1_37 - Baroda ICAI

Report
Works Contract Under GVAT Act, 2003
July 22, 2014
CA Prakash B Thakkar
Prakash Thakkar & Co.
Chartered Accountants
Baroda
Background
Judicial Pronouncement
Statutory Meaning
Taxable Event
Calculation of Sale Price under GVAT Act
VAT Liability of Building Contractors
Input Tax Credit
Tax Deduction at Source
Interstate Works Contract
Calculation of Sale Price under CST Act
Composition Scheme of WC under GVAT Act.
2
Contents
Background
3
Sales Tax on Indivisible Contract
State of Madras v Gannon Dunkerly & Co., (1958) 9 STC 353 (SC)
• Supreme Court while interpreting the expression
“sale of goods” held that, the expression "sale of
goods” as used in the entries in the Seventh
Schedule to the Constitution has the same meaning
as in the Sale of Goods Act, 1930. In a building
contract, contractor has to construct building in
terms of specification of agreement and entitled to
receive consideration as provided therein. There
was neither contract to sale the material used in the
construction nor the property passed therein as the
movables.
4
By virtue of this judgement, in the case of an indivisible works
contract, it is not possible to levy sales tax on the transfer of property in the
goods involved in the execution of WC as it has been held that there is no sale of
the materials as such and the property in them does not pass as moveables.
I
Constitutional Amendment
46th Amendment made to the Constitution from February 2, 1983
In Article 366 a definition of "tax on the sale or purchase
of goods by inserting a new clause (29A).
The definition specifically include within the scope of
that expression tax on--(i) ….
(ii) the transfer of property in goods involved in the
execution of a works contract;
(iii) …..
By this amendment the concept of deemed sales was introduced.
Under the deemed Sale, an artificial break up of indivisible works
contract has to be made to arrive at the ‘material’ value and the
‘labour’ value of the contract. This permitted the States to levy tax
on the Sale of goods involved in execution of a work contract.
Meaning – WC – Judicial Pronouncements
• It is difficult to establish whether a particular contract is
‘contract for work’ or ‘contract of sale’ and rigid and
inflexible fast tests cannot be laid down. It depends on
main object of the parties, circumstances and customs of
trade.
• Generally, a contract of sale is a contract whose main
object is the transfer of the property in, and delivery and
possession of, a chattel as a chattel to the buyer. Where
the main object of work undertaken by the payee of the
price is not the transfer of a chattel qua chattel, the
contract is one for labour and work.
• The aspects like ownership of material, value of skill and
labour compared to value of material can be considered,
but these are not conclusive.
State of Gujarat v. Variety Body Builders (1976) 38 STC 176 (SC). – same view in
State of Himachal Pradesh v. Associated Hotels - (1972) 29 STC 474 (SC).
6
Meaning – WC – Judicial Pronouncements
• When and how the property in a transaction passes to
the customer : is it by transfer at the time of delivery of
the finished article as a chattel or by accession during
the process of work on fusion to the movable property
of the customer?
• If a major component of the end product is the material
consumed in producing the chattel and skill & labour
are employed for converting the main components into
the end products, the skill & labour incidental, the
delivery of the end product would constitute a sale. On
the other hand, if the main object of the contract is to
avail the skill & labour of the seller, though some
material and components may be incidentally used, the
transaction would be a contract for works and labour.
[State of Maharashtra v Sarvodaya Printing Press, Nagpur (1999) 114 STC 242 (SC)]
7
Meaning – WC – Judicial Pronouncements
“Whether the contract involved a dominant
intention to transfer the property in goods, in our
view, is not at all material. It is not necessary to
ascertain what is the dominant intention of the
contract. Even if the dominant intention of the
contract is not to transfer the property in goods
and rather it is the rendering of service or the
ultimate transaction is transfer of immovable
property, then also it is open to the States to levy
sales tax on the materials used in such contract if
it otherwise has elements of works contract…”
[Vide Para 64 - Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr (2013)
65 VST 1 (SC)]
8
Meaning – WC – Judicial Pronouncements
“In our opinion, the term works contract in Article
366(29- A)(b) is amply wide and cannot be confined
to a particular understanding of the term or to a
particular form. The term encompasses a wide range
and many varieties of contract. The Parliament had
such wide meaning of works contract in its view at
the time of Forty-sixth Amendment. The object of
insertion of clause 29-A in Article 366 was to enlarge
the scope of the expression "tax on sale or purchase
of goods" and overcome the judgement in the case of
State of Madras v Gannon Dunkerly & Co; (1959) 9
STC 353 (SC)”
Vide Para 76 - Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr (2013)
65 VST 1 (SC)]
9
Meaning – WC – Judicial Pronouncements
“For sustaining the levy of tax on the goods deemed to
have been sold in execution of a works contract, in our
opinion, three conditions must be fulfilled: (i) there must
be a works contract, (ii) the goods should have been
involved in the execution of a works contract, and (iii) the
property in those goods must be transferred to a third
party either as goods or in some other form. In a building
contract or any contract to do construction, the above
three things are fully met. In a contract to build a flat
there will necessarily be a sale of goods element. Works
contracts also include building contracts and therefore
without any fear of contradiction it can be stated that
building contracts are species of the works contract.”
Vide Para 94 - Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr (2013)
65 VST 1 (SC)]
10
Meaning – WC – Judicial Pronouncements
“At this juncture, it is condign to state that four concepts have
clearly emerged. They are
(i) the works contract is an indivisible contract but, by legal
fiction, is divided into two parts, one for sale of goods, and the
other for supply of labour and services;
(ii) the concept of “dominant nature test” or, for that matter, the
“degree of intention test” or “overwhelming component test” for
treating a contract as a works contract is not applicable;
(iii) the term “works contract” as used in Clause (29A) of Article
366 of the Constitution takes in its sweep all genre of works
contract and is not to be narrowly construed to cover one species
of contract to provide for labour and service alone; and
(iv) once the characteristics of works contract are met with in a
contract entered into between the parties, any additional
obligation incorporated in the contract would not change the
nature of the contract.”
