Indirect Taxation of Works Contract in India


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This presentation has been given at various forums focusing on indirect taxation aspects of Works Contracts, mainly covering Service and VAT.

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Indirect Taxation of Works Contract in India

  1. 1. 1<br />Works Contract<br />
  2. 2.
  3. 3. Problem given to Jinee<br />
  4. 4. 20 August 2011<br />4<br />Contents<br />Constitutional provisions<br />What is works contract <br />Works contract back-ground<br />
  5. 5. 20 August 2011<br />5<br />Constitutional Provisions<br />Article - 246<br />Schedule VII<br />List-1 (Union List)<br />Entry 92-A<br />LIST- 2 (State List)<br />Entry 54<br />Taxes on the Sale or Purchase of goods other than news papers. Where such sale or purchase takes place in the course of inter-state trade or commerce.<br />Taxes on the Sale or Purchase of goods other than news papers, subject to provisions of Entry 92 A of List 1<br />
  6. 6. Supreme Court in a very old case of State of Madras v. Gannon Dunkerley & Co. held that<br />No tax can be levied on Works Contract<br />No sale of goods involved in movable form<br />
  7. 7. Constitutional Amendment<br />46th Amendment made to the Constitution from February 2, 1983<br /> Outcome of the above:<br /><ul><li>Permitted the States to levy tax on the Sale of goods involved in execution of all work contract.
  8. 8. States have been given power to separate the contract between work and the labour and services
  9. 9. Identifying whether the goods retained their original identity after the work was executed or had been merged, integrated or becoming part and parcel of the works, buildings etc.</li></ul>All the States to power under this Constitution Amendment and made Amendments in their respective Sales Tax Law to levy tax on such sale either by making separate legislation or by amendment in existing sales tax law<br />7<br />
  10. 10. 20 August 2011<br />8<br />What isWorks Contract ?<br />46th amendment to the constitution does not provide any definition of works contract.<br />Works Contract is generally defined under CST and various State Acts, as:<br /> “Works Contract means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property.”<br />Predominant intention of the parties to the contract is not to sale or purchase the goods but to carry out certain work for a lump sum price <br />
  11. 11. The works contracts are not normal sales. <br />For example, at the site of construction of a building, before the Construction (works contract) commences, the goods like cement, steel, sand etc. are lying but after the Construction a building (immovable goods) comes to an existence. This is the difference between the ` Normal” sale and the “deemed sale” in the indivisible works contract .<br />
  12. 12. Basic Sale of Goods vis-à-vis Works Contract <br />Also works contract per se, does not include transfer of goods<br />10<br />
  13. 13. VAT – The Three words which have really tormented the contractors<br />Contractor<br />
  14. 14.
  15. 15. Registration Requirement<br />REGISTRATION:<br />Turnover Threshold – <br />Casual dealer<br />or auctioneer Turnover of taxable sales of Rs.10,001 or more.<br />All Others Total Sales or Purchase turnover of Rs.5,00,001 or <br /> more <br /> AND turnover of taxable goods of Rs.10,001 or <br /> more.<br />
  16. 16. VAT Basics<br />Different acts for different states<br />VAT a cost to most clients unlike service tax<br />VAT is payable in all Works Contracts which involve transfer of property in goods. <br />Since the value of the Contract is indivisible, various issues are involved with respect to offering the VAT Liability.<br />
  17. 17. Valuation Options under VAT<br />
  18. 18. Valuation options under <br />Works Contract<br /><ul><li>Composition
  19. 19. Actual Labour</li></ul>deduction <br /><ul><li>Standard Labour</li></ul> deduction <br />
  20. 20. Basic Modes available in each state:-<br />Composition – Pay flat rate of tax on the turnover towards civil contracts, for e.g. 0.60% in Gujarat (No out-state purchases allowed), 4% in Orissa, 3% in Rajasthan, 2% in Madhya Pradesh. Advisable in case of Turnkey Contracts with significant material portion.<br />Actual – Identify the material consumed against the Running Account Bills raised during the period. Advisable when major materials like Cement / Steel are being supplied by the client.<br />For Ex. Value of Work is Rs. 20 Crores. <br /> Expected cost of Transferable materials (VAT Rate – 4%) is 4 crores. <br /> GP Rate is expected to be 20%.<br />VAT under Composition (M.P) – 2% of Rs.20 cr = Rs. 40 Lacs<br /> under Normal Scheme – 4% of (Rs 1 cr) = Rs. 4 Lacs<br />Where 1 cr is the allocable GP to Transferable Purchases <br />
