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Vat on works contract

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This presentations discusses the finer aspects of how VAT was being levied on Works contract. And the controversies related to the judgement of Gannon Dunkerly, options available for deductions under …

This presentations discusses the finer aspects of how VAT was being levied on Works contract. And the controversies related to the judgement of Gannon Dunkerly, options available for deductions under VAT for composite contracts

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  • Request- Kindly send me this ppt at ritesh17jan@gmail.com
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  • In Odisha Composition is availaible for a period of three consecutive years as per Rule 8(4).

    Exact wordings of Rule 8(4) - An option once exercised shall remain valid for a period of three consecutive years unless one or more of the conditions specified in sub-rule (1) is satisfied at any time during the three years referred to above:

    Sub-Rule 1 - [(1) A dealer executing works contract shall be eligible to pay tax by way of composition in the manner set out in the following sub-rules, in lieu of tax payable under clauses (a) of section 9, subject to the following conditions and restrictions:
    (a) he shall not purchase or sell goods in course of inter-State trade or commerce;
    (b) he shall not dispatch goods to or receive goods from, outside the State, otherwise than by way of sales or purchases, as the case may be; and
    (c) he shall not import goods from or export goods to, outside the territory of India.
    (d) he shall not undertake any business other than execution of works contract]

    Sub-contractor can Issue Tax Invoice and pass the ITC.

    Composition dealer cannot avail ITC as per Section 20(8)(l). But no restriction is placed for ITC availment if selling dealer opts for Composition.

    But for claiming ITC Tax Invoice is needed Section 20(6) and further no restriction is placed for Composition dealer to issue Tax Invoice.
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  • Dear Sir,

    We are on non composition scheme of WCT at odisha. our Sub Contractor is on composition scheme and got permission in form 602. They have one supply item on which we are paying tax in regular method. Can we ask sub contractor to submit a tax invoice for supply part separately and take input credit on the same. If there any such format available. KIndly advise.

    U. Srinivas Kumar.
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  • You have to find actual labour cost and material and arrive at proportion for material and labour. The said proportion should be applied to your turnover to arrive at the value liable to material and labour for the purpose of charge of VAT and service tax. Or else you may go for composition schemes under VAT and service tax for simplified working. For other details write to us at info@consultconstruction.com
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  • i raised a bill in trunkey project in interior decoration of material plus labour bill when in the gujarat state which amount in applicable for vat & which amount is applicable for service tax. suppose i raised a bill of material and labour of Rs. 500000/- [which amount is applicable for vat & which amt in applicable for service tax]
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  • 1. info@consultconstruction.comwww.consultconstruction.com 1
  • 2. Taxation Central State Government GovernmentDirect Taxes Indirect Taxes Indirect Taxes Goods – VAT, Octroi, Excise/CST/Cu Service Tax Luxury Tax, stoms Entry Tax info@consultconstruction.com www.consultconstruction.com
  • 3. • Problem given to Jinee info@consultconstruction.com www.consultconstruction.com
  • 4. Contents• Constitutional provisions• What is works contract• Works contract back-ground info@consultconstruction.com21 August 2011 www.consultconstruction.com 4
  • 5. Constitutional Provisions Article - 246 Schedule VII List-1 (Union List) LIST- 2 (State List) Entry 92-A Entry 54Taxes on the Sale or Purchase Taxes on the Sale or Purchaseof goods other than news of goods other than newspapers. Where such sale or papers, subject to provisionspurchase takes place in the of Entry 92 A of List 1course of inter-state trade orcommerce. info@consultconstruction.com 21 August 2011 www.consultconstruction.com 5