Vide Para 42 – Kone Elevators India Pvt. Ltd. V State of Tamilnadu and others dtd
6th May 2014
11
Meaning – WC – Judicial Pronouncements
“…. It is necessary to state here that if there are two contracts,
namely, purchase of the components of the lift from a dealer, it
would be a contract for sale and similarly, if separate contract is
entered into for installation, that would be a contract for labour
and service. But, a pregnant one, once there is a composite
contract for supply and installation, it has to be treated as a
works contract, for it is not a sale of goods/chattel simpliciter. It
is not chattel sold as chattel or, for that matter, a chattel being
attached to another chattel. …. The conclusion, as has been
reached in Kone Elevators (2010) 14 SCC 788), is based on the
bedrock of incidental service for delivery. It would not be legally
correct to make such a distinction in respect of lift, for the
contract itself profoundly speaks of obligation to supply goods
and materials as well as installation of the lift which obviously
conveys performance of labour and service. Hence, the
fundamental characteristics of works contract are satisfied. …..
Vide Para 64 – Kone Elevators India Pvt Ltd v State of Tamilnadu & others (SC)
judgement dtd 6th May 2014]
12
Sale of Goods vis-a-vis WC
Sale of Goods
Works Contract
Taxed as Normal Sale : Seller & Buyer
Taxed as Deemed Sale : Contractor &
Contractee
Absolute property of the maker until
produced / manufactured. Later on sold to
buyer
It is never an absolute property of the
maker. Materials used in WC may be
makers absolute property
The sale is ‘chattel as a chattel’ i.e. ‘goods’ Article produced becomes the property of
are sold as ‘goods’ (Hindustan Aeronatics buyer even sometime without first
Ltd. [55 STC 314 (SC)]
becoming property of the maker.
Primary function - supply of materials
Primary function - work and labour
Incidental - work or service (However note Incidental - materials are supplied
L&T 65 VST 1)
Goods remain same before and after the
delivery of goods
13
Goods before the delivery and after
execution of WC are different, many times
in different form also.
Types of contract
1. Supply of Material and Labour : Works Contract (e.g.
Construction of a building, roads, bridges, dams,
erection of Plant & Machinery, Processing jobs, Job
works, Repair jobs, Electrical Fittings, Annual
maintenance Contracts (AMCs). Installation of Elevators,
Repairs of Vehicles, Re-treading of old tyres, Customized
Printing Jobs, Electro Plating, electro-galvanizing,
anodizing etc.)
Types of contract
2. Supply of labour and supply of materials is incidental to
the contract (e.g. Painting, cleaning, overhauling,
lubricating, greasing of an old machinery etc.) These
types contracts were not taxable under the Sales Tax
Regime (Material Value < 15%, ) but now under VAT
regime consideration in relation to material used in such
contract is taxable irrespective of whatever small
magnitude of material is passed on.
The respondent dealer was engaged in printing of lottery
tickets on papers supplied by customers. Dealer used ink
and other processing materials including chemicals held
taxable to the extent of value of ink, chemicals.
[2011] 41 VST 102 (All) Commissioner, Trade Tax, U.P., Lucknow V. Aristo
Printers Pvt. Ltd.
Types of contract
3. Pure Labour Contract –Not a Works contract (e.g. Semifinished material supplied to Job-worker for further
processing, tailor doing stitching work)
It may involve materials for executing contract but there
is no transfer of property in goods, not taxable
The respondent company undertook contracts for
making aluminum alloys out of aluminum supplied by
customers. Silicon and copper were consumed in the
process of manufacture of aluminum alloys and lost their
identity. no property could be said to pass to the
customer. Thus there was no transfer of goods in
execution of a works contract of aluminum alloys.
[2010] 32 VST 56 (Bom) Commissioner of Sales Tax, M.S., Mumbai V.
Moonlight Metal Industries Pvt. Ltd.
WC – Statutory Meaning
17
Works Contract – Statutory Meaning
•The GST Act, 1969 did not contain any definition of WC except
in indirect way and that to partly. Sec. 55A of the GST Act,
permitted payment of composition money at prescribed rates for
WCs. These contracts, mentioned in the said notification, by
implication, could be construed as WCs.
•For the first time vide Finance Act, 2005, definition of WC was
brought into The CST Act, 1956 vide Section 2 (ja) as under:
“Works Contract” means a contract for carrying out any work
which includes assembling, construction, building, altering,
manufacturing, processing, fabricating, erection, installation,
fitting out, improvement, repair or commissioning of any movable
or immovable property”.
Works Contract – Statutory Meaning
The GVAT Act contains the definition of the term “WC”, by way of Explanation (ii), to
Sec. 2(23) while defining the term ‘Sale’. Relevant part of the defn. is reproduced as
under.
Sec. 2(23) “Sale” means a sale of goods made within the State ….. (a) transfer, otherwise than in pursuance of a contract, …….
(b) transfer of property in goods (whether as goods or in some other
form) involved in execution of a WC,
(c) to (j) ….,
but does not include a mortgage, ………..
Explanation –
(i)…..
(ii) for the purpose of sub-clause (b), the expression “Works Contract”
means a contract for execution of works and includes such Works
Contract as the State Government may, by notification in the Official
Gazette, specify:
Vide Noti. (GHN-23) VAT 2006/(S.2)(23)(1)/TH dtd 31/03/06 15 types
of “WCs” have been notified.
