Many businesses supply goods such as machinery, equipment, air conditioners, elevators or solar systems along with installation. Whether the installation is ancillary to goods or constitutes a works contract changes the GST rate and compliance.
General Rule: Composite Supply
When goods are supplied along with installation and the installation is ancillary to the supply of goods, the transaction is a composite supply under Section 2(30). The principal supply is the goods, and installation is ancillary. The composite supply is taxed at the rate applicable to the goods.
Example: A company sells a generator and installs it at the customer's premises. The customer primarily wants the generator. Installation is necessary to make it operational. The supply is composite with generator as principal supply. GST rate on generator applies to the whole transaction.
Distinction from Works Contract
If the installation involves immovable property and the contract is for construction, erection, commissioning or installation of an immovable property, it may be a works contract under Schedule II, which is treated as a supply of services.
A works contract is defined in Section 2(119) and includes any contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property where transfer of property in goods is involved.
The key distinction:
- If installation is of a movable asset (e.g., machinery bolted to floor but movable, generator, lift), it is generally a composite supply with goods as principal.
- If the contract results in creation of an immovable structure (e.g., construction of a building, installation of a pipeline embedded in the earth, HVAC system in a building), it may be a works contract and taxed as a service.
Rate Determination
For a composite supply of goods with installation:
- Identify the HSN classification and GST rate of the goods.
- Apply that rate to the total contract value, including installation charges, if billed as a single composite supply.
- If goods and installation are billed separately but under one contract, they may still be composite if naturally bundled.
For a works contract:
- Taxed as a service. The GST rate for works contract services is specified in notification.
- Works contracts for residential premises may attract 5% or 12% depending on affordable housing criteria.
- Other works contracts generally attract 12% or 18%.
Examples
Example 1: Lift Supply and Installation
Supply of a lift with installation is generally treated as a composite supply with lift as principal supply. The GST rate is the rate applicable to lifts (18% or 28% depending on classification). Some Advance Rulings have treated lift installation as works contract, leading to disputes. The contract wording and whether the lift becomes part of immovable property are crucial.
Example 2: Solar Power System Installation
Supply and installation of a solar power generating system on a roof. If the system is movable and not permanently attached, it may be a composite supply of goods. If it becomes part of the building, it may be a works contract. Advance Rulings have taken different views.
Example 3: Air Conditioner Supply with Installation
A split AC is supplied and installed by the dealer. The AC is movable and installation is simple. This is a composite supply with AC as principal, taxed at 28% (the GST rate on ACs).
Input Tax Credit
- In a composite supply of goods, the supplier can claim ITC on all inputs, including installation-related services.
- In a works contract, ITC is available but restricted in certain cases, e.g., works contracts for construction of immovable property other than plant and machinery are blocked under Section 17(5)(c).
Practical Compliance
- Draft contracts clearly to state whether goods or services are predominant.
- If goods are principal, invoice the entire contract as a supply of goods, showing the HSN and GST rate.
- If works contract, invoice as a service with SAC code and applicable service rate.
- Maintain supporting documentation such as technical drawings, product specifications, site conditions and contract terms.
How Anuj Desai & Associates Can Help
We help businesses classify goods with installation contracts, determine whether composite supply or works contract applies, apply correct rates and manage GST compliance and litigation.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
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