GST Payable On Advance Received Against Supply Portion Of Work Contract: Gujarat AAR

The Gujarat Authority of Advance Ruling (AAR) has held that the GST is payable in advance received against the supply portion in respect of the work contract.

The bench of Amit Kumar Mishra and Milind Kavatkar has observed that the turnkey contract entered into by the applicant has been held to be a work contract.

The applicant is in the engineering, procurement, and construction (EPC) contract business with various distribution companies (DISCOMS).

The applicant stated that they have a turnkey contract with Paschim Gujarat Vij Company Ltd. (PGVCL) for supply of plant as a contract agreement and supply of installation services as a contract agreement under a single agreement.

The applicant contended that in terms of notification No. 66/2017-CT dated November 15, 2017, the Central Government has exempted payment of GST at the time of receipt of advances in the case of goods, effective November 15, 2017. The contract agreement part-I pertains to the supply of goods, and the contract agreement part-II pertains to the supply of services. They do separate billing for supply and erection. It is a purely divisible contract. No GST is payable on advance received against supply at the time of receipt of the advance in terms of the notification that they have received an interest-bearing advance against supply by providing a bank guarantee for 110% of the advance received, which can be treated as a corporate credit facility (loan) from the client.

The department contended that in the works contract agreement undertaken between the employer and taxpayer, it appears that the employer has engaged the services of the contractor for the successful erection and installation of an 11 KVA medium voltage conductor along with its supply. The basic arrangement of supply intended to be received by the employer is not for the sole supply of goods but for a complete package of supply and installation of goods. Only then would the service be deemed to be complete as per the provisions of the agreement entered. Though the monetary bifurcation of goods and services is available in the agreement, the nature and essence of the services intended to be received by the employer are a complete all-round supply and installation work by the contractor.

The department argued that the outward supply of services cannot be fragmented into two separate elements of supply of goods and services but rather be constituted as a single works contract service for the payment of GST. Accordingly, the advances received by the contractor for the scope of work to be accomplished cannot be bifurcated separately for part of the goods supply or part of the service supply but shall be considered a gross receipt of advances for the complete works contract, which includes elements of both supply and service. The provisions of Notification 66/2017-Central Tax dated November 15, 2017 being relied upon by the applicant or contractor for exemption of payment of tax on advances received do not appear applicable.

The issue raised was Notification 66 of 2017 applicable for turnkey contracts and GST payable in advance received against the supply portion of the turnkey contract. Yet another issue was the identification of rates for supply and service separately under a single contract that can be read as a divisible contract.

The AAR noted that the turnkey contract entered into by the applicant is a works contract; Notification No. 66/2017-CT dated November 15, 2017 is not applicable in respect of the turnkey contract.

The AAR held that the Turkey contract entered into by the applicant has been held to be a works contract, and GST is payable in advance against the supply portion in respect of the turnkey contract. As the Turkey contract entered into by the applicant has been held to be a works contract, the turnkey contract cannot be a divisible contract.

Applicant's Name: M/s. Vijai Electricals Ltd.

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