Definition of Works Contract under Gst

The Goods and Services Tax (GST) has revolutionized the way businesses operate in India. One of the key areas that has been affected by GST is works contracts. In this article, we will delve into the definition of works contract under GST and its implications.

What is a Works Contract?

A works contract is an agreement between a contractor and a customer where the contractor agrees to provide services in connection with the construction, erection, installation, or commissioning of a building, structure or any other civil works. The contract includes a combination of goods and services, and the value of the goods and services is not separable.

Under GST, works contracts are considered as a supply of services. It is important to note that a works contract is different from a contract for the supply of goods or services. In a works contract, both goods and services are provided as a package, and they cannot be separated.

Types of Works Contracts under GST

There are two types of works contracts under GST:

1. Composite Supply

A composite supply is a contract where the supply of goods or services is combined with the supply of another product or service. In a composite supply, the goods or services are separate from the main product or service.

For example, if a contractor is hired to construct a building, the supply of cement, steel, and bricks is separate from the supply of construction services. In this case, the value of cement, steel, and bricks is separable from the value of construction services.

2. Mixed Supply

A mixed supply is a contract where two or more goods or services are supplied together in a package, and they are not separable. In a mixed supply, the goods or services are not separate from the main product or service.

For example, if a contractor is hired to provide interior decoration services, the supply of furniture, curtains, and carpets is not separable from the value of interior decoration services. In this case, the value of furniture, curtains, and carpets cannot be separated from the value of interior decoration services.

GST Implications on Works Contracts

Under GST, works contracts are considered as a supply of services and are taxable. The rate of GST applicable on works contracts is 12% for normal contracts and 18% for those contracts involving government agencies.

In a works contract, the value of goods and services cannot be separated, and hence, GST is applicable on the entire contract. Contractors can claim input tax credit on the GST paid on goods and services used in the works contract.

Conclusion

Under GST, a works contract is defined as a combination of goods and services provided in connection with the construction, erection, installation, or commissioning of a building or other civil works. It is important for businesses to understand the implications of works contracts under GST to ensure compliance with the GST laws. With this understanding, businesses can make informed decisions regarding their works contracts and avoid any potential legal complications.