  • 6. • Supreme Court in a very old case of State of Madras v. Gannon Dunkerley & Co. held that – No tax can be levied on Works Contract – No sale of goods involved in movable form Works Contract to avoid Sales Tax info@consultconstruction.com www.consultconstruction.com
  • 7. Constitutional Amendment46th Amendment made to the Constitution from February 2, 1983 Outcome of the above: • Permitted the States to levy tax on the Sale of goods involved in execution of all work contract. • States have been given power to separate the contract between work and the labour and services • 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. 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 info@consultconstruction.com 7 www.consultconstruction.com
  • 8. What is Works Contract ?• 46th amendment to the constitution does not provide any definition of works contract.• Works Contract is generally defined under CST and various State Acts, as: “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.”• 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• Poser 1 info@consultconstruction.com21 August 2011 www.consultconstruction.com 8
  • 9. Petitioners had relied on the following rulings in support of their plea that there is no transfer of property in ink and consumables in the jobs of printing in the contracts which were service contracts and passing of property if any is merely incidental and not intended at all:• R.M.D.C. Press (112 STC 30)• M/s. Rainbow Colour Lab & Others (118 STC 9 S.C.)Respondents on the other hand had relied on the following judgments:• Sarvodaya Printing Press vs. State of Maharashtra (93 STC 387) as approved by the Supreme Court — There is transfer of property in ink.• Associated Cement Companies Ltd. vs. Commr. of Customers (124 STC 59) — Rainbow Colour Lab is no more good law• Matushree Textiles Ltd. (132 STC 539) — Transfer of property in colours and chemicals in the changed form of shade in the job of printing and dyeing of cloth. info@consultconstruction.com www.consultconstruction.com
  • 10. • The works contracts are not normal sales.• 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 . info@consultconstruction.com www.consultconstruction.com
  • 11. Basic Sale of Goods vis-à-vis Works Contract Sale of Goods Works ContractTaxed as actual Sale : Seller & Buyer Taxed as Deemed Sale : Contractor & ContracteeAbsolute property of the maker when In WC, it is never an absolute propertyproduced / manufactured. Later on sold of the maker.to buyerThe sale is ‘chattel as a chattel’ i.e. In WC, article produced becomes the‘goods’ are sold as ‘goods’ property of buyer without first becoming property of the maker.Primary function - supply of materials Primary function - work and labourIncidental - work or service Incidental - materials are suppliedTDS provisions are not applicable TDS provisions are applicableAlso works contract per se, does not include transfer of goods info@consultconstruction.com 11 www.consultconstruction.com
  • 12. VAT –The Three words which have really tormented the contractors Contractor info@consultconstruction.com www.consultconstruction.com
  • 13. info@consultconstruction.comwww.consultconstruction.com
  • 14. Registration RequirementREGISTRATION:Turnover Threshold –Casual dealeror auctioneer Turnover of taxable sales exceeding Rs.10,000All Others Total Sales or Purchase turnover of more than Rs.5,00,000 AND turnover of taxable goods exceeding Rs.10,000 info@consultconstruction.com www.consultconstruction.com
  • 15. • Poser - 2 info@consultconstruction.com www.consultconstruction.com
  • 16. Types of contract • Supply of Materials and Labour – Works Contract (e.g. Construction of a building, roads, bridges, dams etc.) • Supply of labour and supply of materials is incidental to the contract – Not a Works contract (e.g. Cleaning, overhauling, lubricating, greasing of an old machinery etc.) • Pure Labour Contract – may involve materials for executing contract – Not a Works contract (e.g. Semi-finished material supplied to Job-worker for further processing, tailor doing stitching work) –Poser 3 info@consultconstruction.com www.consultconstruction.com
  • 17. VAT Basics• Different acts for different states• VAT a cost to most clients unlike service tax• VAT is payable in all Works Contracts which involve transfer of property in goods.• Since the value of the Contract is indivisible, various issues are involved with respect to offering the VAT Liability. info@consultconstruction.com www.consultconstruction.com
  • 18. Valuation Options under VAT info@consultconstruction.com www.consultconstruction.com
