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When Sub-contractor steps into the shoes of a Contractor

 

NOVEMBER 12, 2018

By Lukose Joseph, CA & Anil P Nair,CA

Works Contract and Preferential Rates

GENERALLY for composite supply of works contract, theapplicable GST rate is 18 percent. But for composite supply of some of the specific works contract by way of construction, repairs, alteration of roads, bridges for general public or railways etc (Notification of No.11/2017-Central Tax (Rate), dated the 28th June, 2017 read with Notification of No.20/2017-Central Tax (Rate), dated the 22nd August, 2017 ) the GST rate applicable is 12 percent (CGST+SGST).

Now the question before us is whether the reduced rate is pertinent for supply of service by a sub-contractor to the main contractor too.

In our view nothing prevents the subcontractor from contending that the diminished rate is applicable as far as the nature of work remains a composite supply of works contract by way construction, repairs, alteration of roads, bridges for general public or railways etc.

Service Tax Regime

Earlier under the service tax regime, the Central Board of Excise and Customs ("CBEC") emerged with a Service Tax Circular No. 147/16/2011 on October 21, 2011 to elucidatethe applicability of Service Tax on services provided by the sub-contractors/consultants and other service providers to the Works Contract (WC) Service provider in respect of construction of Dams, Tunnels, Road, Bridges etc.

In response to the representations from the industry, CBEC clarified that, in case the services provided by the sub-contractors to the main contractor are independently classifiable under works contract, then they too can enjoy the exemption so long as they are in connection with the infrastructure projects mentioned above.

But the work of technical consultants, architect etc will not be eligible for exemption.

Ruling in support

Our perspective is that the same logic is applicable under GST regime too.The sameview was upheld by the Maharashtra Authority For Advance Ruling in the matter of Shree Construction - 2018-TIOL-143-AAR-GST .

Here,the authority held that the applicant has submitted that they have been Sub-Contracted by the main contractor to supply Work Contract Service (WCS) and in turn the main contractor is supplying WCS to the Railways. From the submissions made by the applicant, it appears that the WCS provided by them is the same or a part of the contract between the main contractor and the Railways.It also appears that WCS is civil works performed by the sub-contractors for the Railways and the property in goods (materials used in the supply of WCS) also gets transferred to the Railways directly. In such a case as per clause (v) of Notfn No.20/2017-Central Tax (Rate) dated 22.08.2017, the work contract service provided by the sub-contractor would be supply of Works Contract pertaining to Railways and, therefore,chargeable to tax @ 12% (6% of CGST and SGST each).

Works Contracts to Government

Vide notifications (Notification of No.20/2017-Central Tax (Rate), dated 22/08/2017, Notification of No.31/2017-Central Tax (Rate), dated 13/10/2017, Notification of No.24/2017-Central Tax (Rate) dated 21/09/2017, Notification of No.46/2017-Central Tax (Rate), dated 14/11/2017) some of the composite supply of works contracts to Central Government, State Government, Union Territory, a local authority, a governmental entity by way of construction, erection, commissioning etc.are also entitledfor a reduced rate.

Again the same question, whether the sub-contractor could claimsuch reduced rate? The question was on the assumption that the recipient of service isGovernment. As far as the issue we considered earlier, the description was only for work and not of the Recipient.

The question or issue was resolved by Notification No. 1/2018-Central Tax (Rate) dated 25th January, 2018 where it is clearly asserted that sub-contractor of Government work is eligible for a lower rate .

What would be the rate for such works before the period of the said notification?

We are of the opinion that, if agreement with the contractor and the awarder(here, Government) has clause to sub-contract, sub-contractor can claim such reduced rate. (Alternate opinions solicited.)

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

 RECENT DISCUSSION(S) POST YOUR COMMENTS
   
 
Sub: Exemption to sub contractors

Govt while making a subordinate legislation had used the word `substitution' in place of the word `addition', which shows that the object and purport of the subsequent notification no 1/2018 was to grant the same benefit which had been granted to main contractors. Apex Court has made this point clear in Indian Tobacco Association case. Similar view was held by Hon SC in W.P.I.L. LTD case also. Ahmedabad Tribunal in Zabatex Textiles India Ltd case upheld the same view.
Legislative intent in giving exemption to subcontractors was visible in erstwhile Central Excise and Service Tax Notifications also.
Since it was the consistent policy of Government to grant exemption to supplies to Govt or for projects of national importance it could be easily construed that the subject notification merely clarifies the position and makes explicit what was implicit and hence will have retrospective application
PG JAMES

Posted by james pg
 

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