CGST scans works contracts over alleged ineligible input tax credit claims

The Central Goods and Services Tax (CGST) authorities in Siliguri have initiated a wide-ranging investigation into several works contractors engaged in executing government infrastructure projects over alleged irregular utilisation of Input Tax Credit (ITC) running into crores of rupees.

According to sources familiar with the development, the probe is focused on certain business practices adopted by principal contractors who secure high-value infrastructure contracts from government departments and project authorities but subsequently subcontract a substantial portion of the execution work to smaller contractors.

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Reliable sources said the CGST Commissionerate in Siliguri has already issued letters and summons to more than 40 works contractors as part of the ongoing investigation. In one of the cases under scrutiny, the potential tax liability has reportedly been estimated at nearly Rs 1,000 crore.

Officials said investigation and quantification of liabilities in other cases are still in progress.

The probe seeks to determine whether contractual arrangements were structured to project the principal contractor as the executor of the works contract while, in reality, the entire execution, procurement of materials and deployment of labour were carried out by subcontractors.

Departmental sources indicated that in several instances the role of the principal contractor was largely limited to securing the contract, coordinating with the project owner and raising invoices, while the subcontractor undertook the entire execution at the project site.

According to preliminary findings, subcontractors procured construction materials in their own name, bore the cost of labour, machinery and consumables, and assumed the full commercial and operational risks associated with the work.

Despite this operational reality, invoices were allegedly structured to portray the principal contractor as the entity executing the works contract, creating what officials described as a mismatch between the contractual form and the commercial substance of the transaction.

Investigators believe such arrangements may have resulted in improper characterisation of supplies under the CGST framework and the availment of input tax credit that may not be legally admissible.

Under Section 2(119) of the CGST Act, a works contract refers to a contract involving construction, fabrication, completion, erection, installation or commissioning of immovable property where transfer of property in goods occurs during execution of the contract.

However, according to the department’s analysis, in cases under scrutiny the principal contractor did not materially invest in goods or construction inputs. Instead, materials were procured and consumed directly by the subcontractor during execution of the project.

Once incorporated into the structure, these materials cease to exist as movable property and become part of the immovable property under the legal principle of accretion.

Officials involved in the investigation believe that in such circumstances, the transfer of property in goods effectively takes place at the level of the subcontractor and not at the level of the principal contractor.

If established, this could have significant implications for the eligibility of ITC claimed by the principal contractor.

Under Section 17(5) ( c ) and (d) of the CGST Act, input tax credit is restricted in respect of works contract services and goods or services used for construction of immovable property when such construction is undertaken on one’s own account.

The law provides an exception where works contract services are used for the further supply of works contract services. However, officials indicated that in the cases under investigation, the principal contractor may not qualify for this exception if it is established that no actual works contract service involving transfer of property in goods was supplied by them.

The department is also examining whether amounts collected as tax from contractees were deposited with the government in accordance with statutory provisions.

Section 76 of the CGST Act stipulates that any person who collects an amount as representing tax must deposit it with the government, irrespective of whether the amount was actually required to be collected under the law. Failure to do so may attract interest and penal consequences.