  21. 21. 20 August 2011<br />18<br />Supreme Court Judgement in the case ofGannon Dunkerley & Company (88 STC 204)<br />Total Contact Value : xxxxx<br /> Less : Prescribed deductions: <br /> a) Labour charges for execution of Works Contract xxxxx<br /> b) Amount paid to sub-contractor for labour and services xxxxx<br /> c) Charges for planning, designing & Architect’s fees xxxxx<br /> d) Charges for acquiring machines, tools etc. on hire or xxxxx<br /> otherwise <br /> e) Cost of consumable in which property does not pass <br /> to contracteexxxxx<br /> f) Cost of establishment relating to supply of labourxxxxx<br /> and sevices<br /> g) Other expenses relating to supply of labour and services xxxxx<br /> h) Profit of contractor relating to labour & services xxxxx<br /> -----------<br /> BALANCE = Taxable Amount xxxxx<br /> ----------- <br />
  22. 22. Regular Mode<br />The practical scenario is not so easy. In an unorganised sector, it is very difficult to obtain the relevant details.<br />Since the Sales Invoices are raised on a progressive basis, the VAT liability also has to be discharged on a progressive basis. <br />Identification of material transferred in each of the sales invoices is required. But which is a big task if the inventory has not been maintained in order.<br />Further if you are working with a client like Reliance, when you have 10-12 orders from 10-12 different group companies for the same plant, the situation can be very tricky.<br />Bifurcation of material into transferable and non-transferable may not be easy.<br />
  23. 23. Basic Step is to sit with the Site Engineer and bifurcate all the purchases into Transferable and Non-Transferable. For Ex- Wooden Materials which are used for Shuttering activity, are not transferred to the client and are consumed and booked as “Consumables, Stores and Spares”. <br />You can then mark up the Purchases of Transferable with GP rate and offer the relevant rate on a monthly basis. <br />
  24. 24. Calculation sheet<br />Further you need to make sure that Non-Transferable Purchases of Rs. 40 has been Shown under the Head of Consumables, Stores and Spares in P&L Account. <br />
  25. 25. Calculation of Sale Price of Works Contract <br />Composition Scheme – For contractors who do not wish to pay tax based on the specific formula or after considering the lump sum deductions<br /><ul><li>Rate of tax is 0.6% or 2% of the total contract value as under:</li></ul> 0.6%- Construction contracts relating to roads, buildings, <br /> bridges, pipeline laying, dams, etc.<br />2% - Other contracts including contracts for erection, <br /> installations etc.<br /><ul><li> Restrictions:
  26. 26. ITC not available on purchases
  27. 27. Contractor not eligible to issue VAT Invoice and also can not charge tax in the invoice - Therefore, no ITC is available to the employer
  28. 28. Cannot import goods on interstate basis or branch transfer basis</li></li></ul><li>Composition for Turnkey Contracts –<br />Composition for Certain Sections<br />Composition for Certain Line Items<br />Composition by splitting up value on the basis of separate working<br />
  29. 29. Types of composition<br />For complete contract <br />within 30 days of commencement of Work<br />For Complete year<br />Application within 30 days of commencement of Work<br />No condonation for delay – Matter Pending before Tribunal<br />Non receipt is assumed as granted<br />
  30. 30. Deduction in composition scheme - <br />Deduction of amount of entire sub-contract shall be made, if any<br /> - If under complete composition then even for unregistered contractors deduction is available<br /> - If composition contract to contract then only for registered sub- contractors. <br />No Labour deduction in Works Contract, if composition is opted<br />?<br />
  31. 31. Conditions for the composition Scheme:-<br />Dealer must be Registered Dealer<br />Conditions attached to Tax credit depending on state to state<br /> Tax Invoice shall NOT be issued to the client<br /> Tax shall NOT be charged from the client<br /> Conditions attached with regard to making Interstate / OGS Purchases<br />?<br />?<br />
  32. 32. 20 August 2011<br />27<br />TAXABILITY UNDER COMPOSITION METHOD<br />
  33. 33. Continued…<br />Once Application for composition is made and is not rejected by the department, the acceptance is presumed .<br /> Option shall be final and is IRREVOCABLE. <br /> (Rule 28(8)(i) )<br />Suggestion –<br /> 1. If you are applying a fresh registration, then its advisable to apply for composition at the same time. (Permissible period of 90 days is likely to lapse)<br /> 2. OGS items as Free Supply from the contractee.<br />?<br />
  34. 34. When no records are maintained<br />Adhoc deduction is available in each of the state – <br />In Gujarat under Rule 18AA specifies the rate of deduction<br />
  35. 35. Calculation of Sale Price of Works Contract<br />Indivisible Contract – in case separate books of A/c’s are not maintained – Lump sum deductions are allowed <br />30<br />
