The Goods and Services Tax Bills (‘’the GST Bills”) passed by both the houses of Parliament recently contain many changes vis-à-vis draft Model law released in November 2016 (“Model GST Law”). One of such key amendments is the change in the definition of ‘works contract’. This amendment make ‘works contract’ a hot topic for discussion, contrasting opinions and a future point of litigation.
Under the Model GST law (Schedule II), a works contract was treated as “supply of service”. This treatment of works contract as “supply of service” and not “supply of goods” was immensely welcomed by the industry.
However, the GST Bills restricts the definition of ‘works contract’ to those pertaining to immovable property only. Therefore, the fate of works contract with respect to movable property under the upcoming GST laws is open to different interpretations.
Let’s compare the provisions with respect to ‘works contract’ under the Model GST Law and GST Bills:
|
Relevant Provision |
Model GST Law | GST Bills |
| Schedule II: Activities to be treated as ‘supply of goods’ or ‘supply of services’ | 5. The following shall be treated as “supply of service”:
(f) works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract |
6. The following composite supplies shall be treated as a supply of services, namely:—
(a) works contract as defined in clause (119) of section 2
|
| Definition of ‘Works Contract’ | “works contract” means a contract wherein transfer of property in goods is involved in the execution of such contract and includes contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property
[Section 2(110)] |
“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 [Section 2(119)] |
On a careful reading of the above definitions, it appears that the legal draftsmen have interestingly played with the words ‘means’ and ‘includes’. By moving the contracts for immovable property under the ‘means’ part of the ‘works contract’ definition in the GST Bills, works contract with respect to the movable property are out of its ambit.
In the absence of any specific treatment of work contracts involving movable property, one would need to apply the concept of ‘composite supply’ to determine the nature of such works contract. Under the GST Bills, composite Supply’ means a supply 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 principal supply. Principal supply has been defined to mean the supply which constitutes the pre-dominant element of a composite supply. It has been further provided that a composite supply shall be treated as supply of the principal supply forming part of the said composite supply.
By virtue of the above provisions, the concept of ‘dominant intention test’ in context of works contract has been given statutory recognition in GST. Thus, in any works contract of movable property, it would be critical to identify the principal supply because the rules related to place of supply, rates etc would be applied accordingly.
Let’s take an example of supply of an air condition along with installation. Here it can be said that the dominant intention of customer is purchase of AC. Accordingly, the principal supply in the instant case would be that of ‘goods’. Hence the composite supply of AC along with installation would qualify as ‘supply of goods’. This conclusion is even supported by Section 10(1)(d) of the IGST Bill, which provides that where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly.
We can also talk about an annual maintenance contract (‘AMC’) or a repair activity with respect to any machine. Again, it can be argued that intention of the customer would generally be to avail the maintenance or repair service to ensure that his machine is always up and running. Although, AMC/ repair may ultimately entail supply of goods which could be of substantial value. This may result in interpretation issues and classification dispute.
Interestingly, Point 3 of Schedule II of the GST Bill provides “any treatment or process which is applied to another person’s goods is a supply of services”. Basis this, it can also be argued that any AMC/ repair activity should always qualify as ‘supply of service’ without application of dominant intention test as the AMC/repair should be covered under any process applied to another person’s goods irrespective of the fact that the same may require supply of goods as well.
Thus, the tax treatment of works contract supplies involving movables is still not clear even under the upcoming “One Nation One Tax” regime. Despite of the efforts made by the legal draftsmen towards minimizing possible disputes, it appears that the treatment of works contract under GST will still be open to interpretation and prone to litigation. Clarification from the Government in this regard would certainly be appreciated by taxpayers.