The Comptroller and Auditor General of India (CAG) has asked the revenue department to improve coordination between the income tax and GST authorities to determine the GST liability of entities involved in works contract and construction services. 
In its compliance audit report on goods and services tax for the period ended March 2024, the CAG said information gathered during income tax proceedings should be used to identify corresponding GST liabilities, particularly where unaccounted supplies or income have been detected. 
The audit report recommended stronger coordination between the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes and Customs (CBIC). The CAG said information about unaccounted income available with income tax authorities should be used to determine the corresponding GST liability of taxpayers providing works contract and construction services. 
The audit covered a sample of 735 taxpayers and identified 123 cases involving compliance deficiencies. These cases had a revenue implication of INR 190.98 crore. 
The deficiencies included incorrect claims of concessional tax rates or exemptions on works contracts related to roads, bridges, railways and earthwork. The audit also found instances of short payment of liability on works contract services provided to government authorities, irregular availment of input tax credit (ITC) on ongoing and completed projects, and non-payment of GST on unaccounted on-money income detected during income tax proceedings. Short payment of GST liability in the execution of metro projects was another issue identified by the audit. 
The CAG has asked the revenue department to create a mechanism to cover a larger number of such cases through scrutiny or internal audit. This is particularly relevant where subcontractors and sub-subcontractors claim concessions while carrying out works relating to roads, bridges and railways. 
The report also suggested introducing suitable validation controls to regulate concessions claimed under GST. Such checks could help authorities identify cases where taxpayers may have claimed exemptions or concessional rates without meeting the required conditions. 
Another recommendation relates to taxpayers executing works contracts or construction services who receive services from government bodies or procure inputs and input services from unregistered suppliers. The CAG suggested that such cases should also be selected for scrutiny or internal audit to verify whether the applicable tax has been discharged under the reverse charge mechanism (RCM). 
The audit's focus on coordination between direct and indirect tax authorities is particularly relevant in cases where income tax proceedings reveal transactions that are not reflected in GST records. Linking such information can allow the tax authorities to examine whether the same transactions have corresponding GST obligations. 
Under the GST framework, a works contract is treated as a service when it relates to an immovable property. This differs from the earlier VAT and service tax regime, under which works contracts involving movable properties could also fall within the scope of the provisions. 
The GST law covers contracts involving building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of an immovable property, provided the execution of the contract involves the transfer of property in goods, either in the same form or in another form. The transfer of property in goods is therefore a key requirement for a transaction to qualify as a works contract under GST. 
The CAG's audit examined the discharge of GST liability and the availment of ITC by taxpayers engaged in works contract and construction supplies. The findings point to gaps not only in tax payment but also in the verification of exemptions, concessions and ITC claims. 
The recommendations now place emphasis on wider case selection, better use of information already available with income tax authorities and stronger validation of GST claims. For the construction and infrastructure sector, this could result in closer scrutiny of tax treatment across contractors, subcontractors and project-related transactions. 
Source PTI