  • 19. Valuation options under Works Contract• Actual Labour • Composition deduction • Standard Labour deduction info@consultconstruction.com www.consultconstruction.com
  • 20. • Impact of exercising an option can be significant. info@consultconstruction.com www.consultconstruction.com
  • 21. • Basic Modes available in each state:- – 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. – 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.For Ex. Value of Work is Rs. 20 Crores. Expected cost of Transferable materials (VAT Rate – 4%) is 4 crores. GP Rate is expected to be 20%.VAT under Composition (M.P) – 2% of Rs.20 cr = Rs. 40 Lacs under Normal Scheme – 4% of (Rs 1 cr) = Rs. 4 LacsWhere 1 cr is the allocable GP to Transferable Purchases info@consultconstruction.com www.consultconstruction.com
  • 22. • One of the paths is taking actual deductions…. info@consultconstruction.com www.consultconstruction.com
  • 23. Supreme Court Judgement in the case of Gannon Dunkerley & Company (88 STC 204) Total Contact Value : xxxxx Less : Prescribed deductions: a) Labour charges for execution of Works Contract xxxxx b) Amount paid to sub-contractor for labour and services xxxxx c) Charges for planning, designing & Architect’s fees xxxxx d) Charges for acquiring machines, tools etc. on hire or xxxxx otherwise e) Cost of consumable in which property does not pass to contractee xxxxx f) Cost of establishment relating to supply of labour xxxxx and sevices g) Other expenses relating to supply of labour and services xxxxx h) Profit of contractor relating to labour & services xxxxx ----------- BALANCE = Taxable Amount xxxxx ----------- Poser - 4 info@consultconstruction.com21 August 2011 www.consultconstruction.com 23
  • 24. WORKS CONTRACT TURNOVER- NON COMPOSITION METHOD Analysis of prescribed deductions: a) Labour charges for execution of Works Contract: The value consists of mobilisation of men and material and establishment of site office etc. As these are preliminary expenses not involving value goods cannot be subjected to tax. b) Amount paid to sub-contractor for labour and services: Value relatable to sub-contractors turnover where sub-contractor is engaged only for labour and services not involving supply of goods Deduction available only for amt paid to registered sub-contractor if contract involves usage of material. c) Charges for planning, designing & Architect’s fees: Value for planning, designing and architects fees relating to construction of building or plant. As the expenses are in the nature of services hence eligible for deduction info@consultconstruction.com21 August 2011 www.consultconstruction.com 24
  • 25. WORKS CONTRACT TURNOVER- NON COMPOSITION METHOD Analysis of prescribed deductions: d) Charges for acquiring machines, tools etc. on hire or otherwise These goods are either taken on hire or purchased as assets for use in the process of execution of works contract. However, since the goods are neither incorporated in works contract nor sold to the customer there is no transfer of property in them and hence excluded for the levy of VAT. Nevertheless, Lease tax or VAT is payable to the vendor from whom they are acquired. Depreciation - L&T - 34 VST 53 – Karnataka High Court e) Cost of consumable in which property does not pass to contractee These are the items such as water, electricity, fuel, lubricating oils, electrodes etc, which are getting consumed in the process of execution of works contract and hence the property therein is not transferred to the contractee and hence are excluded for the purpose of levy of tax. info@consultconstruction.com21 August 2011 www.consultconstruction.com 25
  • 26. WORKS CONTRACT TURNOVER- NON COMPOSITION METHOD Analysis of prescribed deductions f) Cost of establishment relating to supply of labour and services This cost is relatable to facility given to labor such accommodation and other facilities to make them available at job site for purpose of carrying out labour and rendering of services in connection with execution of works contract. g) Other expenses relating to supply of labour and services These are expenses in the nature of overheads, rent, salary, electricity, telephone charges expended relating to works contract job. h) Profit of contractor relating to labour & services This is the profit earned by the contractor over the cost of labour and services expended by him i.e. difference between the value recovered from the employer and the cost incurred by the contractor Poser - 5 info@consultconstruction.com21 August 2011 www.consultconstruction.com 26
