Overview: What is works contract service under GST?
Section 2 sub Section (110) of CGST Act, 2017 defines Works contracts 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. For better understanding, gst on government works contracts pdf is attached.
The Central Board of Indirect Taxes (CBIC) has recently increased the rate of GST on works contract services involved in the execution of government contract vide notification number 15/2021- Central Tax (Rate) dated 18.11.2021 which amended notification number 11/2017- Central Tax (Rate), dated the 28th June, 2017 (this notification was already amended several time, so it should be read in conjuncture with latest amendment made). As per the said notification, CBIC has substituted the words – “Union territory, a local authority, a Governmental Authority or a Government Entity” with the words – “Union territory or a local authority” which is going to be effective from 01.01.2022. When GST was role out in 2017, rate of gst on construction services was 18% irrespective of type service recipient be it Government or Private concern. However, it was reduced to 12% and 5% (where labour component is more than 75%) vide notification number 20/2017- CT (R), dt 22.08.2017 and 31/2017- CT (R), dt 13.10.2017 respectively for contractor and vide notification number 1/2018- CT (R), dt 25.01.2018 for sub- contractor.
Notification Wordings:
Before analyzing further, the impact of gst rate on works contract 2021, let me first re-produced the said notification:-
In exercise of the powers conferred by sub-section (1), sub-section (3) and sub- section (4) of section 9, sub-section (1) of section 11, sub-section (5) of section 15, sub-section (1) of section 16 and section 148 of the Central Goods and Services Tax Act, 2017, the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, further amended the notification of the Government of India, in the Ministry of Finance (Department of Revenue) No.11/2017- Central Tax (Rate), dated the 28th June, 2017.
In the said notification, in the TABLE, –
- against serial number 3,-
- in column (3),in the heading “Description of Service”, in items (iii),(vi),(ix) and (x), for the words “Union territory, a local authority, a Governmental Authority or a Government Entity” the words “Union territory or a local authority” shall be substituted;
- in column (3), in the heading “Description of Service”, in item (vii), for the words “Union territory, local authority, a Governmental Authority or a Government Entity” the words “Union territory or a local authority” shall be substituted;
- in column (5), in the heading “Condition”, the entries against items (iii),(vi),(vii),(ix) and (x),shall be omitted;
Position before amendment:
For the better understanding of the said notification, the relevant Sr. no of the said notification is re-produced as under:-
| Sl No. | Chapter, Section or Heading | Description of Service | Rate (per cent.) | Condition |
| (1) | (2) | (3) | (4) | (5) |
| 3 | Heading 9954 (Construction services) | (iii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied 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 historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); (b) canal, dam or other irrigation works; (c) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal. |
6 | Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be; |
| (vi) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, 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; (b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or(iii) an art or cultural establishment; or (c) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017. |
6 | |||
| vii)Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, involving predominantly earth work (that is, constituting more than 75per cent. of the value of the works contract) provided to the Central Government, State Government, Union territory, local authority, a Governmental Authority or a Government Entity. | 2.5 | Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be | ||
| [(ix) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (iii) or item (vi) above to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity. | 6 | Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be. | ||
| Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (vii) above to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity. | 2.5 | Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be. | ||
Position after the amendment:
So question now arises what are the changes made in the said notification and how does it going to effect gst on works contracts including gst on works contract of residential house provided by the contractor/sub-contractor to various government department/authority.
For getting better understanding of GST on works contract services, let us first analyse para one of Sr no 3 (iii) of column 3 of the said notification which is as under:-
Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied to Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity.
| Before amendment | After amendment |
| The Central Government | The Central Government |
| The State Government | The State Government |
| The Union territory | The Union territory |
| A local authority | A local authority |
| A Governmental Authority | Removed |
| A Government Entity | Removed |
From the above, it appears that Governmental Authority or Government Entity have been removed from the above and accordingly GST on works contract services provided to a Governmental Authority or a Government Entity against sr no (iii),(vi),(vii),(ix) and (x) will be 18% from the present rate of 12% and against sr no (vii) 18% from the present rate of 5%. (Sr no (vii) is applicable where labour component in the contract is more than 75%)
This is also applicable to sub-contractor providing works contract services to various government department/authority through main contractor.
It is pertinent to note that in the said notification, they have not mentioned the words, “the Central Government, State Government”. It means that GST on works contract services provided to the Central Government, State Government is still 12%.
It is also important to note that CBIC has note touched upon sr no viii which is in respect of offshore works contract relating to oil and gas exploration and production (E&P) in the offshore area beyond 12 nautical miles. Accordingly, GST on works contract services is still 12%.
Meaning and Impact Analysis of rate on supply under works contract service to different Government department/ Authority:
What is the meaning of ‘Government’?
As per section 2(53) of the CGST Act, 2017, ‘Government’ means the Central Government. As per clause (23) of section 3 of the General Clauses Act, 1897 the ‘Government’ includes both the Central Government and any State Government.
What is the meaning of ‘Central Government’?
