Earthwork for mining development taxable @5%, constitutes ‘composite supply of works contract’

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Categories: Advance Ruling
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The Hon’ble AAR Haryana in M/s. KSC Buildcon Private Limited [Advance Ruling No. HAR/HAAR/R/2019-20/26 decided on August 28, 2020] observed that major part of the contract involves earthwork (more than 75%) provided to a Government Entity. Hence, the said work order qualifies for the benefit of Serial No. 3(vii) of the Notification No. 11/2017-Central Tax (Rate), dated June 26, 2017 (“Services Rate Notification”) as amended by Notification No. 31/2017-Central Tax (Rate), dated October 13, 2017 (“NN 31/2017- CTR”) issued under Central Goods and Services Tax Act, 2017 (“CGST Act”) being composite supply of works contract as defined in Section 2(119) of the CGST Act. Therefore, GST @5% will be applicable.

Facts:-

M/s. KSC Buildcon Private Limited (“the Applicant”) is engaged in the business of providing composite supply of work contract including sale of goods and also indulged in the mining of various stones and minerals, etc., in the state of Haryana. The Applicant also transfers the property in goods so produced during the process of works contract to various government entities engaged in the business of mining and private firms in trading of the said goods.

A works contract was allotted to the Applicant by Haryana State Industrial & Infrastructure Development Corporation Limited (“HSIIDC”) involving predominantly earth work viz drilling, excavation, removal, and dumping of waste material along with supply of skilled & unskilled manpower, special purpose vehicles & equipment, supply of stones, construction including haul roads/ramp/benches on the mining site and transportation of the excavated goods. Such type of work is related to mining development and generally is done on earth surface to excavate stones as per requirement of contract.

The Applicant stated that he was providing composite supply of works contract as defined in Section 2(119) of the CGST Act, involving predominantly earth work (more than 75% of the value of works in contract) to HSIIDC which is a Government entity. Further stated that, the consideration provided by HSIIDC would be subject to tax deduction at source (“TDS”) under Section 194C (i.e. TDS on payment to contractor) of Income Tax Act, 1961 (“IT Act”)

Issue:-

Whether the services provided by the Applicant will be taxable @5% GST under the benefit of Serial No. 3(vii) of the Services Rate Notification as amended by NN 31/2017- CTR.

Held:-

The Hon’ble AAR Haryana in Advance Ruling No. HAR/HAAR/R/2019-20/26 decided on August 28, 2020 has held as under:

  • Noted that the term “Earth Work” has not been defined under any GST provisions and referred to various dictionaries to state that bulk earthworks include removal, moving or adding of large quantities of soil or rock from a particular area to another. It is done in order to make an area of suitable height and level for a specific purpose.
  • Observed that, the nature of the work awarded to the Applicant is related to mining development and is done on earth surface to excavate stones as per requirement of contract. It can be said that more than 75% of the works involves earth work.
  • Further observed that, the Applicanthas provided a composition of various inseparable services and goods which are naturally bundled whose consideration has been received through undistributed bills. Hence, the Applicant has provided composite supply of works contract as per Section 2(119) of the CGST Act.
  • Furthermore noted that, HSIIDC is Government entity as per the definition described in Services Rate Notification (as amended) by noting that:
    • 100% equity of the HSIIDC was held by the State Government of Haryana.
    • HSIIDC is a Government Company under Section 617 of the Companies Act, 1956.
    • The work of mining project has been entrusted to HSIIDC by Department of Industries and Commerce, Government of Haryana.
    • As per Section 51 of the CGST Act, government entity is entitled to deduct TDS@1% on payments made to the supplier of taxable goods and/or services or both under a contract if it exceeds ₹ 2,50,000. HSIIDC being a government entity and the Applicant being a contractor in terms of work scontract allotted to them, TDS was deducted and deposited by HSIIDC, concluding the nature of payments as contractual services.
  • Held that, as per Serial No. 3(vii) of the Services Rate Notification (as amended), work carried by the Applicant is a composite supply of works contract involving pre dominantly earth work provided to a Government Entity. Thus, services provided by the Applicant to HSIIDC will be taxable @5% (2.5% CGST + 2.5% SGST).

Relevant Provisions:-

Serial No. 3(vii) of the NN 11/2017-CTR as amended by NN 31/2017-CTR:

S. No. 

Heading   Description of Service  Rate

Condition

3

Heading 9954 

(Construction services)

(vii) Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, involving predominantly earth work (that is, constituting more than 75 per cent. of the value of the works contract) provided to the Central Government, State Government, Union territory, local authority, a Governmental Authority or a Government Entity.

2.5

Provided that where the services are supplied to a Government Entity, they should have been procured by the said entity in relation to a work entrusted to it by the Central Government, State Government, Union territory or local authority, as the case may be

Section 2(119) of CGST Act:

“works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract

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