Works contract is a deemed sale which involves the transfer of property in goods (whether as goods or in any other form) involved in the execution of the works contract. The concept of taxation of goods transferred during the execution of works contract has been a matter of great litigation over the period. I am trying to sum up the regularly followed methods and procedures while determining the taxation of works contracts in the hands of contractor.

1. CA Amit Mundhra
Works contract is a deemed sale which involves the transfer of property in goods (whether as goods or in
any other form) involved in the execution of the works contract. The concept of taxation of goods
transferred during the execution of works contract has been a matter of great litigation over the period.
I am trying to sum up the regularly followed methods and procedures while determining the taxation of
works contracts in the hands of contractor.
As far as the Rajasthan VAT is concerned, there are 2 methods by which the Works Contractor can be
assessed to tax. The first one is “Exemption Fees Method” and second one is “VAT Method”.
EXEMPTION FEES METHOD
In Works Contract taxation, the scheme of exemption fees is a mechanism provided for collection of
works contract tax from the contractor in such a way that causes minimum inconvenience to the
contractor assessees and also to the department collecting the tax in computing and assessing the
taxable figures.
In Rajasthan VAT Act, the relevant notification of exemption fees is F.12(63)FD/Tax-2005/80 dated
11.08.2006. The link for this notification is here. Click Here. This notification has been amended from time
to time and I am discussing the provisions contained in this notification as amended up to 01.04.2012.
What is the Exemption Fees Method
In nutshell, exemption fees method is the simplest method of tax collection and payment so far as the
assessee and taxing authority is concerned. In this method, a list of specific kind of works contracts is
specified and tax is charged as a percentage of total gross value of said works contract. The assessee is
required to exercise this option by way of submitting an application along with the copy of the work order
received and the department will issue exemption certificate on the basis of nature of works contract
involved.
Major Features of Exemption Fees Scheme in Rajasthan VAT
o
Assessee to apply and exercise option of exemption fees by making application in form WT-1 along
with the copy of work order received by the contractor.
o
Application in form WT-1 can be made within 60 days from the date of work order without attracting
any late fees.
o
Late fees of Rs. 1000/- is required to be paid if application is beyond 60 days from the date of work
order but within 1 year from this date.
o
Late fees of Rs. 5000/- is required to be paid if application is beyond 1 year from the date of work
order but within 2 years from this date.
o
No application will be entertained after expiry of 2 years from the date of work order.
o
After receipt of application, the assessing authority shall issue exemption certificate in form WT-3
specifying the rate of exemption fees to be payable on each type of work order for which application
has been received. Form WT-3 is issued work order wise.
o
Such contractor is required to make payment of exemption fees as specified in exemption certificate.
o
If the awarder is not deducting TDS from the contractor, then contractor is required to pay such
exemption fees in equal monthly installments during the period of the contract from the date of filing of
the application.

2. o
The contractor shall not be entitled to claim input tax credit in respect of the goods used in execution
o
of works contract for which the exemption certificate has been granted.
The rates of exemption fees for various kinds of works contracts are given in my earlier article
the link of which is here. click here
What will be the Status of Sub-Contractor
As per rule 22(2A) of Rajasthan VAT Rules, 2006, if the main contractor has opted for exemption fees
under above notification, then the sub contractor who is performing the work of main contractor need not
again opt for this scheme as the turnover of such contract will not be included in the taxable turnover of
the contractor.
VAT METHOD
What is the VAT Method
If the contractor does not opt for the exemption fees option as stated above, he will have to go for the
VAT method for determination of his tax liability.
The main drawback of the exemption fees scheme is that the contractor has to forego all the input tax
credit available on goods purchased by him for execution of the works contract. If contractor does not
want to forego the input tax credit, then he will need to get himself assessed under VAT regime.
In VAT method, the taxable turnover of the contractor is calculated by deducting the value of labour and
services involved in execution of works contract and on the balance amount VAT is levied. From this VAT,
the contractor can claim the input tax credit of goods purchased by him and pay the balance liability in
cash.
How the Taxable Turnover is Calculated
The principles of calculation of value of taxable turnover of a works contract have been laid down by
Supreme Court in Gannon Dunkerley and Company Vs State of Rajasthan and Larsen & Turbo Vs
Union of India and Others (1993). The principles laid down by these verdicts are thoroughly followed
while assessing the VAT on contractor if the contractor has not taken the Exemption Scheme route.
Method specified by Gannon Dunkerley & Company and L & T’s case by SC
In this method, the following deductions are made from the gross value of the works contracts performed
by the contractor.
i)
Labour Charges for execution of Works
ii)
Amount paid to sub contractor for labour and services.
iii)
Charges paid for obtaining on hire the equipment or machinery used for execution of works
contract.
iv)
Charges for planning and designing and architect’s fees.
v)
Cost of consumables used in execution of works contract.
vi)
Cost of establishment of the contractor to the extent it is relatable to supply of labour and
services.

