Taxation forms inevitable part of any contract. It is so close to contract conditions that any change in its nature is likely to have a tremendous impact on contract. GST (Goods and Services Tax) is one such change which has shown the courage to flirt with contract conditions. And this time it is romantic enough to evoke a response from contract conditions. It just cannot ignore the call of GST. But what is so fascinating about GST that contract conditions are thinking about it so seriously. Let us make an attempt to understand the dilemma of contract conditions.
The first and foremost change is in the definition of a ‘works contract’. A works contract is an agreement which is a mixture of service or labour and transfer of goods. Under a works contract the contractor agrees to do certain job in execution whereof, certain goods are transferred to the contractee. Thus, an agreement of building, construction, manufacture, processing, fabrication, erection, installation, repair or commissioning of any movable or immovable property, is a works contract. So, earlier it was taxed under both VAT and service tax laws. Also, it covered both movable property and immovable property.
Things have changed now. GST imposes a single rate on works contract depending on type of the contract. Generally, these rates are 5 %, 12% and 18% depending on whether the work is an earthwork, original work or construction services respectively. While here the GST conditions make the life of the contracts easy but where they have confused the contract conditions the most is that now works contract has no relationship with movable property. A very simple example of this is supply of sand to locomotive which includes both material and labour component. Earlier, it used to be a works contract but now it is staring at its existential question.
Interestingly, contracts that were earlier works contract and dealt with movable property are staring at two major confusions. Firstly, whether they will qualify as a service now? Secondly, whether they are a composite supply, a mixed supply or different items clubbed under a single invoice. If they are services, can they use GCC(General Conditions of Contract) for works or they should GCC for services? Ideally speaking they can use any GCC because GST is not so much concerned about the choice of GCC. But, yes, it is definitely concerned that what is tax charged on that particular contract. And here is the beginning of confusion.
A treatment made under composite supply, mixed supply or different items under one invoice can result into completely different tax liabilities. And a contract will fall under one of the aforementioned depending upon whether the items included in the contract are naturally bundled together or not. And here is where the ability of the designer of the contract will get tested. So, the passion of designer of the contract will decide how much love it can get from GST’s flirtatious conditions. I hope everyone gets a lot of love from GST. All the best to all the designers.