[By Abhishek Bhatra]
The author is a student of National Law University and Judicial Academy, Assam.
Introduction
The treatment of Works Contract in the Pre-Goods and Service Tax (GST) era subjected the Service Provider to a variety of indirect taxes such as Service Tax, Value Added Tax (VAT), and Central Excise. However, if the Works Contract was awarded by the Government, a Government Authority, or a Local Authority, the Service Provider was given the liberty to claim exemption from the applicable Service Tax.
With the implementation of the GST Regime, the erstwhile exemption under the Service Rate notification 25/2012 for Government Contractors has been done away with.
Furthermore, liability towards GST for Works Contract is now imposed on the ‘Time of Supply’. This reform has opened up a pandora’s box for the various Service Providers who had been awarded a Works Contract by a Government body in the Pre-GST era but had executed the said work – either partly or wholly – in the GST regime, as to on whom the burden of the additional tax liability shall be imposed.
This article explores this lacuna in light of the legislative actions undertaken and the judicial position established, whilst presenting comprehensive solutions to resolve this conundrum.
The question of law involved
The immediate impact of the GST regime has been the clubbing together of all the applicable different indirect taxes, and now Works Contracts are taxed under a single head – on the entire amount – at a uniform rate, which has been divided into three slabs, namely, @18%, @12%, and @5%, depending on the nature of the works executed.
The liability to pay GST for Works Contract executed is determined on the basis of ‘Time of Supply’ –under Section 13 read with Section 31 of the CGST Act – which constitutes the date on which supply of the services is deemed to have been rendered. In case the invoice is raised within the prescribed period of 30 days, then the date on which invoice is issued by the Service Provider or the date on which he receives the payment – whichever is earlier – is deemed to be the ‘Time of Supply’. And if the invoice is not raised within 30 days, the date of completion of service would be deemed to be the ‘Time of Supply’.
Another integral transposition has been the discontinuance of the distinction between the works contract awarded by a government body and the works contract awarded by a private entity with respect to the Service Tax exemption provided to the former.
Consequently, after the GST regime came into effect, Government bodies were hit with a deluge of representations from the various under contract Service Providers regarding the extra financial burden imposed because, as per ‘Time of Supply’ they would be liable to pay taxes under the GST regime even though they had prepared and submitted their bids taking into consideration the erstwhile taxation rates. This gave rise to a pertinent question of law as to on whom the burden of such differential tax liability must be affixed, because standard works contracts stipulate that the bid price quoted shall be inclusive of any State or Central Taxes.
Steps taken hitherto
To overcome this impediment, the Central Public Works Department, the Ministry of Railways, and various State Governments, such as Kerala, Tamil Nadu, West Bengal, Andhra Pradesh, Bihar, Orissa, as well as various departments under the Karnataka and Chhattisgarh governments, took into consideration the plight of such Service Providers and consequently issued clarifications vide Government Orders, Gazette Notifications, Circulars, and Standards of Procedure.
There was also Judicial Activism for the purpose of resolving this impediment. For instance, the Hon’ble High Court (HC) of Jharkhand, in the case of M/s Sri Sai Krishna Constructions v. State of Jharkhand and Others, had vide its order dated 16.03.2021 directed the State of Jharkhand to formulate guidelines on this issue, in compliance of which the State had accordingly issued requisite directives for dealing with this matter.
These steps, although beneficial, nonetheless encountered a series of difficulties for their effective enforcement, negating the intent behind introducing them because many aggrieved Service Providers could not get the intended relief, due to inefficacious redressal by the State Departments, and thereby had to seek judicial intervention in the process. For instance, in the case of M/s D.A. Enterprises v. State of Chhattisgarh and Others, the State Government had refused to accept the request of the aggrieved Service Provider for refund of the additional tax burden – by failing to abide by its circular – upon which the Service Provider had to file the instant writ petition seeking the Hon’ble Chhattisgarh HC’s intervention for claiming relief. A similar situation was presented before the Hon’ble Madras HC in the matter of Subaya Constructions Company Limited v. Tamil Nadu Water Supply and Drainage Board and Others. wherein the treatment of additional tax burden was processed under the third method of calculation, whereas it was contended by the Service provider that it should have been under another method. The Hon’ble Court, after considering the submissions, ruled in favor of the Service Provider.
At this juncture, there still exists a vast majority of states that have yet to adopt effective measures for the purpose of overcoming this impediment. In such states, the only mechanism for redressal available to the aggrieved Service Providers is the long and expensive route of litigation.
Resolving the conundrum
Since the erstwhile VAT was a state subject under the Seventh Schedule, it is integral that the remaining states implement the requisite clarifications or guidelines for dealing upon this aspect, and the existing states should revise their clarifications or guidelines, through appropriate policy decisions, for effective enforcement and redressal.
Firstly, it must be ensured that a uniform guideline is issued that is applicable for the Works Contracts entered into by all the authorities and departments of a particular state prior to the commencement of the GST Regime. This is pertinent in view of the question of law posed before the Hon’ble Chhattisgarh HC in the case of “M/s D.A. Enterprises (Supra)” wherein the government refused to accept the claim of the aggrieved Service Provider on the grounds that the particular State Department with which it had entered into contract had not issued any conditions for reimbursement, albeit other such State Departments allowed for the same. The Hon’ble HC had declared this action of the State to be arbitrary and discriminatory, and allowed the aggrieved Service Provider to make a fresh claim.
Secondly, the methodology followed by the State of West Bengal can be used as a point of reference by other states for the purpose of drafting or amending such guidelines.
The State of West Bengal, through its guidelines, has demarcated the treatment of Pre-GST Works Contracts in simple and lucid terms. Therein it is stated that all those Works Contracts that were executed and completed before July 01, 2017, but upon which the ‘Time of Supply’ falls on or after July 01, 2017, the erstwhile taxes – instead of GST – would be applicable.
However, the guidelines issued by the State of West Bengal have failed to consider those situations wherein the Works Contract was executed in the pre-GST regime but was completed or is pending completion in the post-GST regime.
To tackle this situation, the methodology followed by the State of Kerala should be used as a point of reference. The State of Kerala’s GST advisory unequivocally provides that erstwhile taxes would be applicable for completed works during the pre-GST regime irrespective of any payment made and GST would be applicable for the remaining works.
Issuing such coherent and unambiguous directives, wherein the burden of such differential tax liability is clearly attributed, would be beneficial in leaving zero to no scope for unjustified recourse to the courts of law. Furthermore, since the tax element in a works contract is not retained as profit and is statutorily given back to the State, it would be equitable for both parties if any GST paid for completed works during pre-GST regime was reimbursed back to the Service Provider.
Conclusion
Most times than not, the lowest Financial Bid – amongst those bids that have cleared the technical evaluation – is given the Letter of Award. As such, in order to secure the contract, the interested contractors submit their bid price with the lowest possible profit margin feasible to them. In order to arrive at this figure, it is necessary to take into consideration all anticipated liabilities and costs.
The implementation of GST and its effect on the taxation liability of Government Works Contracts has undoubtedly affected Service Providers since the same had not been envisaged when entering into contracts. This impediment, if not clarified appropriately, would subject the Service Providers to offences and penalties under the GST Laws for incorrect payment of taxes due to no fault of their own, resulting in further litigation.
It is therefore essential for the respective State Governments to deliberate on this aspect and accordingly issue directives so as to ensure that the rights of the parties are not transgressed.