GST Update on whether credit is available to builder- part-II

GST update- Whether credit is available to builder- part-II

We have seen in our last update that there is confusion over allowing credit to builders. Continuing with the same, we have to see whether the builder falls under the definition of “works contract” service. If it falls under the same then the credit of input work contract service will be allowed by virtue of Section 17(5)(c ) of Central Goods And Services Act, 2017. As we know that the section 17(5) ibid gives the exceptions on which the credit will not be available. The clause (c ) of the same section reads as follows:-

“works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service”.

Hence the credit of input work contract service is available to output works contract service.

The definition of “works contract” given under Section 2(119) of Act mentioned above is as under :-
(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;
It is also important to note that the decision of Apex Court in case of K. Raheja Development corporation v. state of Karnataka (civil appeal 2766 of 2000) where in the issue whether the sale of flats on instalment basis by builder will be convered under “works contract” will be covered was dealt with. In this case, it was held that
Section 2(1) (v-i) is relevant. It defines a "works contract" as follows: "2(1)(v-i) "works contract" includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property."
It is thus to be seen that under the Karnataka Sales Tax Act the definition of the words "works contract" is very wide. It is not restricted to a "works contract" as commonly understood, i.e., a contract to do some work on behalf of somebody else. It also includes "any agreement for carrying out either for cash or for deferred payment or for any other valuable consideration, the building and construction of any moveable and immoveable property" (emphasis supplied). The definition would therefore take within its ambit any type of agreement wherein construction of a building takes place either for cash or deferred payment, or valuable consideration. To be also noted that the definition does not lay down that the construction must be on behalf of an owner of the property or that the construction cannot be by the owner of the property. Thus even if an owner of property enters into an agreement to construct for cash, deferred payment or valuable consideration a building or flats on behalf of anybody else it would be a works contract within the meaning of the term as used under the said Act.
Thus, the definition of “works contract” should include words of “carrying out either for cash or for deferred payment”. But these words are missing in the current definition in question given under CGST Act. Hence, as per opinion of author of this article builders will not be covered under current definition of “works contract”.

But when the same matter was discussed with a VAT consultant then he told that currently also the VAT law carry the same definition and builders are covered under the “works contract” service. Hence, this definition should also cover builders under works contract service.

But there is another point also. If one see schedule II of CGST Act, 2017, the services by builders are covered under clause 5. This definition is same as given under Service tax. Whereas the “works contract” service is separately shown at serial number 6. Hence, when separate clauses are given under Schedule II then it can be concluded that the law is treating them as separate, hence “works contract” service u/s 2(119) will not be covered services given by builder.

Hence, the credit will not be available to the builders under Section 17(5)(c ) of CGST Act. The views of all netizens are invited for healthy discussion and knowledge sharing.

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GST Update on whether credit is available to builder- part-II

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