GST UPDATE No. 135 ON TAXABILITY OF COMPOSITE CONSTRUCTION, O & M CONTRACT

It has always been a point of dispute when there is supply of two or more goods and services together because then the concept of composite/mixed supply comes into picture. Recently, an issue was raised before the West Bengal AAR in the case of SUEZ INDIA PRIVATE LIMITED wherein it was enquired as to whether the contract of “Construction as well as operation and maintenance under a contract” will be considered as a composite supply or as a divisible supply liable to GST individually. The outcome of this decision is the subject matter of discussion of our present GST update. The applicant has entered two separate contracts for construction and O&M of water wastage under a single tender accepted with Kolkata Municipal Corporation. The applicant submits that the contract has a particular sequence of activity whereby O&M necessarily follows successful works completion of construction. It could be implied that a breach in construction works has a definitive impact on the O&M scope of work. The applicant contended that both the contracts are interdependent on each other as second contract cannot be executed independently of the first contract. Therefore, the provisions contained in section 8 of the CGST Act,2017 will apply to a current situation as it is a composite supply and the rate of GST applicable will be as attracted for principal supply. Further, as per para 6 of the Schedule II to the CGST Act, 2017 composite supply of works contract will be considered as a supply of services. AAR West Bengal had gone through the contract entered by both parties and concluded that design and construction phase entitle the contractor to apply for certificate of sectional completion only. Also, both the contracts are interdependent of each other. Both the contracts are entered into based on single tender. Based on these conditions, current arrangement will be treated as composite supply of DB and O&M which qualifies as ‘works contract’ as defined in clause (119) of section 2 of the GST Act. Further, as per Para 6 (a) of Schedule II to the GST Act, workscontracts as defined in clause (119) of section 2 shall be treated as a supply of services. So, the instant supply shall be treated as supply of services. Furthermore, as the supply was made to Municipal Corporation, the concessional rate of GST @12% would be applicable in the present case. It is worth mentioning that the Andhra Pradesh AAR has also taken the similar view in case OF SHAPOORJI PALLONJI & COMPANY PRIVATE LIMITED whereby the applicant was providing the services of construction and O& M to GVSCCL (a govt. undertaking). Here, the applicant was providing services of Construction of the Project, development of the Project which included plantation, landscaping etc. as well as maintenance of the project. AAR concluded that works contract has been defined under clause (119) of the section (2) of the CGST Act and as per serial No. 6, Schedule II of CGST Act, 2017 composite supply of works contract will be considered as supply of service and tax will be charged accordingly. In both the above cases, AAR has taken affirmative view that construction and maintenance together would constitute composite supply of works contracts and tax on the same will be charged by treating it as supply of services. However, it is worth pointing out that in case of works contract, there is no need to invoke the provision contained in section 8 of composite supply as the entry 6 of schedule II to the CGST Act, 2017 clearly states that the works contract is to be treated as supply of service.

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GST UPDATE No. 135 ON TAXABILITY OF COMPOSITE CONSTRUCTION, O & M CONTRACT

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