Goods and services tax on Government Contracts
Government contracts has assumed great importance in the modern times with Government working on major projects either by way of public private partnerships or through technically and professionally qualified contractors in Goods and services tax.
A contract to which the Central Government or a State Government is a party can be called a ‘Government Contract’ and the party who is required to execute the contract for or on behalf of Government is referred to as a ‘Government Contractor’.
Contract could take any of the form such as fixed-price contracts, cost-reimbursement contracts, fixed price or incentive contracts, indefinite – delivery contracts etc.
In Government contracts, generally, open tenders are floated through sealed bidding and Request For Proposals (RFP) may be invited.
Government engages contractors, who are generally empanelled with Government or Government agencies and contracts are awarded for the projects/works of following types –
Civil construction – residential, commercial or industrial
Erection, commissioning & installation
Management, maintenance & repairs
Other projects (e.g., EPC contacts, construction of structures, infra projects etc)
Most of these contracts relate to public sector such as railway, metro, road, airports, ports, dams, canals, irrigation etc.
Works contracts has been defined under section 2(119) of CGST Act, 2017. that 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.
Works contract has been defined only with reference to immovable property. In case immovable property is not involved then, the transaction of supply can not be categorized as works contract.
In case of supply of goods and services in relation to supply of goods which are movable, the transaction of such nature would either be classified as composite supply or mixed supply for the taxability of which separate provisions have been made in CGST law.
There should be a contract to provide / undertake works contract. The activities to
be undertaken under a works contract may be one or more of the following :
Such activities shall be in relation to any immovable property. Works contract including transfer of property in goods, (whether as goods or in some other form) involved in the execution of a works contract shall be treated as supply of service.
Under Goods and services tax , as per section 51 of the CGST Act, 2017, the Central or a State Government may mandate-
(a) A Department or establishment of the Central or State Government, or
(b) Local authority, or
(c) Governmental agencies, or
(d) Such persons or category of persons as may be notified by the Government.
to deduct Tax Deducted at Source (TDS) @2% (1% each for CGST and SGST or 2% for IGST) from the payments made or credited to the supplier of taxable goods and/or services under a contract where value of supply exceeds INR 2.50,000. This will be over and above the TDS required to be deducted under Income Tax.
Deducted TDS amount should be deposited to the appropriate Government within ten (10) days from the end of the month in which such deduction is made.
The deductor (i.e., Government) will have to furnish a TDS certificate to the deductee[i.e., contractor(s)] mentioning in it the following:
(a) contract value
(b) rate of deduction
(c) Amount deducted
(d) Amount paid to the appropriate Government
(e) Any other particulars as may be prescribed.
Time limit of furnishing TDS certificate will be 5 days and if any deductor (i.e., Government) fails to furnish the certificate within specified time then such deductor will be liable to pay late fees of INR 100 per day but subject to maximum limit of INR 5000/-.
The deductee (i.e., contractor) shall claim credit, in his electronic cash ledger, of the tax deducted and reflected in the return of the deductor (i.e., Government) filed under section 39(3), in the prescribed manner. Section 39(3) provides that every registered taxable person required to deduct tax at source shall furnish, in such form and in such manner as may be prescribed, a return, electronically, for the month in which such deductions have been made along with the payment of tax so deducted within ten days after the end of such month.
For any excess or erroneous deduction of TDS, refund can be sought by deductor or deductee under the relevant provisions of GST law. However, in case the amount of TDS deducted and deposited has been credited to the electronic credit ledger of deductee, no refund will be allowed to the deductor.
Tax deduction at source will result in temporarily blockage of funds for contractors. It may negatively impact working capital requirements of contractors who are working at very low scale. It may be noted that such contractor may take input tax credit of the TDS deducted by the Government after claiming the credit in the monthly return which is related to the month in which TDS is to be deducted by the Government. Additionally, a contractor is required to get TDS certificate(s) from the Government in respect of all the deductions made within 5 days of the date when amount is deposited by the Government.
Thus, Government contractors shall be subjected to deduction of tax at source, both, under Goods and services tax as well as Income Tax.
However, the provision relating to TDS under Goods and services tax law is put on hold for the time being and the same will be brought into force from a date which will be notified later.
The deductee (taxable person from whose payments tax has been deducted) will take the credit of TDS deducted from his payments on the basis of certificate to be issued by deductor. The deductee will claim the credit in his electronic credit ledger, the claim of which will be matched with the return of the deductor filed for the said period.