As per clause (8) of section 3 of the said Act, the ‘Central Government’, in relation to anything done or to be done after the commencement of the Constitution, means the President. As per Article 53 of the Constitution, the executive power of the Union shall be vested in the President and shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution. Further, in terms of Article 77 of the Constitution, all executive actions of the Government of India shall be expressed to be taken in the name of the President. Therefore, the Central Government means the President and the officers subordinate to him while exercising the executive powers of the Union vested in the President and in the name of the President.
Example: Defence (Army, Air force, Navy), Finance, Railways, Highways & Transport are all treated as Central Government department since they derive their power & action through President of India. Ruling party is merely a facilitator for smooth functioning of Central Government.
Impact of GST on works contract services provided to Central Government Department: Since the wording “Governmental Authority or Government Entity” have only been removed from the said notification, the rate of GST on works Contract Services on Central Government department is still 12% / 5% and there will be no impact on Contracts.
What is the meaning of ‘State Government’?
Similarly, as per clause (60) of section 3 of the General Clauses Act, 1897, the ‘State Government’, as respects anything done after the commencement of the Constitution, shall be in a State the Governor. As per Article 154 of the Constitution, the executive power of the State shall be vested in the Governor and shall be exercised by him either directly or indirectly through officers subordinate to him in accordance with the Constitution. Further, as per article 166 of the Constitution, all executive actions of the Government of State shall be expressed to be taken in the name of Governor. Therefore, State Government means the Governor or the officers subordinate to him who exercise the executive powers of the State vested in the Governor and in the name of the Governor.
Example: PHED, WRD, Irrigation Department, PWD are all treated as State Government department since they derive their power & action through Governor of that state. Ruling party of that particular state is merely a facilitator for smooth functioning of State Government.
Impact of GST on works contract services provided to State Government Department: Since the wording “Governmental Authority or Government Entity” have only been removed from the said notification, the rate of GST on works Contract Services on State Government department is still 12% / 5% and there will be no impact on Contracts.
What is the meaning of ‘Union Territory’?
As per Sec 2(114) of the CGST Act, 2017, ‘Union Territory’ means the territory of-
- The Andaman and Nicobar Islands,
- Lakshadweep,
- Dadra and Nagar Haveli
- Daman and Diu,
- Chandigarh, and
- Other territory.
Impact of GST on works contract services provided to Union Territories: Since the wording “Governmental Authority or Government Entity” have only been removed from the said notification, the rate of GST on works Contract Services on Union Territories is still 12% / 5% and there will be no impact on Contracts.
What is the meaning of ‘Local authority?
The definition of ‘local authority’ is very specific and means only those bodies which are mentioned as ‘local authorities’ in clause (69) of section 2 of the CGST Act, 2017. It would not include other bodies which are merely described as a ‘local body’ by virtue of a local law. Local authority means the following:
- a “Panchayat” as defined in clause (d) of article 243 of the Constitution;
- a “Municipality” as defined in clause (e) of article 243P of the Constitution;
- a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund (Example: Gorkhaland Territorial Administration- GTA in the Darjeeling district of WB);
- a Cantonment Board as defined in section 3 of the Cantonments Act, 2006; (Army Area)
- a Regional Council or a District Council constituted under the Sixth Schedule to the Constitution; (for Tribal Areas in the States of Assam, Meghalaya, Tripura and Mizoram)
- a Development Board constituted under article 371 of the Constitution; (special powers to the governors of Gujarat and Maharashtra to create independent development boards for Vidarbha, Marathwada and the rest of Maharashtra and Saurashtra, Kutch and the rest of Gujarat.)
- a Regional Council constituted under article 371A of the Constitution (Special provision with respect to the State of Nagaland.)
Example: Kolkata Municipal Corporation, Delhi Cantonment Board, GTA in the Darjeeling district of WB, Naga Hills Tuensang Area (NHTA)
Impact of GST on works contract services provided to Local Authority: Since the wording “Governmental Authority or Government Entity” have only been removed from the said notification, the rate of GST on works Contract Services on Local Authority is still 12% / 5% and there will be no impact on Contracts.
What is the meaning of ‘Government Authority’?
As per explanation 2(16) of IGST Act, 2017, “Government Authority “means an authority or a board or any other body –
- Set up by an Act of Parliament or a State Legislature; or
- Established by any Government,
With 90% or more participants by way of equity or control, to carry out any function entrusted to a Municipality under Article 243W of the Constitution or to a Panchayat under Article 243G of the Constitution.
What is the meaning of ‘Government Entity’?
As per Para iii(x) of the Notification NO. 31/2017-CT (Rate), dated. 13.10.2017, ‘Government Entity’ means an authority or a board or any other body including a society –
- Set up by an Act of Parliament or a State Legislature; or
- Established by any Government,
With 90% or more participants by way of equity or control, to carry out any function entrusted by the Central Government, State Government, Union Territory or a Local Authority.
There is only a thin line of difference between Government Authority and Government Entity in respect of function entrusted. Government Authority function is entrusted in respect of Municipality/ Panchayat whereas Government Entity function is entrusted by the Central Government, State Government, Union Territory or a Local Authority. Another difference is in respect of coverage of society under Government Entity.
