WORKS CONTRACT METHODS AND TYPES OF
ASSESSMENT
Sale
means any transfer of property in goods by one person to another for cash or
deferred payment or for any other valuable consideration. One person cannot make a sale to himself and
hence there must two persons for the purpose of sale and then only one person
can make sale to another person. The selling person must give goods and receive
payment by way of cash or deferred payment or any other valuable consideration
against the goods. Any other valuable consideration
means cash, cheque, promissory note or any other mode of payment equivalent to
money. One person sells goods and
receives payment and this transaction is called Sale.
In
simple for sale there must be two parties one as seller or supplier and another
as purchaser or customer and there must be supply and transfer of goods (other
than newspaper) by the seller to buyer either by way of sale or resale for
valuable consideration i.e. price agreed by parties for the goods sold or
purchased. This is called normal sale
or direct sale. The State Government
has power to impose tax on sale of goods within the state. Under the State Sales Tax Laws, the Sales Tax was
applicable only on the sales covered under the sale of goods Act (Normal sale)
as shown above.
In works
contract there is an agreement between contractor and contractee or client
and there is a project development either by construction or repair etc through
supply of goods and services and the transfer of goods on the theory of
accretion and the price agreed by both parties for the execution of Works
contract. The contractor receives money or any valuable consideration in one
lump sum or in instalments and delivers the project later after completion and
this kind of sale is called Deemed Sale and not normal sale.
The
indivisible works contracts were not covered under the State Sales tax Acts
since works contracts were not normal sales as defined above. Due to this legal status, the states were
denied the levy of Sales Tax on the indivisible works contracts. Such
contractors were outside the clutches of sales tax laws.
Hence
the Central Government has amended the constitution and as per the 46th amendment,
Clause 29-A inserted in article 366 after definition of “tax on the sale or
purchase of goods” as shown below:
(29-A) “Tax on the sale or purchase
of goods” includes—
(a)
a tax
on the transfer, otherwise than in pursuance of a contract, of property in any
goods for cash, deferred payment or other valuable consideration:
(b)
a tax
on the transfer of property in goods (whether as goods or in some other form)
involved in the execution of a works contract;
(c)
a tax
on the delivery of goods on hire-purchase or any system of payment in
instalments;
(d)
a tax
on the transfer of the right to use any goods for any purpose (whether or not
for a specified period) for cash, deferred payment or other valuable
consideration;
(e)
a tax
on the supply of goods by any unincorporated association or body of persons to
a member thereof for cash, deferred payment or other valuable consideration;
(f)
a tax
on the supply, by way of or as part of any service or in any other manner
whatsoever, of goods, being food or any other article for human consumption or
any drink (whether or not intoxicating)
Where such supply or service is for cash, deferred
payment or other valuable consideration, and such transfer, delivery or supply
of any goods shall be deemed to be a sale of those goods by the person making
the transfer, delivery or supply and a purchase of those goods by the person to
whom such transfer, delivery or supply is made:
After
the said 46th Amendment to the Constitution, the States were empowered to levy
Sales Tax / Works Contract Tax on such sales, called as “Deemed sales” involved
in the execution of works contract. Due to the above said amendment, the
concept of `Deemed Sale’ was introduced.
The important features of deemed sales
are as under,
(a) It
is not a normal sale as defined under sale of goods Act but a deemed sale of
goods subject to sales tax by the States.
(b) In
the `deemed sales’ the states can levy Sales tax only on the transfer of
property in goods”. In other words, the states can levy Sales Tax / Value Added
Tax only on the `Material Value’ of the works contract and not on the `labour
portion’ of the works contract.
(c) If
in a contract there is no transfer of property in goods from the
contractor to the contractee, then No sales tax is applicable on such
contracts, called as “Pure Labour Jobs”.
(d)
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.
After
the 46th Amendment to the Constitution of India, the States are empowered to
levy sales tax (now Value Added Tax) on such deemed sales but only on the
`Material Value’ of the works contract.
The
High Courts and the Supreme Court have suggested methods on “How to arrive at a
material value from the total Contract Price”.
The
Supreme Court has also allowed the States to come out with an alternative
method to levy Sales Tax on Works contract, if to arrive at material value is
difficult.
The
states have come out with an alternative method called as “Composition Tax”
method to tax the indivisible works contract, which is a non-legal /alternative
method. The small percentage like 1%, 2%, 4%, 5% as Composition Tax is levied
but on the total contract price without any deduction which is available in the
legal options under the State Sales Tax / Value Added Tax Acts.
The Government
of Tamil Nadu has incorporated separate provision to levy Sales Tax on the
deemed sales in the works contracts. Accordingly, no contractor or contractee were
entitled to claim any set off of Sales Tax paid to their vendors.
WORKS CONTRACT IN TAMIL NADU
As per Tamil
Nadu Value Added Tax Act, 2009 Section 2(43), “works contract” includes any agreement for carrying out for
cash,
deferred payment or
other
valuable consideration,
building construction, manufacture,
processing, fabrication, erection,
installation, fitting out, improvement, modification, repair or commissioning,
of any movable or immovable property.