3. vii)
viii)
Other similar expenses relating to supply of labour and services.
Profits earned by contractor to the extent it relates to supply of labour and services.
Thus after deducting the above items, the remaining figure will be the taxable turnover of the contractor.
At What rate the Tax will be levied on the Taxable Turnover
Now the question arises, on the taxable turnover as arrived above, what tax rate will be applicable.
Instead of discussing the methodology in words, I prefer to use following example by which the
computation of tax liability can be easily understood.
Draft Works Account of a Contractor
Particulars
Amount
To Opening WIP
125000
Particulars
By
Gross
Contract
Receipts
2500000
By Closing
WIP
To Purchase of
Materials
1375000
Taxable at 5%
675000
Taxable at 14%
625000
Exempted
Materials
To
Wages
Labour
To
Rent
75000
&
575000
Equipment
60000
To Sub Contract
Labour
50000
To Designing &
11000
Amount
150000

4. Planning Charges
To Consumables
25000
To Gross Profit
429000
2650000
2650000
Calculation of Taxable Turnover
Particulars
Amount
Gross Turnover of Contractor
2500000
Less: Admissible Deductions
Wages & Labour
575000
Equipment Rent
60000
Sub Contract Labour
50000
Designing & Planning Charges
11000
Consumables
25000
721000
1779000
Less: Profit on labour and services
(17.16% of 721000/- applying the GP
rate)
Taxable Turnover
123724
1655276
Now the Taxable Turnover will be bifurcated into turnover of different tax rates based on the following
calculation.

5. Purchase of
Materials
Taxable
5%
at
Taxable
14%
at
Exempted
Total
Amount
As % of
Total
Taxable
Turnover
675000
Taxable
49.10% 5%
at
625000
Taxable
45.45% 14%
at
75000
1375000
5.45% Exempted
100.00% Total
Amount
(Applying
the same
percentage)
812590
752398
90288
1655276
Thus the tax on turnover will be calculated at the rates specified as above and from the output tax the
assessee can claim input tax on the goods purchased by him. The difference if any will be payable by the
contractor as VAT.
This above example is just for simple understanding of the concept; however the computation of tax
liability will vary depending upon the facts and circumstances of each case.
Cases Where Proper Books of Accounts are not kept by Contractor
In the above calculation, it is presumed that the contractor performing the works contract is maintaining
proper books of accounts and other relevant records and he can prove the genuineness of the deductions
claimed from the gross turnover before the assessing authority.
But however, to deal with the cases where the contractor does not maintain proper books of accounts or
the books of accounts produced by him cannot be said to be reliable, then the legislature can prescribe
some arithmetic formula by which a certain percentage is specified which is to be deducted from the
value of gross contracts for determining the taxable turnover of the contractor.
In Rajasthan VAT Rules, Explanation to Rule 22(2) deals with such situation. It reads as under.
“Where the amount of labour is not determinable from the accounts of the contractor, or is considered to
be unreasonably high in view of the nature of the contract, the deduction towards labour charges shall be
allowed by the assessing authority according to the limits laid down in Column 3 for the type of contract
specified in Colomn 2 of the table appended hereto;”

6. S.n.
Type of Contract
Labour
Charges
as
percentage
of gross
value of
the
contract
1
2
3
1
2
Fabrication
Machinery
and
installation
of
Plant
&
Fabrication and erection of structural works of
iron and steel including fabrication, supply
and erection of iron trusses, purlins and the
like.
25
15
3
Fabrication and installation of cranes and
hoists
15
4
Fabrication and installation of elevators (lifts)
and escalators
15
5
Fabrication and installation of rolling shutter
and collapsible gets
15
6
Civil Works like construction of building,
bridges, roads, dams, barrages, canals and
diversion
30
7
Installation of doors, door frames, windows,
frames and grills
20
8
Supply and fixing of tiles, slabs, stones and
sheets
25
9
Supply and installation of air conditioners and
15

7. coolers
10
11
12
Supply and installation of air conditioning
equipments including deep freezers, cold
storage plants, humidification and plants and
dehumidors
Supply and fitting of electrical goods, supply
and installation of electrical equipments
including transformers
Supply and fixing of furniture and fixtures,
partitions including contracts for interior
decorators and false ceiling
15
15
20
13
Construction of railway coaches and wagons
on undercarriage supplied by railway
30
14
Construction or mounting of bodies of motor
vehicles and construction of trailers
20
15
Sanitary fitting for plumbing and drainage or
sewerage
20
16
Laying underground or surface pipelines,
cables or conduits
30
17
18
19
20
Dying and printing of textiles
Supply and erection of weighing machines
and weighing bridges
Painting, polishing and white washing
All other contracts not specified from s.n. 1 to
19 above
30
15
25
25

8. Returns to be submitted by Contractor
Contractors who have taken exemption certificates for all the contracts performed by them during the year
are required to submit only Annual Return to the department in form VAT-11.
Contractors who have not taken exemption certificates or taken exemption certificates for some work
orders then they are required to submit quarterly VAT Returns in form VAT-10 and Annual VAT return in
form VAT-10A.
Now let’s discuss the second method for payment of tax under Work Contract in Rajasthan. The second
method is “VAT Method”
Which method to choose “Exemption Fees” or “VAT Method”
This is a tricky issue and a lot of tax planning is involved here whether to go for exemption fees option or
VAT option. A contractor can go for exemption fees option for one contract and VAT option for another
contract. The exercise of each option should be done after estimating the requirements of goods required
to be purchased for each type of contract and after doing a Cost and Benefit Analysis of both type of
methods.
I hope that this article clarifies most of the issues pertaining to taxability of contractors in the Works
Contract Regime. However, suggestions for any further inclusions to be made in this article are gladly
invited.