Example of Government Authority: Kolkata Municipal Development Authority (KMDA), Noida Development Authority (NDA)
Example of Government Entity: Madhya Pradesh Jal Nigam Maryadit (MPJNM), Odisha Power Transmission Corporation Limited (OPTCL), NHPC Ltd
Analysis of Government Authority and Government Entity through case study and Advance ruling:
The Hon’ble High Court of Patna in case of Shapoorji Paloonji & Company Pvt. Ltd. vs CCE vide Civil Writ Jurisdiction Case No.16965 of 2015 noted that semi column “;” and the word “or” appearing between two sub-clauses are independent to each other and the expression “90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution” is related to sub-clause (ii) alone. It means that an authority established by Government should have 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution to be eligible for exemption.
The Authority set up by an Act of Parliament or State Legislature is not and cannot be linked to the condition of 90% or more participation by way of equity or control to carry out any function entrusted to a municipality under Article 243W of the Constitution.
Relied upon the above ruling of Patna High court, AAR-Uttarakhand vide order no 10/2018 dated 22.10.2018 further elaborated meaning of ‘Government Entity’ in the case of NHPC Ltd as under:
- that there are various entities ‘established’ by the Government by way of 90% or more participation in equity or control; however after the ‘establishment’ of such entities, the Government participation by way of equity or control is usually diluted to less than 90%.
- The definition of ‘governmental entity’ merely contemplates that an entity is required to be ‘established’ by the Government by way of 90% or more equity or control.
- The definition does not contemplate continuous fulfilment of such requirement post ‘establishment’ of the entity. Therefore, the intention of the notification is to enlarge the scope of definition to cover Government Companies incorporated under the Companies Act also within the ambit of the definition of “Government Entity”.
- Thus, if the criterion is fulfilled, at the time of ‘establishment’ by way of 90% or more Government Participation in the equity or by way of control, the entity would be considered as ‘Government Entity’.
Accordingly, AAR concluded that M/s NHPC Ltd. falls under the definition of “Government Entity” in as much as at the time of establishment of the Company the Hon’ble President of India and its nominees hold 100% equity shares of the Company.
AAR further noted that there can be no “government entity” if the very essential ingredients for being recognized as “government entity” gets lost over a period time and the control or equity by way of 90% or more does not vest with the Government. It observed that a Company or a Society or a trust in addition to an authority or a board may continue be in existence as they get incorporated and brought into existence under different Acts and law, for example a Company gets incorporated under the Companies Act, a society gets incorporated under Societies Registration Act, etc. however, such incorporated legal entity/person cannot claim the benefits or right which are extended in favour of such incorporated bodies recognizing them as “government entity” until and unless they continue to fulfil the requirement for being recognized as Government Entity as per law .
Take away from the AAR ruling:
from the advance ruling it appears that all the public sector undertaking should be treated as Government Entity like NTPC, BHEL, Coal India etc. because initially, 90% & more stake in these PSU were hold by Central Government. In my view, it should not hold good because of the fact that very basic purpose of giving exemption to Government Entity will be defeated. If for some reason Government diluted their stake in favour of private entity and majority of stake is hold by that private entity, will it be still treated as Government entity. The answer will be absolutely No.
Impact of GST on works contract services provided to Government Authority and Government Entity: Since the wording “Governmental Authority or Government Entity” have been removed from the said notification, the rate of GST on works Contract Services on Government Authority and Government Entity will be 18% and it will automatically fall under Sr. no. 3(xii) of notification number 11/2017- CT (Rate), dated 28.06.17 and accordingly there will be an impact of 6% on GST on works Contract Services provided by Contractor/sub-contractor if it is an inclusive contract. Even if GST on works Contract Services is extra, project cost is going to increase by 6% for Government since Government as an end client not going to get ITC benefit of GST paid to contractor.
Conclusion:
Apparently from the notification, it seems that CBIC has increased the rate of GST on works contract services provided to Government from 12% to 18%. However, a careful and thorough analysis of different provisions, notifications, understanding the meaning of different government department/ authority, case laws and Advance ruling as mentioned above, it gives a clarity on rate of GST on Works Contract Service provided to various government department/ authority. The intention of Government of removing Government Authority and Government Entity from the said list is not clear. However, from the various Advance ruling it appears that advance ruling like NHPC Ltd, OPTCL gives a misinterpretation and very basic purpose of giving exemption to Government Authority and Government Entity is defeating and at the same time government is losing good chunk of GST revenue and hence, decided to remove above two from the said list. It is interesting to see how contractor/ sub contractor is going to react for this increased rate of GST on works contract services provided to Government Authority and Government Entity.
Present Status:
Ministry of Finance vide its notification number 03/2022- Central Tax (Rate) dated 13.07.2022 increased GST rate on Government works Contract from 12% to 18% except oil & gas sector related government works contract like ONGC, IOCL awarding works contract for its oil exploration.
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