WC – Taxable Event
20
Taxable Event under WC
• Taxable event is transfer of property in goods (whether as
goods or in some other form) involved in the execution of
WC. The rate of tax will be applicable by the nature of goods
that is incorporated.
• The contractor becomes liable to pay vat ordinarily when, the
goods or materials are used in the contract. It is not necessary
to wait till the final bill is prepared for the entire work.
• Any stipulation in the agreement that transfer of property in
the goods involved in the execution of the contract would take
place only on complete execution of contract etc, would have
relevance only for determining whether the contractor has
fulfilled his obligation under the contract.
In WC property would pass on accretion or accession as and when it takes
place and not in conglomerate..
21
Works Contract –Taxable Event – Case Study
(1) K & Co., has launched a scheme for residential flats. On the first day
it has received a sum of Rs. 5.00 Crores as booking advance. He has
not commenced any construction activity nor has purchased any
material. Whether K & Co., is liable to obtain registration under
GVAT Act, in view of rule 28(e) which reads as under
(2) Rule 28 (e)The amount shall be considered to have been received as
under:(i) from the date on which it becomes due as per the schedule of
payment in respect of contracts which provided for a schedule of
payment,
(ii) the date on which the bill is prepared or the amount is
received whichever is earlier in respect of contracts, which do not
provide for schedule of payment.
(2) In the above case if K & Co. obtains voluntary registration, what
shall be the liability on the above advance of Rs. 5.00 Crore.
Works Contract –Taxable Event – Case Study
• Opinion :- Taxable event is transfer of property in goods (whether as
goods or in some other form) involved in the execution of WC. VAT is
payable when the goods or materials are used in the contract. It is not
dependent on when the goods purchased or when the payment received
or when the Bill issued.
• Tax Rate will depend upon nature of goods that is incorporated in WC.
• Any stipulation in the agreement that transfer of property in the goods
involved in the execution of the contract would take place only on
complete execution of contract etc, would have relevance only for
determining whether the contractor has fulfilled his obligation under the
contract
• In view of the above for the issue in hand K & Co., is not required to
obtain registration as it has not crossed threshold limits of turnover.
However, it will be liable to regn/tax when actually work is carried out.
• If K & Co. obtains voluntary registration, then also advance of Rs. 5.00
crore will be taxable when work is carried out to that extent.
WC – Calculation of Sale Price
24
Calculation of Sale Price under Gujarat VAT Act
Valuation options under
Works Contract
Actual Labour
deduction
Composition
Standard Labour
deduction
Calculation of Sale Price of Works Contract
Actual labour deduction – Deductions allowed where books of
accounts are maintained – Gannon Dunkerly & Co., 88 STC 204
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Labour charges & Service charges
Sub-contract charges
Planning, designing and architect's fees
Machinery on hire and tools used
Depreciation – L&T 34 VST 53 Karnataka HC
Cost of consumables, the property in which is not transferred ( e.g. Water
Electricity, Fuel, Lubricating Oil, Electrodes etc)
Cost of establishment to the extent to it is relatable to the supply of labour
and services (e.g. accommodation to labour and other facilities at job
site).
Other expenses relatable to the supply of labour and services (in the
nature of overheads, rent, salary, telephone charges)
Profit earned by the contractor to the extent it is relatable to the supply of
said labour and services (Difference between the value recovered from the
contractee and cost incurred by the contractor)
Calculation of Sale Price of Works Contract
Indivisible WC – in case separate books of A/c’s are not maintained –
Lump sum deductions Rates – Rule 18AA
Description of Works Contract
Percentage of
Deduction
Construction, improvement, repair of any building, road, bridge, dam,
canal or other immovable property
30%
Installation, fabrication, assembling, commissioning or repair of any
P&M
15%
Installation, fabrication, assembling, commissioning of Air conditioner,
air cooler
10%
Assembling, fitting, re-assembling, improving, producing, repairing,
furniture, fixtures (interior decoration)
20%
Construction, fabrication, assembling, commissioning, repairs of bodies
on chassis of motor vehicles
20%
Overhauling or repairing or dismantling of any motor vehicles, vessels
of every description meant for plying on water or any vessel propelled
by mechanical means, any air craft, etc
20%
* Amount to be deducted from the contract price (expressed as a percentage of contract
27
Calculation of Sale Price of Works Contract
Indivisible WC – in case separate books of A/c’s are not maintained –
Lump sum deductions Rates - Rule 18AA
Description of Works Contract
Percentage of
Deduction
Fitting out, assembling, altering, ornamenting, re-assembling, blending,
finishing, furnishing, improving, processing, otherwise treating,
adapting or fabricating of any goods
15%
Erection, installation and commissioning of wind turbine generator
30%
Fixing of marble, slabs, polished granite stones and tiles other than
mosaic tiles
20%
Fixing of sanitary fittings and plumbing
15%
Painting and polishing
20%
Laying of pipes excluding plumbing
20%
Tyre retreading
30%
* Amount to be deducted from the contract price (expressed as a percentage of contract pri
28
Calculation of Sale Price of Works Contract
Indivisible WC – in case separate books of A/c’s are not maintained –
Lump sum deductions Rates - Rule 18AA
Description of Works Contract
Percentage of
Deduction
Supply of goods in providing know-how, designs, labour, supervision,
inspection, training or other services with any of the operations
specified above
20%
Dyeing and printing of textiles
30%
Printing contracts
30%
Any other works contract
20%
To arrive at Taxable turnover above rates are applied after deducting
payment made to sub contractor.
29
Calculation of Sale Price of Works Contract
Composition Option – Section 14A - For contractors who do not wish to pay
tax based on the specific formula or after considering the lump sum deductions
•Section 14A provides option to pay lumpsum tax on total turnover of WC
at the rates specified as under.