As per
Tamil Nadu Value Added Tax Act, 2006, Section 6. Payment of tax at compounded
rates by
works
contractor.
-- (1) Notwithstanding anything contained in this Act,
every dealer, other than the dealer who purchases goods from outside the state or imports goods from outside the country
may,
at his option, instead of
paying tax in accordance with section 5, pay, on the total value of the works contract executed by him in a year, tax calculated at the following rate, namely:--
(i)
|
Civil works contract
|
Two per cent of the total contract value of the civil works executed;
|
(ii)
|
Civil Maintenance Works Contract
|
Two per cent of the total contract works value of the maintenance works executed;
|
(iii)
|
All other works contracts
|
Four per cent of the total
contract value of the
works executed. (Upto
9.3.2012)
Five per cent of the total
contract value of the
works executed. (From
10.3.2012 onwards)
|
(2) Any dealer, who executes works contract,
may apply to the assessing authority along with the first monthly return for the financial year or
in the
first
monthly return
after the
commencement of the
works
contract, his option to pay the tax under sub-section (1) of Section 6 and shall pay the tax
during the year in the monthly instalments and for this purpose, he shall furnish such return within such period and in such manner
as may be prescribed.
(3) The option exercised under sub-section (1) of Section 6 shall be final for that
financial year.
(4) A dealer, exercising option under sub-section (1) of Section 6 shall, so long as
the
option remains in force, not be required to maintain accounts of his
business under this Act or the rules made there under
except the records in original of
the works contract, extent of their execution and payments
received or receivable in relation to such works contract, executed or under execution.
(5) The dealer, who pays tax under this section, shall not collect
amount by way of tax or purporting
to be
by way of tax and shall not be entitled to input tax credit on the
goods purchased by him.
Explanation.- For the purpose of this section "civil works contract" includes civil works of construction
of
new building, bridge, road, runway,
dam
or canal including any lining, tiling, painting or decorating which is an
inherent part of the
new construction and
any repair, maintenance, improvement or upgradation of such civil works by means of fixing and
laying
of
all kinds of floor tiles, mosaic tiles, slabs, stones, marbles, glazed
tiles, painting, polishing, partition, wall panelling, interior decoration, false
ceiling, carpeting and extra fittings, or any manner of improvement on an existing structure.
There are two methods of levy of
tax on works contract:
METHOD
1. (REGULAR SCHEME)
Non-Composition Scheme or Regular Scheme paying tax
on the deemed sale value: The High Courts and the Supreme Court have
suggested methods on “How to arrive at a material value from the total Contract
Price”.
Based on the guidelines and
directions levy of tax made on contracts by calculating the deemed sale value
of transfer of properties involved in the execution of works contract
As per
Tamil Nadu Value Added Tax Act, 2006, Section 5. Levy of tax on transfer of goods involved in works contract.-- (1) Notwithstanding anything
contained in
this Act, but subject to the
provisions of this Act, every dealer, shall pay, for each year, a tax on his taxable turnover,
relating to his business
of
transfer of property in goods involved in the execution of works contract, either in the same form or
some
other form, which may be arrived at in such manner
as may be prescribed, at such rates as specified in the First Schedule.
Explanation. - Where any works contract
involves more than one item
of
work, the rate of tax shall be determined separately for each such item of work.
(2) The dealer,
who pays tax under this section, shall be entitled to input tax credit on goods specified in the First Schedule purchased by him in
this
State.
And the dealer need not pay on the total
value of the works contract executed by him.
The dealer is entitled for Input Tax Credit on the Ist schedule goods
purchased from the registered dealers within the State.
SAMPLE
CALCULATION OF VAT UNDER BOTH METHODS
Details
|
Regular Scheme
|
Composition Scheme
|
Section 5
|
Section 6
|
|
Purchase of Cement from the registered dealers within the State
with tax invoice
|
350000.00
VAT @ 14.5% 50750.00
Total Rs.400750.00
|
350000.00
VAT @ 14.5% 50750.00
Total Rs. 400750.00
|
Purchase of Jally (Purchase from unregistered dealer)
|
150000.00
|
150000.00
|
Purchase of Sand (Purchase from unregistered dealer)
|
100000.00
|
100000.00
|
Purchase of Stones (Purchase from unregistered dealer)
|
100000.00
|
100000.00
|
Labour charges paid for execution of works contract
|
400000.00
|
400000.00
|
Marginal profit @ 10% which includes, Plan, Plan approval,
Freight, Supervision etc.
|
115075.00
|
115075.00
|
Total value of works contract executed i.e. deemed sale value
|
1265825.00
|
1265825.00
|
Tax payable @ 2% for Civil Works Contracts or Civil Maintenance
Works Contracts
|
Not applicable
|
25316.50
|
Tax payable @ 5% for all other works contracts
|
Not applicable
|
63291.25
|
Labour charges are exempt from tax.
Cement is taxable at 14.5% and
Sand, Jelly and Stones are taxable at 5%. The sale value may be arrived by
applying the following Formulae.