  36. 36. Whether Sub-Contractors are liable to VAT?<br />
  37. 37. 20 August 2011<br />32<br />Client’s material<br />Client can issue his material for use in execution of works contract awarded to the contractor where:<br /> a) Material can be issued as free supply not resulting in either recovery or<br /> sale to contractor or<br /> b) Material can be supplied on recovery basis or can be sold to the<br /> contractor .(N.M. Goel 72 STC 368 (SC) )<br />Value of material supplied not resulting in either recovery or sale, is outside the scope of works contract turnover and hence not liable for tax.<br />Value of material supplied on recovery basis or sold to the contractor will be included in the scope of works contract turnover and hence liable for tax <br />
  38. 38. 20 August 2011<br />33<br />Terms of Contract - Client’s material<br />To avoid litigation and tax being levied on value of the clients material, the dealer should ensure to incorporate the following clauses in the contract. <br /> a) The employer to issue his material free of cost..<br /> b) The free issue material supplied by the employer shall be held in the custody of the<br /> contractor as bailee.<br /> c) Contractor to provide periodical statement of reconciliation.<br /> d) The material in possession of the contractor shall not be diverted for any other use <br /> e) The cost of the free issue material supplied by employer will be outside the scope of<br /> contract and shall not be the part of consideration to be paid to the contractor. <br />
  39. 39. VAT – Input Tax Credit<br /><ul><li>ITC available on all inputs used in works contract other than composition method subject to fulfilment of conditions
  40. 40. Broad Restrictions on ITC:
  41. 41. CST purchases
  42. 42. Capital goods used in works contract – Some of the States
  43. 43. Lease goods
  44. 44. Goods purchased from Lump sum dealer
  45. 45. Goods not connected with business
  46. 46. Vehicles, equipments, accessories or spare parts
  47. 47. Fuel used in motor vehicles
  48. 48. Goods used as fuel in generation of electrical energy</li></li></ul><li>Is VAT applicable to Builders / Developers?<br />VAT<br />
  49. 49. When is a job established as a Works Contract – <br />FACTS IN THE CASE OF SUPREME COURT JUDGEMENT<br />OF K. RAHEJA DEVELOPMENT CORPORATION<br /><ul><li>Appellants were carrying on business as real estate developer.
  50. 50. They entered into Development agreement with owners of land.
  51. 51. The agreement was for carrying out construction on behalf of somebody else. </li></li></ul><li>Facts Contd….<br /><ul><li>The land owner transferred only the ownership of land to the purchaser and the appellant transferred structure by a separate agreement for construction.
  52. 52. The appellants were carrying out construction as developers for the prospective purchaser.
  53. 53. Agreement entered into before the completion of the unit, was considered as Works Contract.
  54. 54. Agreement entered into after the flat or unit already constructed would not be within the ambit of works contract.</li></li></ul><li>On the basis of K Raheja, can we say that all builders are liable to VAT?<br />
  55. 55. Latest……<br />However Supreme Court on Aug 19, 2008 has referred the judgment for reconsideration to a larger bench considering the Writ Petetion filed by L&T on the count that the judgement has adversely affected the entire construction industry.<br />
  56. 56.
  57. 57. A small e.g. for Builders<br />
  58. 58. TDS Rate under GVAT<br />Person responsible for payment exceeding Rupees 1 crore for<br /> works contract is responsible for deduction of tax at prescribed rates <br />?<br />
  59. 59. Some Tips :-<br />Free Supply vs Price Deduction by Contractee<br />If the client in his WO mentions VAT – Extra, WCT – Extra<br />Unregistered sub-contractor is making any taxable purchases, <br />Compare outstate suppliers’ with CST rates with the Gujarat suppliers’ before & After VAT rate.<br />In case of stock transfer, if VAT reversal rate comes more than 2% go for CST sales in place of stock transfer.<br />VAT on Concrete is 15%, but VAT on Sand/Aggregate is 5%, so what you transfer is important. – Cement is Free issue.<br />?<br />
  60. 60. Back to Back Contracts<br />L&T Judgement – <br />Property passes on from the Sub-contractor to the Client and contractor is just an agent.<br />Impact - <br />Mr X has awarded contract to Mr Y at Rs.100 cr.<br />Mr Y has sublet the complete job to Mr Z at Rs.80 cr.<br />Mr Y does not need to pay any tax on the portion of Rs.20 cr as there is no element of transfer of property as per Sale of goods Act.<br />Suggestion – Projects with huge margins can be subletted to any sister concern to reduce VAT implications.<br />?<br />
  61. 61. Any queries on VAT<br />
  62. 62.