0.5% Processing of polyester textile fabrics including bleaching ,
dyeing and printing thereof
0.6%- Construction contracts relating to roads, buildings, bridges,
pipeline laying, dams, etc.
2.0% -Other contracts including contracts for erection, installations etc
•Dealer can opt for composition of tax either contract wise or on yearly
basis.
• Restrictions:
 ITC not available to contractor (also to contractee)
PT on URD Purchases, in addition to Composition Tax.
Contractor not to issue TAX Invoice
Cannot purchase goods by way of import/interstate/BT
Goods supplied by the contractee-Free of Cost
Where the materials are issued free of cost by contractee to the contractor for
ensuring project quality what will be the VAT implication?
Opinion:- In a works contract where any goods supplied by the contractee to
the contractor for execution of Works Contract, Value of such goods cannot be
included in the taxable turnover of the contractor [Builders Association of India
(88 STC 204 (SC)]
Goods supplied free of cost to be used in the works contract, there will be no
sale [ONGC v CST UP 1996 102 STC 466 (All)]
Mukhya Rail Path Nirishak, Saharanpur v The commissioner of Trade Tax UP,
Lucknow [2007] NTN (Vol. 33) -86 and VS Engineering Pvt. Ltd (2014) 68
VST 87 also confirms the same view.
In Ts Tech Sun (India) Limited [2008] 15 VST 559, Supreme Court held that
for sales tax purpose, consideration for transfer of property in goods is to be
considered and cost of manufacture is irrelevant.
Goods supplied by the contractee-Price Recovered
Where the materials are issued for a fixed price to be recovered or
adjusted in the bill of the contractor what will be VAT implication?
Opinion: - Where contractee supplies goods, cement, steel etc to
the contractor for use in the works contract for a fixed price to be
recovered or adjusted in the bill of the contractor, such supply is
sale of the contractor. [Rashtriya Ispat Nigam Ltd V/s State of A.P
[1966 102 STC 454 (A.P.)]
Supply of material by contractee to contractor for use in works
contract, for consideration is sale [Cooch Bihar Contractor
association V/s State of W.B. [1996 103 STC 477 (SC)] also refer
[2010] 32 VST 355 (Cal) Gourangalal Chatterjee V. State of West
Bengal and others.
To avoid tax being levied on Free Supply goods
Contractor to ensure following clauses in the contract
The free issue material supplied by the Contractee shall be held
in the custody of the contractor as bailee.
Contractor to provide periodical statement of Consumption/
Stock of free material supplied.
Material in possession of the contractor shall not be diverted for
any other use.
The cost of the free issue material supplied by contractee will be
outside the scope of contract and shall not be the part of
consideration to be paid to the contractor.
The contract may contain a stipulation to the effect that
specified material will be supplied by the contractee free of cost
Whether Freight forming part of sale price?
Where Ready Mix Concrete (RMC) is supplied to the contractee on
site in the vehicle/machine and RMC is filled at the requisite place
as per the requirement of Contractee, whether freight charges
incurred for the same will form part of the sale price and therefore
liable to VAT?
Opinion: -Definition of Sale Price in Sec 2(24) reads as under:
“sale price” means the amount of valuable consideration paid or payable
to a dealer or received or receivable by a dealer for any sale of goods
made including the amount of duties lived or leviable under the Central
Excise Tariff Act, 1985 or the Customs Act, 1962 and any sum charged
for anything done by the dealer in respect of the goods at the time of or
before delivery thereof and includes,- …….
From the facts of the case it appears that delivery is completed only on
application of RMC at requisite place, therefore Freight will be added in
sale price and subject to VAT.
Deduction of payment to sub-contractors in WC
Larsen & Toubro Ltd and anothers v State of AP and Ors. 148 STC 616
• The property in goods passes from sub-contractor to
employer directly on theory of accretion.
• There is only one sale from sub-contractor to employer
directly and not two sales (1) from sub-contractor to main
contractor and (2) from main contractor to employer.
• The sub contractor is an agent of main contractor.
•Also note that amount paid to sub-contractor is available as
deduction from total turnover of main contractor.
•Rule 18AA provides for deduction only if the sub-contractor
is RD.
•Rule 28(8)(c) provides for deduction of payments to
subcontractor in composition option also.
35
Back to Back Sub Contracting
A construction contractor is giving back to back (100% work) subcontract to another contractor, what will be the tax liability of Main
Contractor and Sub-Contractor.
Opinion: -A sub-contract, if granted validly and in terms of the
provisions of the contract entered into between the principal and the
main contractor, is a part of the main contract itself.
Therefore, whether the goods are supplied by the sub-contractor or by
the contractor himself, title thereto passes to the principal directly in
execution of the main contract. Thus, the goods in question would be
liable to sale tax only once. If the sub-contractor had already been
assessed to sales tax on goods supplied by him in execution of his
portion of the contract, no further sales tax would be leviable in relation
thereto, on the main Contractor.
75 STC 211 (Pat) Hindustan Dorr-Oliver Ltd. and Another V. Union of
India and Others
Entire contract is sub-contracted – VAT Liability
Issue:- Mr. X a contractor has been awarded a contract for a total
consideration of Rs. 100.00 Crores. He assigns entire contract to
Mr. Y sub-contractor for Rs. 90.00 Crores. What will be VAT
liability of Mr. X and Mr. Y where:-
1.
2.
3.
4.
5.
6.
X and Y both has opted composition.
X & Y both has not opted composition.
X has opted composition but Y has not opted Composition.
Y has opted composition but X has not opted composition.
