Definition• Work Contract is a deemed Sale, which involves the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.
Works Contract – Genesis– Before proceeding to delve into the concept of works contract, it is important to first understand its origin– Works contract term was first coined or incorporated in the sales tax / VAT– Entry 54 of the State List :Taxes on ‘Sale of goods’: State Governments levy VAT under this entry– Entry 92A of the Union List :Taxes on ‘Sale of goods’ in the course of interstate trade: Central Government levies CST under this entry– Sales of Goods Act, 1930: A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another
State of Madras Vs Gannon Dunkerley & Co. AIR (1958) S.C. 560• In a decision related to works Contract -, the Court held that expression “sale of goods” used in the entry 54 of State list of Seventh Schedule has the same meaning as in the Sale of Goods Act, 1930• Definition of sale under Sale of Goods Act, 1930 covers cases where the goods are sold to the purchaser. It does not covers the cases where the goods are not sold as chattel• In above decisions it was held that in case of indivisible works contract, it is not possible to levy sales tax on the transfer of property in the goods involved in the execution of such contract as it has been held that there is no sale of material as such and the property in them does not pass as such
Works Contract –Types of works contracts Works Contract Divisible works Indivisible works contract contract• Divisible contract i.e. where the elements of sale of goods and labor are clearly segregated• Indivisible contracts, where the parties agree for lump-sum consideration for the entire contract. The sale consideration of the materials used in the contract and remuneration for labor is not separately identifiable
Deduction from contractual transfer price for determination of tax payable under section 18.(1)A dealer who is liable to pay tax under section 14, may, for the purpose ofDetermining his taxable contractual transfer price on which tax is payable undersubsection (1) of section 18 during any period, deduct under clause (d) ofsub-section (2) of that section, from contractual transfer price received orreceivable, the following:-(a) labour charges for execution of works contract;(b) charges for planning, designing and architects fees;(c) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;(d) cost of consumables such as water, electricity, fuel etc. used in the execution of works contract, the property in which is not transferred in the course of execution of the works contract;(e) cost of establishment of the contractor to the extent it is relatable to supply of labour and services; and(f) other similar expenses relatable to supply of labour and services; and(g) profit earned by the contractor to the extent it is relatable to supply of labour and services subject to furnishing of profit and loss account of the works site.
(2) In the cases where the amounts referred to in clause (a) to clause (g) ofsub-rule (1) are not ascertainable from the accounts of a dealer, or if a dealerdoes not maintain proper accounts, the taxable contractual transfer price may,at the option of such dealer, be determined after deducting the amount,calculated at the percentages specified in column (3) of the following table fordifferent types of contracts, and the application of different rates of tax on suchpercentages as mentioned in column (4) of the table, of the taxable contractualtransfer price, so determined :- Percentage of Percentage of totalSerial Type of contract. deduction from value of contract No. the contractual taxable transfer price. @ (1) (2) (3) (4) 4% 13.5%1. Fabrication and installation of 25 25 50 plant and machinery2. Fabrication and installation of 15 25 60 cranes and hoists.
Fabrication and erection of structural works3. of iron and steel including Fabrication, supply 15 45 40 and erection of iron trusses, purloins and the like.4. Fabrication and installation of elevators (lifts) 15 20 65 and escalators.5. Fabrication and installation of rolling shutters 15 45 40 and collapsible gates.6. Civil works like construction of buildings, 25 20 55 bridges, roads, dams, barrages, canals and diversions.7. Installation of doors, door frames, windows, 20 10 70 frames and grills.8. Supply and fixing of tiles, slabs, stones and 20 Nil 80 sheets.9. Supply and installation of air conditioners and 15 5 80 air coolers.10. Supply and installation of air conditioning 15 5 80 equipment including deep freezers, cold Storage plants, humidification plants and de- humidors.