  63. 63. [Service Tax]<br />pptPlex Section Divider<br />The slides after this divider will be grouped into a section and given the label you type above. Feel free to move this slide to any position in the deck.<br />
  64. 64. Basics <br />Service Tax Applies to whole of India except J&K.<br />Normal rate of Service Tax is 10.3%<br />Service Provider is normally the person liable to pay service tax upon crossing the turnover of Rs. 10 Lacs p.a.<br />Service tax is to be deposited only when payment is received.<br />Export of services is exempted for payment of service tax.<br />
  65. 65. Applicable rates<br />Period Rate<br />Upto 13.05.2003 5%<br />14.05.2003 to 09.09.2004 8%<br />10.09.2004 to 17.04.2006 10.20%<br />18.04.2006 to 10.05.2007 12.24%<br />11.05.2007 to 23.02.2009 12.36%<br />24.02.2009 onwards 10.30%<br />
  66. 66. Centralised Registration<br />Object – Several Premises for rendering services.<br />Optional<br />CCE grants the registration<br />Centralised Billing / Centralised Accounting<br />Zonal Centralised Registration<br />Modification<br />Concept of Input Service Distributor<br />Advantages<br />Time<br />No information to any other jurisdiction<br />Audit / Correspondence at one place<br />
  67. 67. Option for Discharge of ST<br />
  68. 68. Availment of Cenvat Credit under different schemes<br />Concept of Sold vs Consumed<br />
  69. 69. Introduction of Works Contract service from 2007……<br />Why?<br />
  70. 70. Rule 2A of the Valuation Rules under Work Contact Service<br /> As per Rule 2A(1) of Valuation Rules, the value of the works contract services is equivalent to the gross amount charged for works contract less the value of transfer of property in goods involved in the execution of works contract<br />For this purpose Gross amount shall not include VAT or Sales Tax<br />Value shall include the following:-<br />Labour Charges for the execution of the works<br />Amount paid to the sub contractors for labour and services<br />Charges for planning designing and architect’s<br />Charges for obtaining machinery, tools etc whether on hire or otherwise for the execution of the works contract<br />Cost of consumables such water electricity fuel etc used in theexecution of works contract<br />Cost of establishment of the contractor relatable to supply of labour and services<br />Other similar expenses relatable to supply of labour and services and<br />Profit earned by the service provider relatable to supply of labour and services<br />
  71. 71. Issues in Work Contract Service<br />Contractors not paying service tax prior to 1-6-2007<br />Daelim Industrial Co. Ltd<br />Diebold Systems (P) Ltd<br />URC Construction (P) Ltd <br />vs<br />B Rama Rao & Co. – Bang CESTAT<br />CCE vs BSBK – Delhi CESTAT (overruled Daelim)<br />Instrumentation Ltd – Delhi CESTAT<br />
  72. 72. Issues in Work Contract Service<br />Ongoing Works Contract as on 01-06-2007<br />Recent circular in response to the representation made by M/s Jaiprakash Associates.<br />Under which service category should civil contractors register themselves ?<br />
  73. 73. Budget Amendments 2011<br />Goods / Service that shall not constitute input - Any goods / services used for construction of a civil structure unless it is provided by a sub-contractor to the main contractor.<br />Similarly the definition of exempted services shall include taxable services which are partially exempted with the condition that no credit of input and input service shall be availed. Moreover it has been clarified that exempted service will include trading service. <br />38.1 A tariff rate of 5% excise duty is being prescribed on Ready-mix concrete (RMC). However these goods would attract the concessional 1% duty without CENVAT credit facility. <br />
  74. 74. Budget Amendments 2011<br />The Works Contract Rules, 2007 have been amended <br /> To provide for restriction in availment of CENVAT credit to 40% of service tax paid on services relating to erection, commissioning and installation services, commercial or industrial construction services and construction of residential complex services in case service tax has been paid, without availing the abatement benefit under notification 1/2006.<br />
  75. 75. Pain of Taxation Rules<br />Rule 3 has been amended to provide that the point of taxation shall be as follows:<br /> (a) Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 14 days from the date of completion of the provision of service.<br /> (b) Date of completion of the provision of service or payment, if the invoice is not issued within the prescribed period as above.<br />No provision for Bad Debt – It only mentions if amount is refunded when service is not provided.<br />
  76. 76. Pain of Taxation Rules<br />Cenvat Credit shall be allowed on booking basis, provided payment is made in 90 days.<br />Concept of CSOS – Contract Exceeds 90 Days – <br /> Point of Taxation shall be the date of completion of the specified event stated in the contract which obligates payment.<br /> For example, in the case of construction services if the payments are linked to stage-by-stage completion of construction, the provision of service shall be deemed to be completed in part when each such stage of construction is completed.<br />Existing contracts to be covered under POT Rules from 1st July, 2011.<br />
  77. 77. Construction of complex services <br />
  78. 78. Chronology of Judgements<br />Karnataka High Court - K Raheja - 2006<br />Allahabad HC - Assotech Reality – 2008 (Set Aside by SC)<br />Advance Ruling – Hare Krishna - 2008<br />Guwahati HC – Magus Construction Pvt Ltd – 2008<br />CBEC Circular Dated 29.1.2009<br />
  79. 79.
