Clarification regarding rate of tax applicable on construction services provided to a Government Entity, in relation to construction such as of a Ropeway on turnkey basis-

Circular Number 152/08/2021-GS dated 17th June 2021

1. Reference has been received by the Board for a clarification whether services
   supplied to a Government Entity by way of construction such as of “a ropeway” are
   eligible for concessional rate of 12% GST under entry No. 3 (vi) of Notification No.
   11/2017- CT (R) dt. 28.06.2017. On the recommendation of the GST Council, this issue
   is clarified as below.

2. According to entry No. 3(vi) of notification No. 11/2017-CT (R) dated
   28.06.2017, GST rate of 12% is applicable, inter alia, on-
   “(vi) Composite supply of works contract as defined in clause (119) of section 2 of the Central
   Goods and Services Tax Act, 2017, (other than that covered by items (i), (ia), (ib), (ic), (id),
   (ie) and (if) above) provided to the Central Government, State Government, Union Territory,
   a local authority a Governmental Authority or a Government Entity, by way of construction,
   erection, commissioning, installation, completion, fitting out, repair, maintenance,
   renovation, or alteration of –
   (a) a civil structure or any other original works meant predominantly for use other
   than for commerce, industry, or any other business or profession; “

3. Thus, said entry No 3 (vi) does not apply to any works contract that is meant
for the purposes of commerce, industry, business of profession, even if such service
is provided to the Central Government, State Government, Union Territory, a local
authority a Governmental Authority or a Government Entity. The doubt seems to
have arisen in the instant cases as Explanation to the said entry states, the term
‘business’ shall not include any activity or transaction undertaken by the Central
Government, a State Government or any local authority in which they are engaged
as public authorities. However, this explanation does not apply to Governmental
Authority or Government Entity, as defined in clause (ix) and (x) of the explanation
to said notification. Further, civil constructions, such as rope way for tourism
development shall not be covered by said entry 3(vi) not being a structure that is
meant predominantly for purposes other than business. While road, bridge,
terminal, or railways are covered by entry No. 3(iv) and 3(v) of said notification,
structures like ropeway are not covered by these entries too. Therefore, works
contract service provided by way of construction such as of rope way shall fall under
entry at sl. No. 3(xii) of notification 11/2017-(CTR) and attract GST at the rate of 18%.

Selection of Core Business Activity on GSTN Portal

GST has enabled a new feature on the GST portal. At the login time, the portal prompts the user to select the “Core Business Activity.” This is required for the department to understand the nature of the business carried out by the taxpayers.

The portal prompts three options initially

Manufacture – A manufacturer is a registered person who produces new products from raw materials and components using tools, equipment, and machines and then sells them to the consumers, wholesalers, distributors, retailers, or other manufacturers. A manufacturer may sell some more brought-out items or may provide some ancillary services with his manufactured goods. Still, he would continue to be classified as a manufacturer because it is the Primary Business Activity.

Trader – A trader is a registered person who engages in the buying and selling of goods. Traders have been further classified as –

• Wholesaler or Distributor
• Retailer

Retailer includes a registered person selling goods through e-commerce operators.

Service Provider & Others – A service provider is a registered person who provides service to a recipient and is neither a manufacturer nor a trader—Example Banking service, Information Technology service, works-contract service, agents, intermediaries, Goods Transport Agency etc.

The taxpayers must select only one of the Activity prompted.

The taxpayer should select one Activity which is providing him the major source of Revenue. Say, for example, if the taxpayer is having a manufacturing turnover of rupees one crore and forty lakhs and services of rupees twenty lakhs, in this case, the taxpayer has to select manufacturing as it is contributing maximum Revenue to him/her.

If the taxpayer is providing works contract services or others, then he/she can select the “Service Provider & Others.”

If the taxpayer is selecting “Trader,” then the system will prompt the taxpayer to select either of the following “Wholesaler/Distributor” or “Retailer.”

The options selected by the taxpayers can be modified at a later date by navigating through My Profile on the GST portal.

Demystifying Tax Deduction at Source under GST Act

In the current tax regime under VAT, we have Tax Deducted at Source, and the same is being continued under GST also. Section 51 of the Central Goods and Service Tax Act, 2017 talks about the provisions related Tax Deduction at Source. TDS is applicable to works contract also related to immovable properties in GST.

TDS is applicable on works contract also and the definition of works contract is defined in subsection 119 of section 2 of the CGST Act 2017.

works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or 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;

The tax has to be deducted by category of persons as given in the sub-section 1 of section 51 of the CGST Act 2017.  The category of persons are

(a) a department or establishment of the Central or State Government, or

(b) Local authority, or

(c) Governmental agencies, or

(d) such persons or category of persons as may be notified, by the Central or a State Government on the recommendations of the Council,

Point “d” is an open clause and government on recommendations of the GST Council will notify the class of persons who are required to deduct TDS under GST from time to time whenever it finds that there is a necessity to plug the revenue leakage in the system.

