CAG seeks better IT-GST coordination to ascertain tax dues of works contract, construction services

New Delhi: The Comptroller and Auditor General (CAG) has asked the revenue department to ensure effective coordination between the income tax and GST department to ascertain GST liability of entities providing works contract and construction services.

In its compliance audit report for the report ended March 2024 on goods and services tax (GST), the CAG said information related to income tax proceedings of an assessee need to be leveraged to ascertain corresponding GST liabilities on unaccounted supplies.

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"The department needs to ensure effective co-ordination between CBDT (Central Board of Direct Taxes) and CBIC (Central Board of Indirect Taxes and Customs) and leverage the information of unaccounted income available with the Income Tax authorities to determine corresponding GST liability of taxpayers providing works contract and construction services," the report said.

Out of a sample of 735 taxpayers, the CAG audit observed 123 cases of compliance deficiencies, with a revenue implication of Rs 190.98 crore, due to incorrect availment of concessional rate of tax/exemptions on works contracts relating to construction of road, bridges, railways and earthwork, short discharge of liability on works contract services provided to government authority, irregular availing of ITC on ongoing/completed projects, not discharging GST on unaccounted 'on-money' income discovered by Income Tax authorities and short discharge of tax liability in execution of metro projects.

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The official auditor asked the revenue department to institute a mechanism for covering a larger sample of cases in scrutiny or internal audit, where the concessions related to works contract services are availed by sub-contractor/sub-sub-contractors who are executing works of road, bridge and railways to ensure proper discharge of tax by taxpayers.

"The department may also explore the possibility of incorporating appropriate validation controls to regulate the concessions being claimed," the CAG report said.

It suggested that the revenue department could set up a mechanism for reviewing (by selecting for scrutiny or internal audit, etc) cases where taxpayers executing works contracts or construction services receive services from governments or procure inputs and input services from unregistered suppliers to ensure proper discharge of tax under reverse charge mechanism (RCM) by such taxpayers.

Under GST law, the term 'works contract' refers to any work undertaken for an 'immovable property' unlike the erstwhile VAT and service tax provisions where works contracts for movable properties were also considered.

According to GST law, a works contract refers to any contract involving the building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration, or commissioning of any immovable property, provided there is a transfer of property in goods, either as goods or in another form, during the execution of the contract.

A crucial requirement for a service to qualify as a works contract under GST is the transfer of property.

The CAG audit reviewed the aspects of discharge of tax and availment of ITC by the taxpayers involved in works contract/construct supplies.

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