Taxation of Composite contract under GST

  • Contributed by CA. Dinesh Pagaria

    Let us understand the taxation of works contract (Including any transfer of property when works contract is executed) related to immovable property as the supply of service. Works contract, as well as the sale of under construction property, shall be subjected to GST. As Stamp duty has not been included in GST, therefore over and above GST; buyer has also to pay a stamp duty as applicable in different states. At present, service tax is charged on 40% of project value, so the effective service tax rate is 6%, and effective vat rate comes around 1% charge on project value in the different state.

    The question now comes in mind is, what will be the treatment of Composite contract related to movable property as the concept of composite supply and mix supply has been inserted in Revised Model Draft GST Law in Nov, 2016.

    It is clear that work contract will be taxed in GST, but the issues such as Value of Supply, Place of supply, time of supply and the Rate will arise in future.

    A transaction of works contract is at present taxed twice some times ; firstly as a sale by the State Government and secondly as service by the Central Government as there is of course of supply of goods as well as supply of services.

    At present, the supply of goods is taxable in the form of Value Added Tax (VAT), while the service element is taxable under service tax laws.

    At present, State VAT laws have specific provisions for taxing works contracts. To avoid taxing the services element, these laws and associated rules provide for either separation of material and labour or percentage deductions in transaction value. Another method provides for application of a lower rate of tax in a composition/lump-sum scheme for works contracts. The service tax law has also provided for similar treatment to avoid taxation of sale of goods as part of a works contract.

    In GST Model, goods as well as services will be taxed at a uniform rate. Therefore, the dispute whether a transaction is subjected to VAT or Service tax comes to end.

    All supply of goods or services or both will attract CGST (to be levied by Centre) and SGST (to be levied by State) unless kept out of purview of GST. GST will be applicable even when the transaction involves supply of both (goods and services). In effect, woks contracts will also attract GST. As GST will be applicable on supply ‘the erstwhile taxable events such as manufacture‘, sale‘, provision of services etc. will no more be relevant.

    For taxing a transaction in GST, two things are important one is supply and other is goods or service or both

    Section 2(95)
    Supply shall have the meaning as assigned to it in section 3;
    Supply includes—

    1)
    • All forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,
    • Importation of services, for a consideration whether or not in the course or furtherance of business, and
    • A supply specified in Schedule I, made or agreed to be made without a consideration.

    2)Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

    3)Notwithstanding anything contained in sub-section (1),
    • activities or transactions specified in schedule III; or
    • activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities as specified in Schedule IV, shall be treated neither as a supply of goods nor a supply of services.

    4)Subject to sub-section (2) and sub-section (3), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as—
    • a supply of goods and not as a supply of services; or
    • a supply of services and not as a supply of goods; or
    • neither a supply of goods nor a supply of services.

    5)The tax liability on a composite or a mixed supply shall be determined in the following manner —
    • a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply;
    • a mixed supply comprising two or more supplies shall be treated as supply of that particular supply which attracts the highest rate of tax.

    Section 2(49)
    Goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

    Section 2(92)
    Services means anything other than goods.

    Explanation 1.- Services include transactions in money but does not include money and securities;

    Explanation 2.- Services does not include transaction in money other than an activity relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

    Section 2(27)
    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;

    Section 2(78)
    Principal supply means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary and does not constitute, for the recipient an aim in itself, but a means for better enjoyment of the principal supply.

    Section 2(66)
    Mixed supply means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

     

    Note:
    Views presented in this article are personal view of the author. Information presented in this article is intended for information purpose only and does not constitute any legal opinion or advice. Readers and Users are requested to seek formal legal advice prior to acting upon any of the information provided herein.