  80. 80. Service tax levied on consideration earned by developer<br />• Prior to amendment in 2010, concept of ‘self-service’ existed<br />“construction of a complex (a new building) - intended for sale, -before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder before the grant of completion certificate by the competetent authority) shall be deemed to be service provided by the builder to the buyer”<br />Abatement scheme for builders also introduced.<br />Option to pay Service tax at the applicable rate on 25% of the Agreement value, provided no deduction of land is availed and no CENVAT credit is claimed<br />
  81. 81.
  82. 82. Other points – Con. Of Complex<br />Parking Slots  or Garage of Properties - Along with the apartment or flat, builders also sell parking slots to buyers. No service tax would be applicable for the amount paid for such parking slots.<br /> <br />Preferential Location Services - Builders many times will build internal roads, pavements, or maintain gardens for the development of the property complex. Such services would attract a service tax. Also any additional amount paid for a floor rise, an apartment with a specific number or a specific direction, apartment facing either a park, pool or sea , would cost the buyer a service tax.<br />Low Cost Housing Segment - In recent months, the real estate industry has developed various affordable properties worth less than Rs 20 Lakhs for the lower and middle income group. Properties belonging to this low cost housing segment would be exempt from service tax.<br />
  83. 83. Exemptions under Service tax for the construction sector<br />SEZ<br />Export of services<br />Road (Repair?)<br />Airport<br />Port<br />Bridges, Tunnels, Railways<br />Services to government<br />
  84. 84. Whether Sub-Contractors are liable to service tax?<br />
  85. 85. Giving both taxable and exempt services – <br /><ul><li>Either Maintain Separate Books of Accounts for taxable and exempt services</li></ul> OR<br /><ul><li>Pay 5% of value of exempted servicesOrPay an amount equivalent to Cenvat Credit attributable to input services used in relation to providing exempt services. </li></ul> Once an option is exercised it shall remain so during the year. If you wish to avail the option in red, you need to intimate the same to the dept. in specified format.<br />
  86. 86. At this Point in time, the question is whether the charge of VAT and service tax shall be overlapping.<br />The matter to a certain extent has been settled by the SC Judgement in IMAGIC CREATIVE PVT LTD Vs COMMISSIONER OF COMMERCIAL TAXES Appeal (civil) 252 of 2008 wherein it has been held <br />“28. Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided.“<br />
  87. 87. “They are deciding, what to pay – VAT or Service Tax”<br />
  88. 88. Any Queries on Service Tax<br />
  89. 89. Goods & Services Tax(GST) • Indicated roll-out date is April 1, 2011<br />73<br />
  90. 90. The Gist of Proposed GST: Taxes to be subsumed <br />Central Levies <br />State Levies <br />• Value added tax <br />• Excise duty <br />• Entertainment tax <br />• Additional excise duties <br />• Luxury tax <br />• Excise duty under Medicinal and <br />• Tax on lottery, betting & gambling <br />Toiletries Preparation Act <br />• Entry tax <br />• Service tax <br />• Additional and special additional <br />• Surcharges and cesses <br />customs duties <br />• Surcharges and cesses <br />Central GST <br />State GST <br />74<br />
  91. 91. 75<br />