The Government has finalized a rate of 12% as Goods and Service Tax for work contracts, which initially deemed to be levying higher tax burden on the construction industry, but a closer view of the provisions will suggest a lower tax liability under the new regime for work contract under goods and service tax and we can give the credit of this to the input tax credit availability in the new tax regime.
Further it can be noted that the work contract tax provisions will be much simplier than the old tax regime as the new GST has clarified that the work contract will be regarded as only services and not supply of goods as there was in the old provisions.
If we talk about the old tax provisions for work contracts there was a 6% Service tax rate which was levied by the centre and a vat rate of 1-4.5% which was levied by the state government after abatement on the construction work contracts, however the input tax paid on the raw materials were not available for credit.
In the new regime of GST, the builders will be able to get the input tax credit paid of the raw materials purchased for contruction like steel and cement which are taxable at the rate of 18% and 28% under the GST.
Hence, the increased rate of GST on work contract at 12% may initially look high but its overall impact on the work contract will reduce the prices as there are higher tax benefits available to the work contractor.
Under the old regime, work contract usually covers three types of activities which are supply of goods, supply of Services and manufacturing. The VAT was levied on supply of goods and the supply of services attracts service tax. If a new item is produced at the end of the work contract, it attracts central excise duty.
The GST will give a much simplified tax provisions for work contracts as the work contract will be treated as only service and the availability of the input tax credit will provide a cut in the cost of raw material procurement.
Hence, the overall impact of Goods and service Tax on Work contracts will be positive.