The Authority for Advance Rulings, Gujarat in the case of Vijai Electricals Ltd. vide Order No. GUJ/GAAR/R/2024/16 dated 02.07.2024,  has ruled that GST is payable on advances received against the supply portion in respect of a turnkey works contract. The turnkey contract cannot be split into separate contracts for the supply of goods and services for GST purposes. 

Facts of the Case:-  The Applicant challenged the applicability of GST on advances received for the supply portion of a turnkey work contract. The Applicant is engaged in engineering, procurement, and construction (EPC) contracts. They have a turnkey contract with Paschim Gujarat Vij Company Ltd. (PGVCL) for supply and installation under a single agreement but contend it is divisible into supply (goods) and installation (services). Cited Notification No. 66/2017-CT (dated November 15, 2017), which exempts GST on advances received for goods.

It was argued that the contract is divisible, with separate billing for supply and installation. It was asserted that advances received can be treated as a corporate credit facility (loan) backed by a bank guarantee.

Department's contention:  It was argued that the contract is a comprehensive works contract for the supply and installation, not divisible into separate supply of goods and services. It stated that advances received cannot be bifurcated for goods and services but must be treated as gross receipts for the entire works contract. Aforesaid Notification 66/2017-CT does not apply to such contracts.

AAR Rulings:  The AAR determined that the turnkey contract in question is indeed a works contract as per Section 2(119) of the CGST Act. Notification No. 66/2017-CT does not apply to turnkey contracts, which are classified as works contracts. It is noted that GST is payable on advances received for the supply portion of a works contract, including turnkey contracts. It is concluded that a turnkey contract cannot be considered a divisible contract. The outward supply must be treated as a single works contract service, rather than fragmented into separate elements of supply of goods and services.

The Gujarat AAR ruled that in the case of a turnkey contract classified as a works contract, advances received against the supply portion are subject to GST. The petitioner's contention that such a contract is divisible and thus exempt under Notification No. 66/2017-CT was rejected. The AAR clarified that turnkey contracts are indivisible for GST purposes, and the entire advance received is taxable under the works contract provision.