GST is to be charged on cess and as such cess is not to be charged on GST. GST is to be calculated on the total amount of the cost of construction including the cess levied under the Cess Act. As a sequitur, cess cannot be levied or be payable on GST amount involved in a construction contract.
The Building and Other Construction Workers Cess Act, 1996 (“Cess Act”, hereinafter) was enacted by the Parliament owing to the necessity to levy cess on the cost of construction incurred by the employers on a building and on other construction works, in order to generate funds for the Welfare Boards to enable such Welfare Boards to undertake social security schemes and welfare measures for building and construction workers. As per Section 3 of the Cess Act, the Cess which is to be levied and collected can be at maximum of 2% but not less than 1% of the cost of construction incurred by an employer. The Central Government has notified the Cess amount to be levied at 1% of the cost of construction. The liability to pay Cess under the Cess Act falls upon the ’employer’. The term ’employer’ includes both the owner of the building/establishment and a “contractor”, who supplies the workers. Therefore, the liability to pay Cess falls not only on the owner of a building or establishment, but also upon the contractor. This has been held by the Supreme Court in M/s. Dewan Chand Builders & Contractors vs Union of India & Ors.[1] (“Dewan Chand”, hereinafter). It is also well settled that the both the principal employer and the contractor can inter se decide upon which one of them would bear the liability of payment of Cess (See Employees’ State Insurance Corporation v. M/s Uttar Pradesh Rajkiya Nirman Nigam Ltd.)[2]. In contracts involving construction work relating to Governments or Public Sector Undertakings, the Cess is to deducted from the invoices/bills of the contractor and have to be deposited directly with the Board.
Lately, there have arisen unique situations in both the contracts where the contractor is made responsible to pay the Cess amount and vice-versa. In the former, the contractor is seen to be raising invoices for the payment of cess amount on @1% of the cost of construction (the contract amount with respect to construction) including the 18% Goods and Services Tax (“GST”, hereinafter) amount calculated on the contract amount. Similarly, the Government entities/Public Sector Undertakings, in construction contracts, are deducting cess from the total amount of the bill inclusive of GST. For instance, if the value of the cost of construction is Rs.100/- and a bill/invoice only with this amount is raised by the contractor or conversely, deducted by the Government/PSU, the cess payable/deducted would be Rs.0.99/-. However, if 18% GST were also to be included, the cess amount would shoot up to Rs.1.18/-. This gives rise to the question of whether cess @ 1 of construction cost is to be calculated on GST as well?
One may begin by referring to the Rule 3 of the Building and other Construction Workers’ Welfare Cess Rules, 1998 (“Cess Rules”). Rule 3 of Cess Rules specifically requires payment of cess on the cost of construction. The said Rule is reproduced as under:
“3. Levy of cess .- For the purpose of levy of cess under sub-section (1) of section 3 of the Act, cost of construction shall include all expenditure incurred by an employer in connection with the building or other construction work but shall not include – cost of land; – any compensation paid or payable to a worker or his kin under the Workmen’s Compensation Act, 1923.”
A bare reading of Rule 3 indicates that the payment of cess is to be made on the cost of construction and not on any other tax or cess related amounts. The Supreme Court in UP Power Transmission Co. Ltd v. CG Power and Industrial Solutions Ltd. and Anr.[3] (“UP Power”, hereinafter), has held that Cess under the Cess Act read with BOCW Act is leviable in respect of building and other construction works. The condition precedent for imposition of cess under the Cess Act is the construction, repair, demolition or maintenance of and/or in relation to a building or any other work of construction, transmission towers, in relation inter alia to generation, transmission and distribution of power, electric lines, pipelines etc. is carried out. Mere supply, installation, or erection activities that do not involve any construction work are not subject to statutory cess.
It may also be noted that GST payment is in the form of a ‘tax’ while cess is not a ‘tax’ but a ‘fee’, as held by the Supreme Court in Dewan Chand (supra). Levy of GST amount does not appear to, therefore, be “incurred by an employer in connection with the building or other construction work”. GST, pragmatically speaking, is a tax which is levied at all times where a person/business supplies goods or services for payment. When such is the case, GST cannot be said to have any specific or reasonable nexus with construction work, owing the generality of its levy and collection.