What shall be the consequences if Mr. X is not RD
What shall be the consequences if Mr. Y is not RD
Entire contract is sub-contracted – VAT Liability
Opinion: - Tax liability of Mr. X – Main Contractor
•Not opted for composition.
The property in goods passes from sub-contractor to employer
directly on theory of accretion. The sub contractor is an agent of
main contractor. There is only one sale from sub-contractor to
employer directly and not two sales (i) from sub-contractor to main
contractor and (ii) from main contractor to employer. (17 VST 1–
L&T SC) – In view of above there is no tax liability on X as he has
not made any sales. Turnover of entire 100.00 Crore is exempt.
• Opted for Composition
Rule 28(8)(c): The composition money shall be payable by the dealer
on the full amount received by him at any time in respect of those
contracts for which permission for composition has been granted
after deducting the amount paid by way of price for entire subcontract, if any, made with sub-contractor. Liability on Rs. 10.00 Cr.
Entire contract is sub-contracted – VAT Liability
Opinion: - Tax liability of Mr. X – Main Contractor
•Y is Registered/Un Registered Dealer.
Rule 18AA(1) : The value of the goods at the time of the transfer of
property in the goods (whether as goods or in some other form) involved in
the execution of a works contract shall be determined by deducting the
amounts paid by way of price for sub-contract made with a registered
dealer, if any, pertaining to the said works contract. In view of the above
Sub contractor should be RD , but no such condition should be enforced by
making rule, which is inconsistent with the principle of accretion theory.
The department has got right to tax URD sub-contractor, but cannot deny
deduction to Main Contractor which is otherwise available.
VAT liability of Mr. Y–Sub Contractor Composition opted/not opted
Sub Contractor is liable for VAT on Rs. 90.00 Crores if he has opted
composition, If he had not opted composition he will be entitled to get
deductions of labour charges and tax will be charged only on the value of
transfer of property involved in the execution of WC.
What if X is RD/URD – No difference in tax liability of Sub Contractor.
Actual Deduction - Option
Project A - Financial Figures
Particulars
Sa l es
(Amt Rs . I n
Crores )
Eligible
Deductions
Income (Rs.) Exps (Rs.)
1000
Purcha s e
300
Sub-Contra ctor Exps
300 Sub-Contra ctor Exps
300
La bour Exps
100 La bour Exps
100
Admi n Exps
75 Admi n Exps -rel a ta bl e
to s uppl y of l a bour
10 Fi na nce Cha rges rel a ta bl e to s uppl y of
l a bour
50 Depreci a ti on - Pl a nt &
Ma chi nery
10 Profi t on La bour Rea s ona bl e
Ma na gement Es ti ma te
Fi na nce Cha rges
Depreci a ti on - Pl a nt
& Ma chi nery
Depreci a ti on Others
845 Tota l El i gi bl e Exps
1000
Deemed Sa l es /Ta xa bl e
Turnover
Ra te Wi s e Purcha s e
Cl a s s i fi ca ti on
Purcha s es Ta xa bl e
@ 5%
Purcha s es Ta xa bl e
@ 15%
Tota l
Les s : I TC
Admi s s i bl e
Net Ta x Pa ya bl e
Ra ti o
Ta xa bl e Turnover
bi furca ti on i n the
ra ti o of Purcha s es
40
10
50
75
575
425
Va t Pa ya bl e
200
66.67%
283.33
14.17
100
33.33%
141.67
21.25
300
100.00%
425.00
35.42
25
25
10.42
Standard Deduction - Option
Project A - Financial Figures
(Amt Rs . I n
Crores )
Particulars
Sa l es
Eligible
Deductions
Income (Rs.) Exps (Rs.)
1000
Purcha s e
300
Sub-Contra ctor
Exps
300 Sub-Contra ctor
Exps (Regd under
VAT Act
100 La bour Exps @
30% a fter
deducti ng s ub
contra ctor exps
75
La bour Exps
Admi n Exps
Fi na nce Cha rges
10
Depreci a ti on Pl a nt &
Ma chi nery
Depreci a ti on Others
50
845 Tota l El i gi bl e Exps
Deemed
Sa l es /Ta xa bl e
Turnover
Tota l
Les s : I TC
Admi s s i bl e
41 Net Ta x Pa ya bl e
210
10
1000
Ra te Wi s e
Purcha s e
Cl a s s i fi ca ti on
Purcha s es
Ta xa bl e @ 5%
Purcha s es
Ta xa bl e @ 15%
300
Ra ti o
Ta xa bl e Turnover
bi furca ti on i n the
ra ti o of Purcha s es
510
490
Va t Pa ya bl e
200
66.67%
326.67
16.33
100
33.33%
163.33
24.5
300
100.00%
490.00
40.83
25
25
15.83
Composition Scheme - Option
Project A - Financial Figures
Particulars
Income(Rs.) Exps (Rs.)
Sales
1000
Purchase
300
Sub-Contractor
300 Sub-Contractor Exps
Exps
(Regd under VAT Act
Labour Exps
100
Admin Exps
75
Finance Charges
10
Depreciation 50
Plant &
Machinery
Depreciation 10
Others
1000
845 Total Eligible Exps
Deemed Sales/
Taxable Turnover
(Amt Rs. In
Crores)
Eligible
Deductions Rs.
300
300
700
Vat Payable
4.20
Less : ITC
Admissible
Net Tax Payable
0
4.20
VAT Liability in Building
Construction
43
Tax liability of Builders as Works Contractor
K Raheja Development Corporation v State of Karnataka 141 STC 298
The Hon’ble SC while interpreting the definition of term works
contract as contained in Karnataka Sales Tax Act, held that, ‘works
contract’ has an inclusive definition which includes any agreement
for carrying out building for construction activity hence appellants
are owner to the extent that they have entered into agreement to
carry out construction activity on behalf of somebody else they
would be carrying out a ‘works contract’ and would become liable to
pay turnover tax on the transfer of property in the goods involved in
such works contract.
