GST ON SUPERVISION CHARGES

[VIPUL JAIN]

Respected Members,

My client is a government entity which undertakes the work of supervision of civil construction work of immovable property on behalf of other government departments/authorities/board/entities etc (herein after referred as govt.).

While allocating the work to my client they mention the cost of construction and fixed percentage of supervision charges, my client then publish and issue the tender to sum other contractor, my client add its supervision charges on what ever the bill is raised by the tender allotee and issue a demand note to govt, for example:

Cost of construction: 100

Cost of Interior : 50

Total Cost : 150

Supervision charges (5% of total cost) : 7.5

My question is whether the supervision charges would be liable to GST or will be exempt from GST considering the supervision charges as pure service as per the Serial No. 03 of the Notification No. 12/2017 which states 'Pure services (excluding works contract service or other composite supplies involving supply of any goods) provided to the Central Government, State Government or Union territory or local authority or a Governmental authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G of the Constitution or in relation to any function entrusted to a Municipality under article 243W of the Constitution.' on referring to the article 243W it elobrated a list in 12th Schedule serial no. 2 which mentionsPlanning of land- use and construction of buildings.

My Question is whether Supervision Charges would be exempt from GST or it would be charges at 18% in the above case?

in supply of pure service to Government if invoice should be raised under work contract as 157.5 + GST or invoice should be raised under supervision charges as 7.5 + GST

Further i would like to add that 150 is the actual cost my client only adds its fixed percentage of supervision charges.

[VIPUL JAIN]

KINDLY IGNORE THE LAST 4 LINES OF MY QUERY

[KASTURI SETHI]

Does your client qualify the definition and scope of the term, 'Govt.entity' ?  What is nomenclature of the Govt. entity  ?

[VIPUL JAIN]

Yes Sethi Sir, my client is a government entity, it is a government company.

[KASTURI SETHI]

Dear Querist,

The following aspects have to be examined before taking final decision in this context.

(i) Government Company is not a Government, not even department of Government. It has a separate legal entity. This service is not Govt. to Govt.

(ii) Relevant FAQ [Issued by Directorate General of Taxpayer Services on 18-8-2017].

Question 25 : What is the scope of ‘pure services’ mentioned in the exemption notification No. 12/2017-Central Tax (Rate), dated 28-6-2017?

Answer : In the context of the language used in the notification, supply of services without involving any supply of goods would be treated as supply of ‘pure services’. For example, supply of man power for cleanliness of roads, public places, architect services, consulting engineer services, advisory services, and like services provided by business entities not involving any supply of goods would be treated as supply of pure services. On the other hand, let us take the example of a governmental authority awarding the work of maintenance of street lights in a Municipal area to an agency which involves apart from maintenance, replacement of defunct lights and other spares. In this case, the scope of the service involves maintenance work and supply of goods, which falls under the works contract services. The exemption is provided to services involves only supply of services and not for works contract services.

(iii) Further exemption for pure services supplied to a Govt. Authority or a Govt. Entity has been withdrawn w.e.f. 1.1.22 but partly restored w.e.f. 19.10.23. Whether your services fall in the exemption (partly restored) or not depends upon the terms and conditions of the contract.

(iv) The aspect of difference between Works Contact Service and Construction Service has to be examined from the terms & conditions detailed in the Work Order.

(v) Thus without examining the terms & conditions of the contract/agreement, complete and correct reply is not possible here.

[VIPUL JAIN]

Respected Sethi Sir,

In this query my client is a government entity, but the service receiver is Government itself.

And the services which are provided are pure supervision charges in relation to civil construction i.e we are not the supplier of work contract service, we are just a supervisior, work contract service are provided by some other person, when the supplier of work contract service issue an invoice of Rs. 100, we just forward it to the concerned government department for payment and we separately demand 5% of Rs. 100 i.e Rs. 5 for supervision charges.

[KASTURI SETHI]

Sh.Vipul Jain Ji,

It is not possible to post correct answer without knowing the full name and constitutional status of the Service Provider and Service Receiver. There are so many aspects to be examined for correct answer. 

[KASTURI SETHI]

If you are doubly sure that service recipient conform to the definition of 'Government as per Section 2 (53) of CGST Act and Section 2 (9) of IGST Act read with relevant notification and Supervision charges are not integrated with Works Contract Service at any stage, then exemption is admissible.

[KASTURI SETHI]

2020 (6) TMI 538 - AUTHORITY FOR ADVANCE RULING, GUJARAT - IN RE : A.B. ENTERPRISE

 

[Shilpi Jain]

How does the service fall under Article 243G/W to claim the exemption?

Also your client is providing the works contract + supervision? Then how is it pure service?

[KASTURI SETHI]

In this scenario,  how can 'supervision charges' be independent of 'Works Contract Service' ? That is a crucial question. 

  To supervise means to direct  or oversee the performance or operation  of an activity 

    

[VIPUL JAIN]

Mam, 

My client is not a work contractor, he provides the actual bill to the main recipient of service and separately raises an invoice of supervision charges to the main recipient, the same terms are also mentioned the agreement

[Shilpi Jain]

2 interdependent services provided to one customer, will be regarded as a single supply of whatever is the principal supply.

[VIPUL JAIN]

Service may be interdependent but both the services are provided by unrelated and independent parties to one customer.

[KASTURI SETHI]

Sh.Vipul Jain Ji,

Agreed to the extent that the parties (persons) are unrelated but both services are inseparably related. We supervise over activity/operation/performance. So the word, 'supervision' becomes meaningless without activity/performance/operation. The activity of 'supervision' cannot exist without performance /service (here works contract service) and vice versa. Thus both services are co-related. 

Here we are concerned with the services and not persons.

[KASTURI SETHI]

"Pure services to local authority  are not exempted" ------------Ruled by AAR Maharashtra reported as Re : VFS Global Services Pvt. Ltd. - 2019 (10) TMI 483 - AUTHORITY FOR ADVANCE RULING, MAHARASHTRA

AI Summary

Pure service exemption may not apply to supervision charges if they are integrated with a works contract, requiring GST. Whether supervision charges by a government company to a government recipient qualify as an exemption depends on supplier status and contract character. If the supplier is not the 'Government' and the supervision is integrated with or inseparable from the works contract or involves supply of goods, the pure services exemption will not apply. Contract terms, invoice practice and statutory definitions must be examined to determine whether supervision is an independent pure service or part of a taxable works contract/composite supply.