The tax has to be deducted only in case of contracts where the contract value exceeds Rs 2.5 Lacs by the taxpayer who has issued the contract.

TDS should not be deducted if the location of the supplier and the place of supply is in a State or Union territory which is different from the State or as the case may be, Union territory of registration of the recipient.

For deriving the value of supply for determining the TDS, is the value of supply excluding the taxes paid under GST (Central Tax, State / UT Tax and Compensation Cess).

The tax so deducted has to be deposited by the deductor by 10^th of next month by filing of GSTR – 7

The deductor has to issue a certificate to the deductee, the contractor from whom the tax is deducted with the details like the amount of contract, the rate of tax deducted, amount of tax deducted and amount of tax deposited by the deductor in GSTR – 7A.  The deductor has to issue a certificate within 5 days from the date on which the amount is credited, a late fee of Rs 100 will be levied per day for delay in issue of the certificate. The amount of late fee will not exceed Rs 5000.

The deductee can take the credit of the tax based on GSTR – 2 filed by the Deductor under Section 39, sub-section 3 of CGST Act 2017. The amount will be credited to the electronic cash ledger of the deductee, and he can utilize the same for payment of GST taxes.

In case if the deductor fails to deposit the tax to the respective government, he is liable to pay interest on the defaulted amount as per provisions of Section 50 of CGST Act 2017.

The deductor can claim for refund as per Section 54 of CGST Act 2017 provided that the amount is not credited to the electronic cash ledger of the deductee.

From the provision of this section, it is clear that the government does not want to lose any tax revenue from the small contractors also. One silver lining is that unlike in tax collected at source there is no matching of records to avail the credit. If the contractor wants to avail in the credit, then he has to be registered with GST. In a way, the government is ensuring that there is no revenue leakage from any transactions at any given point of time.

The tax rates with respect to works contract have been reduced from 18% to 12% wide Notification No 20 CGST (Rates) 2017 with respect to composite contracts undertaken for the Government, a local authority or a Governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration. These rates are in addition to the TDS rates. In the erstwhile regime, the contractors were billing under the composite scheme where they were not taking input tax credit, and the excise taxes were added to the cost of the project along with the VAT and Service Tax. But now going forward in GST, as input tax credit is available for all the inputs if used for the furtherance of the business, this means that pricing of the existing contracts has to be re worked to take the benefit of the ITC and it is required as part of the Anti-profiteering provisions of the CGST Act. It will be very tough to say on the face of it that the cost for all the contract will be coming down, it has to evaluated on case to case basis and if there is no remarkable reduction or increase in costs due to lower tax rates on the input supplies. This is most likely to be seen in the case of construction of roads as the major component is gravel which is taxed at 5%, bitumen @ 9%, labor if on pay roll the GST is not applicable as it is part of the wages. Each and every contract has to be evaluated, and price revision has to be carried out accordingly. GST is exempted for some contracts as given in Notification No 12 CGST (Rates), 2017. The prices for contracts falling under such contracts also have to be renegotiated as ITC is not available on inputs.

The rollout date for the TDS in GST will be notified by the government separately, and before that, all the deductors have to obtain new GST registration number for TDS separately. The process of registration for TDS will commence from 18^th of September 2017 based on the press release issued after the 21^st GST Council Meeting held on 9^th September 2017 at Hyderabad.

Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

Blocked Input Tax Credit

Subsection 5 of Section 17 of the GST Act gives the list of items on which GST is not eligible

(5) 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:—
(a) motor vehicles and other conveyances except when they are used––
(i) for making the following taxable supplies, namely:—
(A) further supply of such vehicles or conveyances ; or
(B) transportation of passengers; or
(C) imparting training on driving, flying, navigating such vehicles
or conveyances;
(ii) for transportation of goods;

(b) the following supply of goods or services or both—
(i) food and beverages, outdoor catering, beauty treatment, health services,
cosmetic and plastic surgery except where an inward supply of goods or services
or both of a particular category is used by a registered person for making an
outward taxable supply of the same category of goods or services or both or as
an element of a taxable composite or mixed supply;
(ii) membership of a club, health and fitness centre;
(iii) rent-a-cab, life insurance and health insurance except where––
(A) the Government notifies the services which are obligatory for an
employer to provide to its employees under any law for the time being in
force; or
(B) such inward supply of goods or services or both of a particular
category is used by a registered person for making an outward taxable
supply of the same category of goods or services or both or as part of a
taxable composite or mixed supply; and
(iv) travel benefits extended to employees on vacation such as leave or
home travel concession;
(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 capitalisation, to the said immovable property;
(e) goods or services or both on which tax has been paid under section 10;
(f) goods or services or both received by a non-resident taxable person except
on goods imported by him;
(g) goods or services or both used for personal consumption;
(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free
samples; and
(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.