As per Exemption Notification No. 12/2017 as amended, Supply of Pure Services or Composite Supply of Goods & Services (component of Goods not being more than 25%) like supply of manpower, maintenance service etc. (excluding work contract service) provided to Central Government, State Government or Union Territory or Local Authority in relation to any function entrusted to a Panchayat or Municipality under Article 243G or 243W respectively is exempt from GST.
However, dispute is in that case like where Government allots such contract to the main contractor who in turn sub-contracts the same to the Sub-Contractor. Now question arise whether Supply of Pure Service provided by Sub-Contractor to Main Contractor which ultimately is being provided to the Government by the Contractor is Exempt or not in the hand of Sub-Contractor.
Logically, it appears that it should be exempt as otherwise GST charged by the Sub-Contractor to Main Contractor will ultimately becomes cost of providing service to the Government defeating the very purpose it self. Further, in Service Tax Regime also work contract service by the Sub-Contractor was also exempt where service by the Main Contractor is exempt (N.No. 25/12 as amended).
However, as per language of Exemption Notification in GST it appears that Service by the Main Contractor to the Government is Exempt but not the Supply by Sub-Contractor to the Main Contractor.
The same is also upheld by the Telangana AAR recently in the case of Immense Construction Company. (Copy of Judgement is attached in the end of the article).
Key Findings of the Authority
The exemption is not a general exemption but subject to conditions specified therein. The condition is that the supply has to be made to Central Government, State Government or Local Authority etc. However there is no mention of sub-contractors making supply of such services to a contractor who in turn is making supplies under entry 3A of Notification 12/2017 as amended above. The Hon’ble Apex Court of India in the case of Hemraj Gordhandas Vs H.H. Dave AIR 1970 SC 755 held that exemption notification cannot be given an extended meaning in order to enlarge the scope of exemption granted by the notification. The Hon’ble Apex Court in the case of CCE Vs Ginni Flaments 2005 (181) ELT has held that exemption notification has to be read strictly so far as the eligibility is concerned and the conditions stipulated there in cannot be ignored.
It is also seen that in Notification 1/2018-Central Tax (Rate), Dt. 25-01-2018, which is an amendment to Notification 11/2017, the Government intends to bring the rates of main contractor and sub-contractor at par while they are providing their services to Central Government, State Government, or Local Authority under entry. Thus against Serial no.3 in Col.3 for item (ix) and (x) the sub-contractors are included in the entry for claiming lower rate of tax provided that their services have been procured by the main contractor in relation to a work interested to it by the Central Government, State Government, Union Territory, or Local Authority as the case may be.
Though the CGST Act, does not define a sub-contractor, however Notification 11/2017 as amended makes a mention of sub-contractor whose services are procured by a main contractor. Thus the Scheme of the Act clearly identifies a sub-contractor as a supplier of works contract services to the main contractor.
The supply of services in GST regime by a sub-contractor to a main contractor is a distinct taxable event. This is evident from the amended Notification 11/2017 which enumerates the service supplied by sub-contractor to the contractor as a separate taxable event and prescribes a specific rate of tax.
Though the Notification 12/2017 as amended by Notification 2/2018-Central Tax (Rate), Dt. 25-01-2018 exempt works contract with value of supply of goods less than 25% when the said supply is made to the Central Government, State Government or Local Authority etc., it does not make any mention of the supplies made by the sub-contractor to the works contractor as was done in Notification 11/2017.
Copy of the Judgement
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Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. While due care has been taken by Fab Gyan in preparing this article, certain mistakes and omissions may creep in. The Fab Gyan or its Author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.