Works Contract And Its Relevance Under GST Regime

It looks like controversies around works contract are here to stay for some time and the Government will have to tackle this old demon in the new GST regime.

“Works contract” has been a perpetual area of dispute between the Government and assessee. State Governments have always tried to take a view that any sale of goods is subject to state taxes. Since Independence, they have been insisting on levying taxes on the transfer of property in goods in transactions where dominant intention is to provide service element. However, time and again, the courts concluded that where the dominant intention of a transaction is not to sell goods but to provide services, the State Government has no power to tax such transactions. After the states lost this long-fought battle, the Constitution of India, 1950 was amended in 1982 to bring such transactions within the tax domain of the states. This was done vide Article 366(29A), which provides that “tax on sale or purchase of goods” includes tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.

This fight became even more intense when after the introduction of the service tax regime, the Central Government sought to levy tax on the service element of such transactions. The conflict of interest of Central and State Governments often led to increase in tax costs and costs of litigation for the assessee. As a planning option, assessees often bifurcated their single contracts by entering into multiple independent contracts, i.e., (a) contract for the sale of goods and (b) contract for the supply of services, and thus paying sales tax on the sale of goods and service tax on the supply of services. However, this was also a catch-22 situation as it led to another recurring dispute as to whether such splitting of contracts is permissible in transactions for a single project which otherwise could constitute a single contract.