"2(1)(v-i) 'works contract' includes any agreement for carrying out
for cash, deferred payment or other valuable consideration, the
building, construction, manufacture, processing, fabrication,
erection, installation, fitting out, improvement, modification, repair
or commissioning of any moveable or immoveable property.
44
Larson & Toubro Ltd V/s. State of Karnataka
In Larson & Toubro Ltd. V/s. State of Karnataka ( 2008 17 VST 460
S.C.) the question was whether the appellant which was engaged in
property development involving construction and building of flats and
subsequent sale of completed flats would be liable to pay tax under the
KST Act, 1957.
The appellant had agreed to develop the plot. There were two agreements
1) Developments agreement between the owner of plot and the developer
and 2) Tripartite agreement between the owner of the plot, the developer
and the prospective buyer of the flat. Dept. relied on the decision of K.
Raheja took the view that appellant had constructed the flat on behalf of
prospective buyers. According to them it was not the development
agreement but the tripartite agreement that was the works contract.
Expressing the doubts on the ratio laid down by Raheja’s case the
Lordship referred the matter for reconsideration by larger bench as the
view if accepted than there would be no difference between works
contract and Sale.
45
Larson & Toubro Ltd (SC) 65 VST 1
“In the development agreement between the owner of the land and the
developer, direct monetary consideration may not be involved but such
agreement cannot be seen in isolation to the terms contained therein and
following development agreement, the agreement in the nature of the
tripartite agreement between the owner of the land, the developer and the flat
purchaser where under the developer has undertaken to construct for the flat
purchaser for monetary consideration. Seen thus, there is nothing wrong if
the transaction is treated as a composite contract comprising of both a works
contract and a transfer of immovable property and levy sales tax on the value
of the material involved in execution of the works contract. The observation
in the referral order that if the ratio in Raheja Development is to be accepted
then there would be no difference between works contract and a contract for
sale of chattel as chattel overlooks the legal position which we have
summarized above.”
Vide Para 111 in the case of L&T 65 VST 1. confirming Judgment in the case
of K Raheja Development Corporation v State of Karnataka 141 STC 298 on
which doubts were expressed in the judgement of Larson & Toubro Ltd. V/s.
State of Karnataka ( 2008 17 VST 460 S.C.)
Scope of Tax Planning in Works Contract
115. “It may, however, be clarified that activity of construction
undertaken by the developer would be works contract only from
the stage the developer enters into a contract with the flat
purchaser. The value addition made to the goods transferred after
the agreement is entered into with the flat purchaser can only be
made chargeable to tax by the State Government.”
117. “ …. If at the time of construction and until the construction
was completed, there was no contract for construction of the
building with the flat purchaser, the goods used in the
construction cannot be deemed to have been sold by the builder
since at that time there is no purchaser. That the building is
intended for sale ultimately after construction does not make any
difference.”
Observation of SC -Vide Para 115 and Para 117 in the case of L&T 65 VST 1.
TDS under Works Contract
48
Historical Background of TDS
Larson & Toubro Ltd v Commissioner Of Sales Tax Gujarat –124 STC 162
(Guj HC)
• TDS provisions - object to check evasion of tax
in case of WC.
• Gujarat High Court while examining the
constitutional validity of TDS provisions under
GST Act, declared the provisions of TDS as
ultravires the constitution of India.
• To overcome the said judgement, the TDS
liability on labour/import/OGS purchases/sales
were eliminated. TDS was made applicable only
on the material part transferred from contractor to
contractee
49
TDS Provisions under GVAT
Person responsible for payment of Specified Sale Price >Rs. 1 crore for works
contract is responsible for deduction of tax.
•TDS to be deducted only in the case of Specified WC.
•Specified WC means a WC the specified sale price of which > Rs. 1.00
Crore. Not Applicable on Inter-state WC
•Specified Sale Price means Contract Value less (1) labour charges in
relation to WC (2) price paid/payable for interstate /import purchases.
•No TDS is required to be deducted in pure labour jobs, even though a
condition for TDS is made in Contract. (30 VST 146 Jarnailsingh v BSNL,
P&H High Court)
•Contractor to give self declaration in Form 702 to contractee for
permissible deduction from WC turnover for TDS. (Permissible Deductions
are labour/interstate/import purchases)
•No TDS on amount paid to sub-contract as per section 59B(4) to avoid
multistage deduction. (ideally payment to sub-contractor should have been
covered as deduction in form 702)
TDS Provisions under GVAT
Liability for TDS arises on Payment and not on credit of any sum to the
contractor account.
TDS Rate :0.5% in the case of Processing of Polyester Textile fabrics
contract, 0.6% in Civil construction contract and 2% in other contracts.
Contractee is mandatorily required to obtain TAN No. Online from website in
Form 706 within 30 days, he become liable for TDS deduction and to give a
printed copy of application to JC office within 7 days of application.
Department will issue TDN Certificate in Form 707.
Pay TDS to Government treasury within 22 days from the end of the month
in which TDS is made in Form-207 and issue certificate in Form-703 Serially
and mechanically numbered original copy to the contractor and duplicate
copy should be retained by the contractee.
File a return within 30 days from the end of quarter in Form-704.
TDS deduction account to be maintained in Form 705.
Contractor to file Form 216A for claiming TDS credit the in Return.
TDS – Case Study
Mr. X a construction contractor has furnished following details to A Ltd.
Contractee for TDS under GVAT Act for the month of June 14.