  • 27. Regular Mode• The practical scenario is not so easy. In an unorganised sector, it is very difficult to obtain the relevant details.• Since the Sales Invoices are raised on a progressive basis, the VAT liability also has to be discharged on a progressive basis.• 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.• 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.• Bifurcation of material into transferable and non-transferable may not be easy. info@consultconstruction.com www.consultconstruction.com
  • 28. • 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”.• You can then mark up the Purchases of Transferable with GP rate and offer the relevant rate on a monthly basis. info@consultconstruction.com www.consultconstruction.com
  • 29. Calculation sheetS.N Purchases Basic VAT Whether T GP @ 20% = Deemed Sales VAT VATo. Cost In Input in / NT 25% on Rate Payable Rs. Lacs Rs. Lacs Purchases1 Binding Wire 100 10 T 25 125 10% 12.52 Wooden Ply 20 2 NT - - - -3 Shalitex Board 50 5 T 12.5 62.5 10% 6.254 Nails 20 2 NT - - - -5 Insert Plates 150 15 T 37.5 187.5 10% 18.75 SS TOTAL 340 34 375 37.50 Eligible Input 30 37.5 Credit Pay Difference 7.50 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. info@consultconstruction.com www.consultconstruction.com
  • 30. Calculation of Sale Price of Works Contract Composition Scheme – For contractors who do not wish to pay tax based on the specific formula or after considering the lump sum deductions•Rate of tax is 0.6% or 2% of the total contract value as under: 0.6%- Construction contracts relating to roads, buildings, bridges, pipeline laying, dams, etc. 2% - Other contracts including contracts for erection, installations etc.• Restrictions: ITC not available on purchasesContractor not eligible to issue VAT Invoice and also can not charge tax inthe invoice - Therefore, no ITC is available to the employerCannot import goods on interstate basis or branch transfer basis info@consultconstruction.com www.consultconstruction.com
  • 31. • Composition for Turnkey Contracts – – Composition for Certain Sections – Composition for Certain Line Items – Composition by splitting up value on the basis of separate working info@consultconstruction.com www.consultconstruction.com
  • 32. Types of composition• For complete contract – within 30 days of commencement of Work• For Complete year – Application within 30 days before to commencement of year• For New Registered Dealer – Within 90 Days from the effective date of registration No condonation of delay – Matter Pending before Tribunal Non receipt is assumed as granted info@consultconstruction.com www.consultconstruction.com
  • 33. Deduction in composition scheme -• Deduction of amount of entire sub-contract shall be made, if any• - If composition scheme opted than deduction is available for amounts paid to sub-contractors (Rule 28(8)(c)) – – Both registered and unregistered?• No Labour deduction in Works Contract, if composition is opted, info@consultconstruction.com www.consultconstruction.com
  • 34. Conditions for the composition Scheme:-• Dealer must be Registered Dealer• Conditions attached to Tax credit depending on state to state• Tax Invoice shall NOT be issued to the client• Tax shall NOT be charged from the client• Conditions attached with regard to making Interstate / OGS Purchases info@consultconstruction.com www.consultconstruction.com
  • 35. TAXABILITY UNDER COMPOSITION METHOD Particulars Gujarat VAT Mah VAT Mah VAT (Non- (Construction) Construction) Total Billing 120 120 120 Less : Paid to 20 20 20 Registered Sub- contractor Net 100 100 100 Composition Rate 0.6% 5% 8% Tax Payable 0.60 5.00 8.00 Input Credit - 3.00 (Tax paid 4.00 (64% of in excess of Local VAT) 4%) Net Tax to be Paid 0.60 2.00 4.00 info@consultconstruction.com21 August 2011 www.consultconstruction.com 35
  • 36. Continued…• Once Application for composition is made and is not rejected by the department, the acceptance is presumed . Option shall be final and is IRREVOCABLE. (Rule 28(8)(i) )Suggestion – 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) 2. OGS items as Free Supply from the contractee. info@consultconstruction.com www.consultconstruction.com
  • 37. When no records are maintainedAdhoc deduction is available in each of the state –In Gujarat under Rule 18AA specifies the rate of deduction info@consultconstruction.com www.consultconstruction.com
