If you’re a service provider or contractor, you might already be familiar with works contracts. But do you understand how GST and other taxes affect your works contracts? It’s important for you to understand the type of taxes you’re required to charge your customers so your financial records, annual tax returns, and GST returns are correct.
What’s a Works Contract?
A works contract is simply an agreement between two parties that includes the cost of services rendered. In some instances, it might also contain goods, but the primary focus of the contract is always the service performed. These contracts are typically used between contractors, sub-contractors, and business owners. Some examples of when a works contract is used include:
- Contracts between a plumber and a business owner for the cost of plumbing repairs and any supplies or products needed to complete the job.
- Contracts between a contractor and a sub-contractor where a contractor outsources work to a third party.
- Contracts between freelancers and business owners for services such as copywriting, web design, and social media management.
VAT and Service Taxes for Works Contracts
Because a works contract typically covers both goods and services, it qualifies for both VAT and service taxes. But the actual contract determines which tax you should include on your invoice.
If you have a contract where the main portion of the money owed is comprised of services and there is no element of the sale of goods, you would add VAT to your invoice for the cost of the service only. This allows you to properly tax your customer without breaking up the costs of any products used to complete your services and the cost of the services themselves.
If your works contract does include the sale of goods, you would add a Service Tax to your invoice. This includes any movable and immovable parts used to make repairs, complete construction projects, and finish building renovations.
GST and Works Contracts
Even though you need to include either VAT or Service Tax on invoices issued for works contracts, in most cases, you’ll still need to include GST, too. If your works contract only includes the sale of movable property, you don’t need to include GST on your invoice.
Under GST laws, people using works contracts only need to add GST to their invoice if the contract includes the cost of immovable goods. Some examples of contract work that might include immovable parts includes contracts for:
- Building fabrication
- Completion of construction or renovation projects
- Installation services
- Improvements and modifications
- Repair and maintenance work
When it comes to GST and works contracts, GST is restricted to services involved with construction, renovation, and fabrication of buildings. This is because once the work is complete, the materials can’t be removed from the premises.
GST Rates on Works Contracts
The rate of GST charged for works contract service varies depending on the type of work you’re completing.
- Construction of complex, building, and civil structures are subject to a 9% CGST or a 9% SGST.
- Composite supply works contracts are subject to a 9% CGST or a 9% SGST.
- Composite supply works contracts between a contractor and the government, including but not limited to bridge work, railroad construction, construction of low-cost housing, and preservations of historical monuments, are subject to a 6% CGST or a 6% SGST.
- Services provided to the Central Government, State Government, Union Territory, or local authorities are subject to a 6% CGST or a 6% SGST.
- Any construction services not included above are subject to a 9% CGST or a 9% SGST.
Keeping Records of Your Works Contracts
GST laws require all business owners who use works contracts to maintain separate accounts specifically for works contracts. So if you do a mixture of contract work and traditional business, you should open a separate bank account for the work your complete on contract. You also need to keep track of:
- The names and addresses of the other people and/or companies involved in your contracts
- Description, value, and quantity of the services and goods provided
- Description, value, and quantity of any goods or services used to complete the job
- Details of payments you receive
- Names and addresses of suppliers who provided you with any goods or services you used to complete the work
Because you have a lot of information to store for each works contract you complete, and a lot of information to include on each invoice, you should consider using cloud-based accounting software such as QuickBooks Online to streamline your processes. By using GST-compliant accounting software, you can be sure you charge the correct amount of GST on each invoice, and that other taxes you need to charge are also included on every invoice. Also, it makes it easy to track your expenses for each project and the payments you receive so that your financial information is always up to date.
Don’t let the number of different taxes required keep you from completing contract work. Once you have the basics down, knowing what and how much to charge your clients is simple.