(Total Works
Contract – Pure Labour) X Value of Tax not suffered
Total Value of
goods used in Works Contract
goods
(Total Works
Contract – Pure Labour) X Value
of Tax not suffered
Total Value of
goods used in Works Contract goods
@ 14.5% or
goods @ 5%
By applying the
above formula, tax will be assessed on Sand, Jelly, Stones etc., even though
the commodities were procured /purchased from unregistered sources / dealers.
Rs. 1265825–Rs.400000X350000 = Deemed Sale Value of
700000 Cement
= Rs.432912.50
Rs. 1265825–Rs.400000X150000 = Deemed Sale Value of
7000000 Jally
= Rs.185533.92
Rs. 1265825-Rs.400000X100000 = Deemed Sale Value of
7000000 Sand
= Rs.123689.28
Rs. 1265825-Rs.400000X100000 = Deemed Sale Value of
7000000 Stone
= Rs.123689.28
CALCULATION
OF VAT
Details
|
Turnover
|
Output
VAT Due
|
Input
VAT Paid
|
VAT
Payable
|
Deemed
sale value of cement
|
432912.50
|
62772.31
|
50750.00
|
12022.31
|
Deemed
sale value of Jally
|
185533.92
|
9276.69
|
NIL
|
9276.69
|
Deemed
sale value of sand
|
123689.28
|
6184.46
|
NIL
|
6184.46
|
Deemed
sale value of stone
|
123689.28
|
6184.46
|
NIL
|
6184.46
|
Taxable
Turnover
|
865824.98
|
84417.92
|
50750.00
|
33667.92
|
Exempted
Turnover
|
400000.00
|
|||
Total
Turnover
|
1265824.98
Round
off
1265825.00
|
The
Commissioner of Commercial Taxes, Chennai in ACAAR 70/2013-14 (Acts Cell
II/27833/2013) dated 6.12.2013 has issued clarifications about purchases of
materials such as jelly, sand, bricks from unregistered dealers under Section
12 of the Tamil Nadu Value Added Tax Act, 2006 by the Contractors for contract
works is liable to pay purchase tax on the materials purchased from
unregistered sources and used for executing contracts at the rates as provided
under the First Schedule to the TNVAT Act, 2006. Hence the purchase turnover
should be disclosed in the monthly returns itself.
The
taxable turnover with regard to goods involved in the execution of works
contract has to be determined with regard to the manner prescribed. This manner
is prescribed in rule 8 (5) of TNVAT rules, 2007. According to this rule from
the total turnover of the dealer the following deductions should be made to
arrive at the value of goods involved in the execution of works contract.
(a)
All amounts involved in respect of goods involved in the execution of works
contract in the course of export of the goods out of the territory of India or
in the course of import of the goods into the territory of India or in the
course of inter-State trade or commerce;
(b)
All amounts relating to the sale of any goods involved in the execution of
works contract which are specifically exempted from tax under the Act;
(c)
All amounts paid to the sub-contractors as consideration for execution of works
contract whether wholly or partly: Provided that no such deduction shall be
allowed unless the dealer claiming deduction, produces proof that the
sub-contractor is a registered dealer liable to pay tax under this Act and that
the turnover of such amount is included in the return filed by such
sub-contractor;
(d)
All amount towards labour charges and other charges not involving any transfer
of property in goods, actually incurred in connection with the execution of
works contract,
(e)
all amounts, including the tax collected from the customer, refunded to the
customer or adjusted towards any amount payable by the customer, in respect of
unexecuted portion of works contract based on the corrections on account of
measurements or check measurements.
METHOD 2.
(COMPOSITION SCHEME)
Composition Scheme: Levy
of tax on assessments commonly known as Composition Scheme applicable for
a) Civil Works Contract
b) Civil Maintenance Works Contract
c) All other Works Contract
for which Monthly Return in Form K has to be filed. The rate of tax for composition scheme is 2%,
4% and 5% as shown above with the following conditions.
1. The
dealer should apply to the assessing authority along with the first monthly
return for the financial year or in the first monthly return after the
commencement of the works contract that he wants to opt for compounding system
of tax payment for works contract.
2.
The
dealer should not make any interstate purchases.
3.
The
dealer should not collect the tax from the contractee.
4.
The
dealer should not take input tax credit on the goods purchased by him.
5.
The
option exercised once shall be final for that financial year.
Each and every year the option has to be given before 20th May.
Failure to submit the option within the stipulated time will lead the contractor
to pay tax on regular method and will have to maintain detailed accounts. The dealer who opted to pay tax on composition
basis need not maintain detailed accounts but furnish the monthly returns in
Form K without fail.
In simple the Contractors who opted to pay tax on composition
basis should pay tax at 2%, 4% or 5% whichever is applicable from his margin
and not to collect the same from customers.
To view the works contract under GST click the link given below:
https://abhivirthi.blogspot.com/2017/09/gst-works-contract-in-gst-regime- with.html
To view the works contract under GST click the link given below:
https://abhivirthi.blogspot.com/2017/09/gst-works-contract-in-gst-regime- with.html