  • 38. Calculation of Sale Price of Works ContractIndivisible Contract – in case separate books of A/c’s are not maintained – Lump sum deductions areallowedDescription of Works Contract Percentage of DeductionConstruction, improvement, repair of any building, road, bridge, dam, canal or 30%other immovable propertyInstallation, 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, 20%fixtures (interior decoration)Construction, fabrication, assembling, commissioning, repairs of bodies on 20%chassis of motor vehiclesOverhauling or repairing or dismantling of any motor vehicles, vessels of every 20%description meant for plying on water or any vessel propelled by mechanicalmeans, any air craft, etc Here deduction is available for amounts paid to registered sub- contractor. info@consultconstruction.com 38 www.consultconstruction.com
  • 39. Deductions under Maharashtra VAT Sr.No. Nature of Contract % of deduction 1. Installation of Plant and Machinery 15 2. Installation of Air Conditioner and cooler 10 3. Installation of Elevators 15 4. Fixing of marble slabs, granite & tiles 25 5. Civil works like construction of Bldg. Roads etc. 30 6. Construction of Railway Coaches etc. 30 7. Ship and Boat building etc. 20 8. Sanitary Fittings, Plumbing, Drainage etc. 15 9. Painting and Polishing 20 10. Construction of Bodies of Motor Vehicles and Trucks 20 11. Laying of Pipes 20 12. Tyre re-treading 40 13. Dyeing and printing of Textile 40 14 Annual Maintenance Contract 40 15. Any Other Works Contract 25 info@consultconstruction.com21 August 2011 39 www.consultconstruction.com
  • 40. • Whether Sub-Contractors are liable to VAT? info@consultconstruction.com www.consultconstruction.com
  • 41. Client’s material Client can issue his material for use in execution of works contract awarded to the contractor where: a) Material can be issued as free supply not resulting in either recovery or sale to contractor or b) Material can be supplied on recovery basis or can be sold to the contractor .(N.M. Goel 72 STC 368 (SC) )• 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.• 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 info@consultconstruction.com21 August 2011 www.consultconstruction.com 41
  • 42. Terms of Contract - Client’s material 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. a) The employer to issue his material free of cost.. b) The free issue material supplied by the employer shall be held in the custody of the contractor as bailee. c) Contractor to provide periodical statement of reconciliation. d) The material in possession of the contractor shall not be diverted for any other use e) The cost of the free issue material supplied by employer will be outside the scope of contract and shall not be the part of consideration to be paid to the contractor. info@consultconstruction.com21 August 2011 www.consultconstruction.com 42
  • 43. VAT – Input Tax Credit• ITC available on all inputs used in works contract other than composition method subject to fulfilment of conditions• Broad Restrictions on ITC: ‒ CST purchases ‒ Capital goods used in works contract – Some of the States ‒ Lease goods ‒ Goods purchased from Lump sum dealer ‒ Goods not connected with business ‒ Vehicles, equipments, accessories or spare parts ‒ Fuel used in motor vehicles ‒ Goods used as fuel in generation of electrical energy ‒ Poser 6 info@consultconstruction.com www.consultconstruction.com
  • 44. Is VAT applicable to Builders / Developers? VAT info@consultconstruction.com www.consultconstruction.com
  • 45. When is a job established as a Works Contract – FACTS IN THE CASE OF SUPREME COURT JUDGEMENT OF K. RAHEJA DEVELOPMENT CORPORATION• Appellants were carrying on business as real estate developer.• They entered into Development agreement with owners of land.• The agreement was for carrying out construction on behalf of somebody else. info@consultconstruction.com www.consultconstruction.com
  • 46. Facts Contd….• The land owner transferred only the ownership of land to the purchaser and the appellant transferred structure by a separate agreement for construction.• The appellants were carrying out construction as developers for the prospective purchaser.• Agreement entered into before the completion of the unit, was considered as Works Contract.• Agreement entered into after the flat or unit already constructed would not be within the ambit of works contract. info@consultconstruction.com www.consultconstruction.com
  • 47. • On the basis of K Raheja, can we say that all builders are liable to VAT? info@consultconstruction.com www.consultconstruction.com
