Work contract is a contract that includes moving of property in goods and the carrying out of the following services like erection, installation or commissioning of plant, machinery, installation of electronic and electrical devices, plumbing, construction of new building or new residential complex etc. Basically, a work contact is a transfer of goods as well as mixture of service.
In December 2017, the Central government of India has announced a big relief to the work contractors by reducing the tax rate from 12% to 5% for the supply of work contracts which constitutes mainly of earth work. Moreover, the supply of work contract must mainly include earth work which is created more than 75% of the value of work contract.
As mentioned in Section 2 of the clause 119 of the CGST Act of 2017, Work Contract is defined as a contract for building, fabrication, completion, installation, maintenance, renovation, repairing, commissioning or alteration of any immovable property etc. is involved in the implication of contract.
As per the previous law, work contracts comprise of three types of taxes in India. Creation of new product during the work contract became a taxable event. Before the appearance of the current tax, supplying of goods was taken as a tax in the form of VAT and the whole service was under service tax. Moreover, the central excise duty was imposed in the appearance of the new product during the process of completing a work contract. The aim of the GST is to put an end to all these extra taxes that were levied previously during work contract.
With “One Nation One Tax” of GST has abolished the misconception of the tax treatment completely which means work contract will be dealt as service and tax would be charged accordingly. Previously, there were different schemes for VAT for different states.
Under the new taxation model of India, input tax credit is not available. Regarding the construction of machinery and plant the input tax credit is available for both the builder and for a taxable person. Previously, VAT was payable for the work contract, service tax was paid @15%on either 40% for new work, or for repair and maintenance work 70% is required. Abatement is not mentioned for work contract services in India. It may cause to increase in burden of tax if no abatement is provided for work contract, if such work is taxed under standard GST rate and also may cause to lower tax rate which is of 12%.
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