CAG Seeks Closer GST Scrutiny of Construction and Works Contract Services

The Comptroller and Auditor General of India has called for closer coordination between income tax and GST authorities to identify tax liabilities arising from construction and works contract services.

The recommendation comes from the CAG’s compliance audit of the Goods and Services Tax system for the period ended March 2024. The audit examined 735 taxpayers and identified 123 cases involving compliance deficiencies. Together, these cases had a revenue implication of ₹190.98 crore.

For the construction and infrastructure sector, the recommendation could lead to greater scrutiny of contractors, subcontractors and project-related transactions.

One of the key concerns highlighted by the audit was the need to use information gathered during income tax proceedings to determine whether corresponding GST liabilities have been discharged. This is particularly relevant where income tax authorities detect unaccounted supplies, income or on-money transactions that do not appear in GST records.

The CAG has recommended stronger information sharing between the Central Board of Direct Taxes and the Central Board of Indirect Taxes and Customs. Such coordination could help tax authorities identify transactions that may have escaped GST assessment.

The audit also found several other compliance issues involving works contracts. These included incorrect claims of concessional GST rates or exemptions relating to roads, bridges, railways and earthwork. Cases involving short payment of GST on services provided to government authorities were also identified.

Input tax credit claims on ongoing and completed projects came under scrutiny as well. The audit flagged instances where ITC had been availed irregularly, along with cases involving short payment of GST on metro projects.

The CAG has also called for a mechanism to bring more such cases under scrutiny or internal audit. This could be significant for projects where subcontractors and sub-subcontractors claim GST concessions while executing infrastructure works.

Another recommendation relates to reverse charge mechanism compliance. The CAG suggested that taxpayers executing works contracts or construction services should be examined where they receive services from government bodies or procure goods and services from unregistered suppliers.

Under the GST framework, a works contract involving an immovable property is treated as a service when it includes the transfer of property in goods. This makes accurate classification, tax payment and documentation important for construction companies and contractors.

The latest audit recommendations point towards a more data-driven approach to GST enforcement, with greater use of information already available across tax departments.