  • 48. Latest……• However Supreme Court on Aug 19, 2008 has referred the judgment for reconsideration to a larger bench considering the Writ Petition filed by L&T on the count that the judgement has adversely affected the entire construction industry. info@consultconstruction.com www.consultconstruction.com
  • 49. info@consultconstruction.comwww.consultconstruction.com
  • 50. A small e.g. for BuildersSale Value of Flat Rs.50 LacsCost of Material Involved Rs. 20 LacsCost of Labour Involved Rs. 10 LacsMarket Value Land supported by Rs.5 LacsValuation Certificate(Advisable to show separately to avoidlitigation)Profit Rs. 15 Lacs (30% Margin)Tax under Regular Scheme Rs. 20 Lacs + ProfitTax under Composition Scheme 0.6% on Rs. 45 Lacs info@consultconstruction.com www.consultconstruction.com
  • 51. Entry Tax related issues under VATInward Movement1. Cement / Raw Steel / Motor Vehicle are liable to entry tax.2. Authenticated Form 403 is required.3. Invoice / delivery challan / LR to be made available at checkpost4. For normal Items, Form 403 without authentication is required.5. Scaffolding Pipes are not covered.Outward Movement1. Branch Transfers – Work Order / Declaration Form / Form 402.2. Relevance of F Form – Ambika Steel.3. Having registration / Work order from other state.Any checkpost related issues ? info@consultconstruction.com www.consultconstruction.com
  • 52. TDS Rate under GVAT Person responsible for payment exceeding Rupees 1 crore for works contract is responsible for deduction of tax at prescribed rates TDS Rate : 0.6% in case of construction contract and 2% in case of others Works Contractor is mandatorily required to obtain TDN No. from Commercial Tax Department. Application in Form 706 to get TDN No. within 30 days of agreement. TDS to be claimed in the year in which same is deducted and not in which the same is? paid. Form 702 under Gujarat VAT to be attached with Invoice for lesser deduction. Poser - 7 info@consultconstruction.com www.consultconstruction.com
  • 53. 59A. DEFINITIONS - DEDUCTION AT SOURCE.• (c). "specified sale price" in relation to the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, means such amount as is arrived at by deducting from the amount of valuable consideration paid or payable to a person for execution of such works contract, the amount representing labour charges for such execution and the price paid or payable for the goods purchased in the course of inter-state trade or commerce or in the course of import of goods into the territory of India for the use in execution of such works contract; and• (d). "specified works contract" means a works contract, the specified sale price of which exceed one crore rupees. info@consultconstruction.com www.consultconstruction.com
  • 54. Inter-state WorksContract info@consultconstruction.com21 August 2011 www.consultconstruction.com 54
  • 55. Background – CST Transactions Position before 6th Constitutional amendment • Only states were empowered to levy tax • Interstate sale not contemplated • CST Act was not in existence • Branch transfers were not taxable info@consultconstruction.com21 August 2011 www.consultconstruction.com 55
  • 56. Background – CST Transactions Methodology of levy of tax• Consumption Theory As per provisions of Explanation to Article 286 (1) (as stood in the beginning), only consuming state was competent to levy tax. State of Bombay v. United Motors (India) Ltd.(4 STC 133 )• Nexus Theory Theory of nexus resulted in levy of tax on same transaction by multiple states. This theory was disapproved by Supreme Court in the case of Popatlal Shah v. State of Madras (4 STC 188)• Bengal Immunity v. State of Bihar (6 STC 446 ) It was held that the State Government cannot impose tax on sale or purchase of goods taking place in the course of inter-state trade except when the parliament by Act so provides.• 6th Constitutional amendment The 6th Constitutional amendment was made on recommendation of Taxation Enquiry Committee. info@consultconstruction.com 21 August 2011 www.consultconstruction.com 56