(Rs. In Crore)
Contract Bill (passed for payment)
4.00
1. Price of goods sold in the course of inter state trade
or commerce for the execution of Works contract
0.20
2. Labour Charges
1.00
3. Price Paid/Payable on the goods purchased in
the course of inter state trade or commerce or
in the course of import for the use in the execution
of works contract
0.80
4. Payment to Sub Contractor
0.50
Compute TDS amount of Mr. X for June 14.
52
Works Contract and Input Tax
Credit under GVAT
53
WC and Input Tax Credit under GVAT
• ITC available on all inputs used in works contract subject
to fulfilment of conditions, except where contractor has
opted for composition scheme.
• Denial of ITC to Works Contractor
‒ OGS/Import/BT purchases
‒ Capital goods used in works contract
‒ Lease goods
‒ Goods purchased from Lump sum dealer
‒ Goods not connected with business
‒ Non Transferable Consumable Goods.
54
Inter State Works Contract
55
What is Inter-State Works Contract?
Inter-State WC is often confused as those contracts which are
carried out by a contractor having registered office in one state
and taking up project in some another state. The contractor in
such a case normally opts for VAT registration in the state
where the work is being executed. Hence the turnover for the
contract is offered to tax in the state where the work is being
done.
E.G. If a contractor X, having registered office in Maharashtra
get a project in Gujarat. he would be required to obtain
registration under GVAT. And the turnover for the project would
then be offered under GVAT.
Hence the contract as mentioned above is not a inter-state works
contract.
56
Inter-State Works Contract – Legal Provisions
•
Finance Act 2002, had made amendment in the CST Act 1956, to
include inter-state sales of goods involved in the execution of works
contract taxable from May 11, 2002

clause (ja) in Section 2 of the CST Act was inserted vide Finance Act
2005 defines work contract as:“A contract for carrying out any work – Which includes assembling,
construction, building, altering, manufacturing, processing,
fabricating, erection, installation, fitting out, improvement, repair or
commissioning of any movable or immovable property”.
•
Citus of taxation will come only when:
(a) Contractor executes works in another states and
57
(b) The property in goods passes from contractor to contractee either
by transfer of document of title to the goods when they are in
transit from one state to another or directly on their incorporation in
the works contract.
Essential Ingredients of Inter-State Works Contract
1. Two states involved, one where work is executed and
other from where goods are being transferred to be used
in WC
2. The transfer of goods takes place in pursuance of
contract for carrying out operations in WC
3. The goods as transferred from one state to another are
used as in the same form or condition in the execution
of WC
4. The tailor made goods being used for specific WC.
(Although not a strict rule, but practically this point
needs to be proved to the departmental authorities to
prove the element of inter-state WC)
58
Inter-State Works Contract-Explained
1. Transfer of goods for specific WC in pursuance of
contract received
A customer of Gujarat gives his own specification for the
pollution control equipments to manufacturer in
Maharashtra which thus become tailor made items and
which can only be installed at that customer’s premises in
Gujarat. In this case the sale would be deemed to have
occasioned in the course of inter-state WC, even if delivery
is taken by the Gujarat branch and kept at its premises for
some days. In such a case local Gujarat VAT is not to be
paid but CST in Maharashtra is payable
59
Inter-State Works Contract-Explained
2. Lumpsum transfer for various contracts to be executed in
another state
A dealer is engaged in the activity of supply and installation of
pollution control equipments, having the manufacturing plant in
Maharashtra & a branch at Gujarat. The supplier is in the regular
habit of supply of equipments for execution of jobs in Gujarat. The
goods are received by the Gujarat branch in the regular course and
not specifically for any of the jobs. – Not a ISWC – Local VAT
payable.
3. Transfer for use in manufacture of goods to be used in
execution of WC.
A contractor brings wooden slides to Gujarat from HO at Mumbai
and from the wooden slide contractor manufactured windows and
doors and used the same in execution of WC in Gujarat – Not a
ISWC – Local VAT Payable.
60
Case Study for Inter-State Works Contract
A company X is engaged in the business of manufacture,
supply and installation of lifts and elevators had its branch
office at Bangalore which procured orders from customers
in Karnataka. Lifts and elevators were manufactured in its
factory at UP according to the design and specifications of
the customers and the manufactured items after being
tested were dismantled and dispatched to the customers'
place in the State of Karnataka by way of stock transfers.
The works contract was executed by the branch office by
installation and commissioning of the lifts and elevators at
the customers' place.
Determine whether the above contract is interstate Works
Contract?
61
Case Study for Inter-State Works Contract
Hint : Merely, because the lifts and the elevators are installed and
commissioned in the State, it cannot be said that it is a local sale
exigible to levy tax under section 5-B of the Act on the ground that
the actual transfer of property used in the works contract took place
in the State of Karnataka
State of Karnataka and others vs. ECE Industries [(2006) 144 STC
605] Also refer, ECE Industries Ltd. vs State of Tamilnadu [2013]
66 VST 163 (Mad)
62
Case Study for Inter-State Works Contract
Suzlon Energy Ltd. (SEL) was having a unit manufacturing wind
mills at Diu in (UT) registered under the sales tax law applicable to
Diu. SEL was also registered dealer under the GST/CST Act having
Sales Office at Ahmedabad. SEL had installed 4 wind mills as per
the order of IPCL, in Gujarat. The works was relating to sale,
erection and commissioning as per the Purchase Order. The wind
mills were specifically manufactured at Diu and consigned to IPCL
by way of sale. Thereafter, erection and commissioning was done
through sub contractor.”
During assessment proceeding the STO took a view that since the
works contract as aforesaid was executed by the SEL in the state of
Gujarat. The property in goods was transferred to IPCL in the state
of Gujarat and therefore there was deemed local sale in respect of
the goods, taxable under the GST Act.