One may also, in the same breath, refer to section 15 of the Central Goods and Services Tax Act, 2017. The said Sections reads as under:
“Section 15. Value of Taxable Supply .- (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. (2) The value of supply shall include- (a) any taxes, duties, cesses, fees and charges levied under any law for the time being in force other than this Act, the State Goods and Services Tax Act, the Union Territory Goods and Services Tax Act and the Goods and Services Tax (Compensation to States) Act, if charged separately by the supplier …..”
From the above provision, it becomes clear that while determining the value of supply on which GST is to be levied, all taxes, duties, cesses, fees and charges levied under any law for the time being in force are to be taken into consideration. Thus, GST is to be calculated on the total amount of the contract value including the cess levied under the Cess Act. For this very reason, cess is included in the contract and bills/invoices before the imposition of GST and cess is deducted on the construction contract amount arrived at before the application of GST. This is even more so relevant in Government Engineering, Procurement, and Construction (EPC) contracts wherein, by the virtue of Rule 4(3) of the Cess Rules, cess is not charged separately but is a deduction that is made on the bill value before the imposition of GST.
It may then be possible to state that GST is to be charged on cess and as such cess is not to be charged on GST. Cess will be included in the value of supply and the same is taxable under GST. It would be non-sequitur to state that first GST is calculated and then the cess amount is calculated and paid on the GST amount. When GST is itself leviable on cess amount, it cannot then be that cess is calculated on GST. That would lead to imposition double GST on the same, which is not possible.
It has been seen that an argument which is regularly made is that “cost of construction” is an inclusive definition and includes all expenditure except cost of land and any compensation payable as accident compensation. The question of whether a definition is “inclusive” or “exclusive” is well settled. A definition which uses the term “includes” is usually inclusive i.e. it is capable of a liberal interpretation so as to include more items under its ambit, whereas if the definition uses the term “means”, then it is exhaustive in nature i.e. the definition is a hard and fast definition and no other meaning can be assigned to the expression. However, the Supreme Court in South Gujarat Roofing Tiles Manufacturers Association and Anr. v. State of Gujarat [4], has held that “include” can be given a restrictive meaning if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions defined. It may be equivalent to ‘mean and include’, and in that case it may afford an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions. The word ‘include’ may not always be used by the Legislature for the purpose of enlargement; rather, in a given case, the word ‘include’ may indicate exhaustiveness (See Sterlite Optical Technologies Ltd. v. Oil India Ltd. and Ors.)[5]. The fact that the term “does not include” is followed by “includes” makes it conspicuous enough that the definition was envisaged to be exhaustive and not inclusive. Further, the word ‘includes’, enlarges the meaning of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they shall include (See P. Kasilingam and Others v. P.S.G. College of Technology and Ors.)[6]. As explained above, GST would not come to the natural import of construction work carried out by labour. Moreover, the Supreme Court in UP Power (supra) has explicitly held that cess is only leviable on ‘works’ in a literal sense. Also, as per Office Order dated 23.03.2022 issued by Labour Commissioner, GST is not to be imposed before calculation of cess. The said order also says that cess is to be calculated only on civil construction and not anything else. An upshot of the above discussion would make it clear that cess cannot be levied or be payable on GST amount involved in a construction contract.
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1. 2012 LLR 1 (SC).
2. 2024 LLR WEB 281 (Del. HC).
3. SLP(C) No. 8630/2020 dated 12.05.2021 (SC).
4. CA No.1947/1975 dated 20.10.1976 (SC).
5. WP(C) No.10/2005 dated 31.07.2007 (Guj. HC).
6. CA No.10001/1983 dated 24.03.1995 (SC).
Gaurav Kumar
Advocate, Supreme Court of India
Editor : Labour Law Reporter
Email : info@labourlawreporter.com