  • 57. Jurisdiction for levy of works contract tax• Prior to the decision of supreme court in the case of BAI States took liberty levy tax on the entire value of the works contract including interstate transactions on the assumptions that :• A) In an indivisible works contract the transfer of property in goods is effected in the state in which the contract is executed.• B) Since the transfer of property takes place within the state the taxation field for deemed sale in the nature of works contract was exclusively with in the domain of Entry 54 of List II of the VII Schedule to the constitution and hence the entire turnover in respect of works contract should be subjected to tax under local law not withstanding the nature of interstate transactions involved therein info@consultconstruction.com21 August 2011 www.consultconstruction.com 57
  • 58. Amendment to CST Act – 11.05.2002 Consequent to the 46th Amendment to the Constitution of India, it became possible for the states to levy tax on deemed sale transactions like works contract Although Article 366 was amended to widen the scope of definition of sale to cover deemed sale in it’s ambit, state could not levy tax on transactions relating to inter-state works contract as; a) there was no authority to levy tax on transactions relating to inter-state works contract in absence of amendment to definition of sale to cover works contract transactions therein under CST Act. b) states were loosing revenue on transactions of inter-state works contract c) CST Act was amended almost after two decades from 46th amendment enabling states to levy tax on transactions of inter-state works contract effective from 11.05.2002 info@consultconstruction.com21 August 2011 www.consultconstruction.com 58
  • 59. Impact of CST Amendment1) Consequent to the amendment to CST Act, with effect from 11.05.2002, the definition of sale includes deemed sales.2) Works contract under CST Act, has been defined under section 2 (ja) as “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”3) Despite wider scope of definition of works contract under CST Act, only goods involved in the execution of works contract as defined under Article 366 (29A) (b) can only be taxed and nothing beyond that. info@consultconstruction.com21 August 2011 www.consultconstruction.com 59
  • 60. Works contract v. provision under CST Act• Execution of works contract in respect of immovable property like Lump Sum Turn Key (LSTK) or EPC Contract, construction of buildings, bridges, dams or in respect of movable property like repairs of machinery, equipments etc. requires a) sourcing of materials from outside the state b) sourcing of material from outside the country or c) dispatch of machinery and equipments outside the state or country after repair• These types of transactions in the nature of works contract can be taxed only under CST Act.• The relevant provisions for levy of tax contained in section 3. 4 and 5 of the CST Act info@consultconstruction.com21 August 2011 www.consultconstruction.com 60
  • 61. Works contract v. provision under CST Act• Supreme Court in the case of Gannon Dunkerely and Co. (88 STC 204) (at page No. 288) held: “ We are of the view that even in absence of any amendment having been made in the Central Sales Tax Act (after 46th amendment) expressly including transfer of property in goods involved in the execution of works contract, the provisions contained in section 3, 4, and 5 would be applicable for such transfer and the legislative powers of the state to impose tax on such transfers under entry 54 of the state list will have to be exercised keeping in view the provisions contained in section 3, 4, and 5 of the Central Sales Tax Act.” info@consultconstruction.com21 August 2011 www.consultconstruction.com 61
  • 62. Taxability of inter-state works contract relating to repairs and servicing• Normally the job is carried on movable goods / equipments• After job is done the equipment is despatched outside state• CST is levied in the state from which the equipment is despatched after repair• Taxable turnover to be determined by actual deduction method as prescribed under CST Act.• Set-off of local VAT paid on input used in works contract can be claimed if the local VAT Act, so provides. info@consultconstruction.com21 August 2011 www.consultconstruction.com 62
  • 63. • Poser 8 info@consultconstruction.com www.consultconstruction.com