Whether AO was justified?
63
Case Study for Inter-State Works Contract
Hint : There was no local sale or deemed sale in respect of
the goods used for erection of the said wind mills.
Required materials and parts of wind mill were sold to
IPCL by way of inter state sales as the movement of the
goods occasioned on account of WC between SEL &
IPCL.
The only process undertaken by SEL was the process of
assembling different parts. This being inter state sale of
goods, there was no sale of goods in Gujarat
Suzlon Energy Ltd v State of Gujarat-2009-GSTB-I-214
64
Calculation of Sale Price under
CST Act.
65
Sale Price of WC under CST Act?
 Proviso to Section 2(h) of the CST Act provides the
meaning of sale price as under:‘sale price’ in relation to transfer of property in goods
(whether as goods or in some other form) involved in the
execution of a works contract, shall be determined in the
prescribed manner by making such deduction from the
total consideration for the works contract as may be
prescribed and such price shall be deemed to the sale
price for the purpose of this clause.
 However no deductions has been prescribed under the
CST Act .
66
Sale Price of WC under CST Act?
 Sec 8A of the CST Act does not prescribe any mechanism to
determine the turnover in case of a works contract.
 Sec 13(1)(aa) of the CST Act empowers the Central Govt. to
make rules providing for “the manner of determination of the
sale price and the deductions from the total consideration for
a works contract under the proviso to Section 2(h)”.
 No rules has been framed by the Central Govt. in this regard.
 Sec 13(3) of the CST Act empowers the State Govt. to make
Rules, not inconsistent with the provisions of this Act and the
Rules made under sub-section (1), to carry out the purpose of
this Act.
 No specific rules has been framed by the State Govt. in respect
of inter-state works contract.
67
Sale Price of WC under CST Act
Supreme Court judgment in the case of “M/s. Mahim Patram
Private Limited v. Union of India 6 VST 248 wherein it is held
that local VAT law should be applied for calculating turnover of
WC under CST Act. (Also Refer Commercial of VAT New Delhi
v. State of Haryana 23 VST 10 (CSTAA)).
 Brief facts of the case:• Appellant was engaged in the printing of question papers for
various universities and boards situated outside the State of
Uttar Pradesh;
68
•
As the goods have moved from one State to another, it was an
inter-state works contract;
•
The appellant had contended that in absence of the provisions
for determining the ‘sale price’; taxable turnover cannot be
computed under Section 8A and CST cannot be levied.
Rate of CST on Interstate WC
 Section 8 of the CST Act provides the following rates in
case of an inter-state sale
• If sale is made to a RD against Form ‘C’ – 2%
• If sale is made to a RD/URD without form ‘C’ – Local
Rate applicable.
69
Benefits of claim of Inter-State Works Contract
Why is it advisable to offer a sale transaction as Inter-state
Works Contract rather than sale under local VAT Act in the
state where the project is executed?
•To avail Input Tax Credit on goods used in ISWC.
•Rate of CST is 2% which would always be lesser as
compared to local VAT rate
ISSUE - Whether the client would accept a separate invoice
for sale occasioned in the course of the works contract, when
there is a composite/indivisible works contract.
Opinion - If the sale is foreseen in advance, there can be a
separate terms for major items to be used in WC which is
advisable and adequate convincing records be kept.
70
Composition schemes under
GVAT Act
71
Optional Scheme for Composition of Tax on
Works Contract–Sec 14A
• This is optional Scheme in lieu of tax payable under normal VAT
Provisions
• Composite Tax is payable on entire sale price, No Labour Charges
deduction is available.
• Prevailing composite tax rates are as under
• 0.50% of total value of Works Contract in case of processing of
polyester textile Fabrics including bleaching, dyeing and printing
thereof
• 0.60% of total value of prescribed construction Works Contracts.
• 2.00% for All other kinds of works contracts.
• Conditions
• Dealers are not entitled to ITC
• Cannot issue Tax Invoice/cannot collect VAT
• PT is payable on URD Purchases U/s. 9(1) and also PT U/s. 9(3)
Prakash Thakkar & Co.
Composition of Tax on Works Contract – Section
14A
• Composition Tax – Qua Contract
• Procedure – Application is to be made for each contract separately
in Form 214, within 30 days from the beginning of the contract.
• Permission in Form 215 in respect of the contracts for which
option to pay composition money is exercised and such
permission shall be effective from the date of the beginning of the
contract and till its completion.
• Conditions – W.e.f from 11-10-2006
• From 11-10-2006 OGS/import purchases or BT/Consignment
of Goods from outside of state is not permitted.
• Goods consumed must have suffered tax under VAT Act
• RM for paver blocks used in WC Purchased from RD- Composition
benefit allowable. (Gujarat VAT Tribunal in the case of Super Tiles &
Marbles P Ltd)
• ITC claimed on Stock if any, has to be reversed by the dealer
Composition of Tax on Works Contract – Section
14A
• Composition Tax Qua Financial Year
• Works contractor engaged in Tyre Retrading,
Vehicle Repairing, Printers etc can get permission
for composition of tax for a Financial year
• Newly registered dealers to apply for composition
within 90 days from the date of the effect of such
registration to Jurisdictional CTO in Form 214A and
permission shall be granted within 15 days in Form
215A. Whereas already Registered Dealers to apply
for composition within 30 days before the
commencement of the year.
75
CA Prakash B Thakkar, FCA, DISA (ICA)
M/s. Prakash Thakkar & Co., Chartered Accountants
202, Mangaldhara Complex, 83, Sampatrao Colony,
RC Dutt Road, Vadodara-390007
(O) 0265-2351253/54, (M) 9898061675
Email: [email protected]

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