GST ON CONTRACT VALUE AS PER SECTION 15(2)(b) of CGST ACT

[Ganeshan Kalyani]

PROVISION u/s 15(2)(b)

Section 15 of CGST Act, provides for determination of value of taxable supply on which GST should be charged. Sub-section 2 list downs the expenses which are to be included to arrive at value of taxable supply. As per clause (b) of the said sub-section the following need to be included in the value of taxable supply:

“any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;”

The above provision states that the expenses which ought to be incurred by the supplier but has been incurred by the recipient and provided to the supplier shall be added by the supplier in the invoice to be raised on his customer/recipient. It is mainly seen in the construction project where the receiver of service i.e. contractee procures some crucial material as per his choice of quality and price and provides it to supplier i.e. contractor for using it in the construction work. The contractor will have to add the value of goods received from contractee in his running bill and charged GST on total value.

ADVANCE RULING

The applicant, IN RE: M/S. GVS PROJECTS PRIVATE LIMITED. [2020 (7) TMI 405 - AUTHORITY FOR ADVANCE RULING, ANDHRA. PRADESH] , is engaged in electrification work. The applicant entered into contract with APSPDCL and AEPDCL. The applicant had filed an application on 15.07.2019 seeking Advance Ruling on following questions.

1. Whether APSPDCL & APEPDCL is a Government authority/ Government Entity or not?

2. What is the applicable rate of GST on work agreement entered into with the APSPDCL & APEPDCL as mentioned in the Annexures.

3. Under which Notification the work would fall, for discharging the GST liability?

4. Whether for the value of materials recovered from RA bills issued on cost recovery basis by APSPDCL & APEPDCL tax is liable under RCM as per Notification No.13/2017 Central Tax (Rate) dated 28.06.2017 or not ?

SCOPE OF WORK

“Supply and erection of iiNo's 33/11KV Indoor Sub stations and their connected lines in Z2 division of Visakhapatnam circle on turnkey basis” &” Supply and erection of 33KV Inter linking lines in Srikakulam, Vizag and Vizianagaram Dists Turnkey Basis” & “System improvement project works for erection of 2 nos.

HEARING

The applicant had attended the hearing on 18.09.2019 and made submission including the fact that at present 18% GST is being charged on works contract services.

Discussion and findings:

FIRST ISSUE: Whether APSPDCL & APEPDCL is a Government authority/ Government Entity or not?

The authority for advance ruling has examined the first issue raised in the application that the Applicant’s Contractee i.e. M/s APSPDCL /APEPDCL is a Government entity or not. As per Notification No. 31/2017 - Central Tax (Rate), Dated: 13/10/2017 issued under CGST Act, 2017 and corresponding notification under APGST Act, 2017 Government Entity is defined as under.

“Government Entity” means an authority or a board or any other body including a society, trust, corporation,

i) set up by an Act of Parliament or State Legislature; or

ii) established by any Government, with 90 percent or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.

The authority stated that, when a copy of Audited Annual Accounts of M/s APSPDCL and APEPDCL are examined, it is evident from the schedule of Equity Share Capital of the Annual Statement that 100% share capital is held by the Government of Andhra Pradesh in the name of Honourable Governor of Andhra Pradesh. Thus, based on the above facts, it is concluded that the Government of Andhra Pradesh is having full control over the APSPDCL and APEPDCL and they are covered under the definition of Government Entities.

SECOND AND THIRD ISSUES: What is the applicable rate of GST on work agreement entered into with the APSPDCL & APEPDCL as mentioned in the Annexures? & under which Notification the work would fall, for discharging the GST liability?

The authority observed that in the instant case, the contract entered by the applicant falls under the works contract and falls under entry no. (ii) of S.No.3 of the table of Notification No. 11/2017 - Central Tax (Rate), Dated: 28th June 2017 as amended from time to time and corresponding notifications under APGST Act, 2017, and the applicable rate of tax is 18%.

FOURTH ISSUE: whether for the value of materials recovered by APSPDCL & APEPDCL from the applicant thru RA bills for the material issued on cost recovery basis tax is liable under RCM as per Notification No.13/2017 Central Tax (Rate) dated 28.06.2017 or not ?

The applicant stated that they are receiving materials such as Power Transformers, loo Sqmm Conductor & Station Transformer from the APSPDCL & APEPDCL. The value of such materials is recovered by APSPDCL & APEPDCL from the applicant by deducting it from the applicant’s RA bills. The applicant posed a question whether RCM as per Notification No.13/2017 Central Tax Rate dated 28.06.2017 is applicable or not on these cost recoveries.

As seen from the said Notification No.13/2017, reverse charge is not applicable to the goods issued by APSPDCL & APEPDCL. However, the provisions of Section 15(2)(b) of CGST Act, 2017 which is as follows, attract in such situations.

“Section 15(2)(b) : any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both;”

As per the above provision, the cost of material which APSPDCL and APEPDCL are recovering from the applicant’s R.A. Bill are to be included in the taxable value of the supply by the contractor and GST should be charged on the total contract value.

RULING

The applicable rate of tax is 18% (9% under Central tax and 9% State tax) for the services referred by the Applicant as per entry no. (ii) of S.No.3 of the table of Notification No. 11/2017 -Central Tax (Rate), Dated: 28th June 2017.

The value of materials recovered on cost recovery basis by the Contractees from the R.A. bills issued by the applicant is includible in the taxable value of supply in terms of Section 15(2)(b) of the CGST Act, 2017.

CONCUSION

Generally, in the construction contract the contractee is more concerned about the quality of the construction. Therefore, he to proceeds with purchasing main material required for the construction and then provide it to the contractor for using it in the construction work. While buying the material the contractee pays GST to the supplier. Being construction related material the input tax credit is not allowed to him. And as per the provision in sec 15(2)(b) the cost of such material is required to be added in the value of contract to charge GST. In net effect the contractee ends up in paying GST twice on the same material. One at the time of purchase from the vendor and second while making payment of the running billing (which includes the cost of material supplied by contractee) to the contractor.  

Alternatively, the contractee can supply the material so procured by him to the contractor by charging GST. Since, the purchased material is supplied as such it is a trading activity and he would be eligible to take credit of the tax paid on his purchase. The contractor will account it as his purchases and take input tax credit. He can then adjust the input tax credit against the GST payable on RA bills raised on the contractee. By exercising this option the payment of GST twice on the same material can be avoided.