  • 64. Taxability of works contract transactions under CST Act Normally goods used in the execution of a works contract fall under following categories 1) Manufactured/bought out goods dispatched for execution of works contract in another state for a) lump sum transfers for use in various contracts b) transfer for use in manufacture of goods to be used in execution of works contract c) use in specific works contract in pursuance of the contract received 2) Goods purchased from outside state in which works contract is executed for a) use as raw material or components in manufacture of goods to be used in execution of works contract b) use in works contract as purchased as per billing schedule (sale occasioning inter-state sale) c) use in works contract after sale is effected to the employer under section 6(2) of the CST Act 3) Goods imported from outside the country for a) use in execution of works contract but not imported in pursuance of the contract b) use in works contract but imported on behalf of the customer (Sale occasioning import) 4) Goods imported by the employer and given to contractor as free issue (FIM) for use in works contract info@consultconstruction.com21 August 2011 www.consultconstruction.com 64
  • 65. Taxability of manufactured/bought out goods dispatched by the contractor for execution of w/c in another state [2006] 144 STC 0605- State of Karnataka and others vs. ECE Industries Limited (Karnataka High Court) Transfer of goods ________________________________________________________ Transfer of goods for spe- Transfer for use in manuf- cific works contact in pur- Lumpsum transfer for acture of goods to be used suance of the contract various contracts to be in execution of w/c received executed in another state Goods despatched in pur- Goods transferred are not Goods are not transferred suance of the contract for the specific goods as per in pursuance of the use therein as despatched specific contract contract received To be treated as stock trans. To be treated as inter-stateTo be treated as stock transfer. F form to be obtained from Sale from despatching state.F form to be obtained from receiving state. No tax is No tax is payable in receivingreceiving state. No tax is payable either in receiving state. Exemption to be claimedpayable either in receiving or or in despatching state. Under Local Act.in despatching state. However, However local tax is payable (EEC 38 STC 475)local tax is payable when used on FG used in Works contractin W/C in receiving state. in receiving state. info@consultconstruction.com 21 August 2011 www.consultconstruction.com 65
  • 66. Taxability of goods purchased from outside state Purchase of goods from outside state __________________________________________________ Purchase of RM/Comp.for Purchases of goods, where Purchases of gods under use in mafr. of goods to Delivery taken by contractor Section 6(2) for use in To be used in execution for use in execution of works execution of works contract of works contract. contract in the same form. in the same form. 1) Goods purchased are 1) Goods purchased are as 1) 4% CST is payable to not as per billing per billing schedule. vendor against Form C Schedule 2) 4% CST is payable to 2) Subsequent sale to 2) 2% CST is payable to vendor against Form C customer exempt u/s 6(2) vendor against Form C 1) No tax is payable inLocal tax is payable on FG receiving state, beingmanufactured and used in 1) Customer to receive material purchases in pursuanceexecution of works contract and give as FIM to contractor of contract of sale 2) Contractor to raise bill on (6VST374) customer u/s 6(2) 2) Exemption to be claimed under local Act.(6VST374) info@consultconstruction.com 21 August 2011 www.consultconstruction.com 66
  • 67. Some Tips :- • Free Supply vs Price Deduction by Contractee • If the client in his WO mentions VAT – Extra, WCT – Extra • Unregistered sub-contractor is making any taxable purchases, • Compare outstate suppliers’ with CST rates with the Gujarat suppliers’ before & After VAT rate. • In case of stock transfer, if VAT reversal rate comes more than 2% go for CST sales in place of stock transfer.? • VAT on Concrete is 15%, but VAT on Sand/Aggregate is 5%, so what you transfer is important. – Cement is Free issue. info@consultconstruction.com www.consultconstruction.com
  • 68. Back to Back Contracts • L&T Judgement – Property passes on from the Sub-contractor to the Client and contractor is just an agent. • Impact - Mr X has awarded contract to Mr Y at Rs.100 cr. Mr Y has sublet the complete job to Mr Z at Rs.80 cr. 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. Suggestion – Projects with huge margins can be subletted to any sister concern to reduce VAT? implications. Section 80 Determination in the case of Paharpur Cooling Tower dated 15-4-2010 in Gujarat VAT has reaffirmed the view. info@consultconstruction.com www.consultconstruction.com
  • 69. • Any queries on VAT info@consultconstruction.com www.consultconstruction.com

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