Government Construction Contracts under GST
1. The standard rate of tax for composite supply of Construction Contracts under GST and also construction services is 9% CGST + 9% SGST and 18% IGST
2. As per the amendment the rate of tax is now reduced to 6% CGST + 6% SGST and 12% IGST in respect of services supplied to the Government, a Governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of canal, dam or other irrigation works; pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal.
A similar provision is also made in respect of contracts for a road, bridge, tunnel, or terminal for road transportation for use by general public.
3. It was further reduced to 2.5% CGST + 2.5% SGST and 5% IGST in case of works contracts involving predominantly earthwork that is, constituting more than 75 percent of the value of the works.
4. In most such contracts the work is executed through subcontractors. Since subcontractor is giving service to the main contractor and not to the Government in my opinion services provided by subcontractor to the main contractor will attract tax at the rate of 9% CGST + 9% SGST.
5. Under the circumstances, it is likely that the input tax credit will be more than the output tax credits. Thus the main contractor will have accumulated credits because of inverted tax structure i.e. inward supplies are taxable at the higher rate than outward supplies.
6. Question is whether the refund can be claimed?
As per the provisions of Sec 54 refund can be claimed only for two reasons
1. Zero-rated supplies made without payment of tax.
2. Where the credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies.
The word input is defined to mean goods other than capital goods. The section is silent about input services. Sub contractors are service providers therefore in my opinion though tax rate of input services is higher than the tax rate of output supplies the main contractor will not be entitled to claim refunds but can carry it forward.
What is a remedy?
A) Reduce the rate of tax for sub contractors: Under the earlier tax laws, the exemption or reduced rate of tax applicable to the main contractor was made applicable to the subcontracts also. If the Government makes similar provision in GST then the problem can be solved. The tax on inputs will be less than the tax on outward supplies.
B) Amend sec 54: The omission of word input services appears to be the inadvertent mistake while drafting the GST Act. Goods and services are now at par. I do not find any reason for not including the words input services along with inputs. If the provision is suitably amended then the main contractor will be able to claim the refund of excess credit on account of the higher rate on input services.
The amendment to sec. 54 is necessary not only for construction contracts but all service contracts where a rate of tax on input services is higher than outward supplies. Another point is that in the definition clause the word used is outward supplies but sec 54 uses the word output supplies. For the purposes of uniformity instead of words “output supplies” used in sec 54 the words “outward supplies” may be replaced.