Supply and fitting of electrical goods, supply and11. installation of electrical equipments including 15 5 80 transformers.12. Supply and fixing of furniture and fixtures, Partitions Including contracts for interior 20 5 75 decorators and false ceiling.13. Construction of railway coaches and wagons. 20 50 3014. Construction or mounting of bodies of motor 20 30 50 Vehicle and construction of trailers.15. Sanitary fitting for plumbing drainage or 25 15 60 sewerage.16. Laying underground surface pipeline, cables and 30 10 60 conduits.17. Dying and printing of textiles. 30 Nil 7018. Supply and erection of weighing machines and 15 30 55 weigh bridges.19. Painting, polishing and white washing. 30 Nil 7020. All other contracts not specified from serial No. 1 20 15 65 to 19
Case - 1During the financial year 2012-2013 a contractor has beenassigned works contract relating to construction of an officebuilding for Rs. 20 Lakhs by an awarder in order to executeworks contract.Against supplies and charges for labour and services. Thecontractor maintains proper books of accounts, which showfollowing particulars:Total receipts from the awarder Rs.20,00,000G.T.O. Rs.20,00,000Eligible deductions of chargestowards labour and services Rs. 5,00,000T.T.O. Rs.15,00,000Division of T.T.O.Supply of 4% taxable goods Rs. 2,63,000Supply of 13.5% taxable goods Rs.12,37,000
The contractor makes following purchases : 4% taxable items 13.5 % taxable items VAT paid VAT paid Goods Amount (Input Goods Amount (Input tax) (Rs.) (Rs.) tax) (Rs.) (Rs.) Grit 50,000 6,750 Sand 80,000 10,800 Bricks 50,000 2,000 Masonr 1,45,000 19,575 y stone Iron & 1,50,000 6,000 Kota 1,40,000 18,900 Steel flooring stone Total 2,00,000 8,000 Cement 3,75,000 50,625 Timber 75,000 10,125 Sanitar 25,000 3,375 y goods Electric 25,000 3,375 goods Paints 25,000 3,375 Total 9,40,000 1,26,900
Now to calculate net VAT payable first find out input tax, output tax andinput tax credit, which comes as under:Input TaxTax paid on purchases of 4% taxable goods Rs. 8,000Tax paid on purchases of 13.5% taxable goods Rs. 1,26,900Input Tax Credit Rs.(8,000 +1,26,900) Rs. 1,34,900Output TaxTax on supply of 4% taxable goods Rs.2,63,000 Rs. 10,520Tax on supply of 13.5% taxable goods Rs.12,37,000 Rs. 1,66,995Tax liability Rs. 1,77,515Net VAT Payable = (Tax liability – Input tax credit) = 1,77,515– 1,34,900 = Rs 42,615
In Brief TOTAL CONTRACT VALUE RS 200 Crores Less : DEDUCTION U/S 18 RS 50 Crores CONTRACTUAL TRANSFER PRICE RS 150 Crores(RS 50 Cores @ 4%) (RS 100 Cores @ 13.5%) RS 2 Crores RS 13.5 Crores TOTAL OUTPUT TAX RS 15.5 Crores TOTAL INPUT TAX RS 10.5 Crores TAX PAYABLE RS 5 Crores
Case - 2During the financial year 2012-2013 a contractor has been assignedworks contract relating to construction of a civil office building forRs. 100 Crores by an awarder in order to execute works contract.Against supplies and charges for labour and services. The contractordoes not maintains proper books of accounts.Following information are provided :Total receipts from the awarder Rs.100 CroresG.T.O. Rs.100 CroresTotal Input Value Rs.5.225 CroresSerial No. Type of contract. Percentage of Percentage of total deduction value of contract from the CTP taxable @ (1) (2) (3) (4) 4% 13.5%6. Civil works like construction of buildings, bridges, 25 20 55 roads, dams, barrages, canals and diversions.
In Brief TOTAL CONTRACT VALUE RS 100 Crores Less : DEDUCTION U/S 18 RS 25 Crores CONTRACTUAL TRANSFER PRICE RS 75 Crores(RS 20 Cores @ 4%) (RS 55 Cores @ 13.5%) RS 80 Lakhs RS 7.425 Crores TOTAL OUTPUT TAX RS 8.225 Crores TOTAL INPUT TAX RS 5.225 Crores TAX PAYABLE RS 3 Crores
Composition SchemeAny registered dealer, who is liable to pay tax for execution of “ WorksContract ”, may, at his option, pay tax at a compounded rate of twoper centum of the aggregate of the amount received or receivable bysuch dealer for each month of the year in lieu of the amount of taxpayable as per 12.4.EntitlementThe dealer engaged in execution of works contract, shall be entitled tothe composition scheme, provided he is not engaged in the following :-• Making sale as referred to in sub-clause (ii) of clause (g) of section 2 of the CST Act ; orb) Making sale in the course of import of the goods into, or export of the goods out of, the territory of India; orc) Transferring goods otherwise than by way of sale for execution of works contract outside the State.No Tax Invoice : Provided that the dealer opting for“Composition Scheme” shall not be entitled to issue tax invoice.