors under GST is higher than the tax rate under the old tax regime. Under GST, the tax rate applicable is 18%, whereas under the old tax regime, it was around 12-15%, depending on the nature of the contract.

Moreover, the availability of input tax credit (ITC) to works contractors is also restricted under GST. Works contractors are not allowed to avail ITC on the goods and services used in the execution of works contracts, which has increased the cost of works contracts for them.

Conclusion

The introduction of GST has brought significant changes to the taxation system in India. Works contract, which was earlier taxed under multiple taxes, is now taxed under a single tax regime, which has made the entire process simpler and more transparent.

However, the higher tax rate and the restriction on the availability of input tax credit (ITC) have increased the cost of works contracts for works contractors. The composition scheme has been introduced to provide relief to small works contractors, who can now pay tax at a lower rate and comply with the GST law easily.

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Updated on:
March 16, 2024