What is a work contract under GST: Taxability ITC, etc

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What is a Work Contract?

Any work that is done for an “Immovable Property” is defined as a “Works Contract” under the new GST legislation, unlike the former VAT and Service Tax provisions, which included works contracts for “movable property.” It’s a type of service contract that involves the provision of commodities to carry out the agreement. Work contracts are therefore a mix of service and product transfer.

Definition of Work Contract Prior to GST Regime

There were three types of taxable activities included in prior legislation when it came to work contracts. In addition to supplying items, it also catered to the service industry.

If a new product was manufactured as part of the works contract, it was considered a taxable event. Previously, products were subject to VAT, while services were subject to service tax.

Central Excise tax was imposed if a new product was developed during the course of fulfilling a work contract.

As a result, separate laws levied taxes on different components of the same activity. Because of this, there was a lot of legal wrangling about the handling and taxability of work contracts. The goal of the GST is to put an end to such cases of legislative ambiguity.

Understand the Concept of  Work Contract under GST

A “Works Contract” under GST refers to only work done on an “Immovable Property,” in contrast to the former VAT and Service Tax rules.

Schedule II of the GST clearly identifies the following services being supplied under work contract:

  • Construction of a complex, a building, or civil construction, in whole or in part, with the purpose of resale,
  • Works contract includes the transfer of property in goods (whether as products or in another form) as part of the contract’s fulfillment.

Impact of GST on Work Contracts

The introduction of the GST has eliminated any ambiguity regarding taxation. This indicates that a work contract will be taxed as a service, and tax will be imposed accordingly. This new approach to employment contracts as a service, rather than a sale of things, provides much-needed clarity.

Different states had their own VAT regime under the former administration. There were a variety of taxation regimes, each with a distinct rate of VAT. With a 60% reduction on new works and 30% reduction on maintenance contracts, service tax was also complicated. As a result, the calculation for GST is significantly less complex.

Input Tax Credit under GST on Work Contract

During the construction of plant and machinery, both a builder and a taxable person can claim an input tax credit under GST if having GST Registration. However, any taxable person who creates on his own account, even if it is for commercial purposes, is not eligible for an input tax credit.

Can you have a GST Registration under Composition Scheme for a work contract?

Yes, you can have a GST Registration Online under composition scheme for a work contract. Contractors with an annual turnover of up to Rs.50 lakhs can opt for composition scheme under GST.  Previously, the composition scheme was only applicable to goods businesses and not to service providers. Using Composition Scheme, you can reduce your burden of GST Return Filing.

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A problem with the tax treatment of building contracts was present during the former regime. This changed, however, when the GST was implemented. Work contracts are defined, indicating that they contain service supply, and taxed at the same rate across India by the GST.  The GST has simplified and made more straightforward the administration of taxation on work contracts.

Gst Exempt On Service Provided To Government Organisations

Moreover, If you want any other guidance relating to GST Registration, please feel free to talk to our business advisors at 8881-069-069.

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