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WORKS CONTRACTDefinition of Sale : Section 2(24)Explanation : b
(ii) The transfer of property in goods (whether as goods or in some
other forms) involved in the execution of a works contract
including an agreement for carrying out for cash, deferred payment
or other valuable consideration, the building, construction,
manufacture, processing, fabrication, erection, installation,
fitting out, improvement, modification, repair or commissioning of
any movable or immovable property.
EXAMPLES OF WORKS CONTRACTS
Composite contract for maintenance & service, repairs,
improvements , alteration , amendment , mixing , blending,
processing , servicing of any immoveable or moveable
property.Construction work like Building, road, dam, canals, jetty,
treatment plants , etc.
METHODS OF COMPUTATION OF TAXThere are two methods for
computation of tax liability in respect of Works Contract
transaction.Determination of sale price of goods (u/r 58):a)Actual
Expensesb)Fixed Percentage (Table)Composition u/s 42(3) & (3A):
a) Construction or Non-construction contract b) Builder /
Developer.
SALE PRICE OF GOODS USED IN W.C. u/r 58(1)
ENTIRE VALUE OF CONTRACT LESS:-Labour & Service charges for
the execution of works; Amounts paid by way of price for
sub-contract, if any to sub-contractors;c) Charges for planning,
designing, & architect`s fees;
d) Charges for obtaining on hire or otherwise, machinery &
tools for the execution of the works contract;
e) Cost of consumables such as water, electricity, fuel used in
the execution of the contract, the property in which is not
transferred in the course of execution of the works contract;
f) Cost of establishment of the contractor to the extent to
which it is relatable to supply of the said labour &
services;
g) other similar expenses relatable to the said supply of labour
& services, where the labour and services are subsequent to the
said transfer of property;h) Profit earned by the contractor to the
extent it is relatable to the supply of labour & services:
SALE PRICE OF GOODS: FIXED PERCENTAGE (Table U/R 58)Where proper
evaluation of such expenses [a to h of Rule 58(1)] is not possible,
fixed percentage of deduction is prescribed from 15% to 40% various
activities enlisted in the table, e.g.Installation of Plant &
Machinery 15%, Painting 20%, Pipeline 20%, other works
contracts-25%.Either dealer or department may chose lump-sum
deductions if books are not intelligible.Construction contracts of
flats: cost of land is also allowed as deduction. Ready reckoner
rates on 1st Jan of the year in which the agreement to sell the
flat is signed.
COMPOSITION METHOD U/S 42(3) & (3A)
8% for all contracts up-to 20.06.2006.8% for All contracts
except Construction contract. ( w.e.f. 21.06.2006)5% for notified
construction contracts w.e.f. 21.6.2006, (Notifi- dt.- 30.11.2006),
1% for construction of flats / buildings, etc. w.e.f. 01.04.2010.
(Notifi dt.- 09.07.2010)
Construction contracts are notified by Government vide
notification no. VAT-1505/CR-134/Taxation-1 DT.30.11.2006, e.g.
Buildings, Roads, Dams, Swimming Pool, Canals, Drainage, Jetty,
etc.
On Going Works Contract (S -96)Provisions of old Works Contract
Act are applicable if works started prior to 1.4.2005 and continued
thereafter.Works Contracts started prior to VAT Act If tax was paid
under composition scheme under old Act before 01.04.2005 , then tax
is payable at the same rate under VAT, if contract continues.No set
off is allowable for such ongoing contract.
SET OFF (ONLY FOR - RD)Normal Method: U/R 58(1) = Full set off
Subject to conditions U/R 55, 54, 53 & 52 Composition :Tax @ 8%
= 64% of set off [Rule 53(4)]Tax @ 5% = 4% Reduction [Rule
53(4)]Tax @ 1% = no set off (As per notification)On Going Contracts
:No set off is allowed for RD purchases.
ISSUE OF TAX INVOICEThe contractor who opts for Composition
scheme can issue Tax invoice & recover tax @ 5% or 8% in the
Tax invoice.Composition Amount is included in the definition of Tax
[2(29)].Subcontractor can issue Tax Invoice, collect tax, but no
set off is allowed to the contractor in case of immovable
property.
Interstate Works Contract As per section 2(g)(ii) of CST Act,
Interstate Works Contract is treated as sale.Hon`ble Supreme Court
decision, M/S Mahim Patram Private Ltd vs Union Of India &
Others (6 VST 248) (sc)Provisions of the State Act can be used for
assessment under CST Act [Section 9(2)].
TDSDeduction is to be made on the date of Payment or
Credit.Amount of TDS not to exceed amount of Tax Payable.TDS is not
applicable on amount of Tax.NO TDS on subcontracts.Payment of TDS -
within 21 days from the expiry of the month of deductionInterest
@1.25% p.m. for late payment of TDS.
Rates of TDS2% TDS - Registered dealers / contractors. 4% TDS
Unregistered Contractor (up to 30.04.2012)5% TDS Unregistered
Contractor (w.e.f. 01.05.2012)
EXEMPTION FROM TDSIf the aggregate amount payable to a dealer is
less than Rs.5 lakh in a financial year, no tax at source is to be
deducted.If pure labour contract then no Tax is to be deducted.JC
(Adm) may issue a certificate in response to application of the
dealer that the contract is not a Works contract then TDS is not
required.
FORMS TO BE ISSUED BY PRINICIPAL CONTRACTORCertificate regarding
payment by the principal Contractor -Form 406.Declaration by
Principal Contractor- Form - 409.
FORMS TO BE ISSUED BY SUB-CONTRACTORCertificate regarding
payment by the subcontractor - Form 407.
Declaration by registered Sub-Contractor - Form 408.
Works Contract - BuildersThe taxable event Agreement to sale the
flat before completion of the Building.Period - 20.06.2006 to
31.03.2010Tax can be paid by way of :a. Composition (u/r 42 (3) @
5%)b. Actual expense method [u/r 58(1) and 1A]c. Standard deduction
method [u/r 58(1)]
Works Contract - BuildersPeriod : w.e.f. 01.04.2010 Tax can be
paid by way of :a. composition (u/r 42 (3A) @ 1%b. Actual expense
method [u/r 58(1) / (1A)]c. Standard deduction method (u/r 58)d.
composition u/s 42(3)No set off is allowed if composition is opted
u/s 42(3A).
IMPORTANT JUDGEMENTSBuilders Association (73 STC 370).States can
not levy WCT on entire consideration, but only on valuable
consideration received in respect of goods transferred.Gannon
Dunkerly (88 STC 204).Formula for calculating the value of the
goods by deducting the various charges towards labour and services,
etc .N M Goel (72 STC 370). Goods supplied by employer to
contractor for valuable consideration is treated as transaction of
sale.
IMPORTANT JUDGEMENTSK. Raheja Case (141 STC 298)works contracts
include any type of agreement wherein the construction of a
building took place for valuable consideration.Mycon Construction
(111 STC 322) Validity of composition scheme is upheld.Larsen &
Tourbo Ltd. (17 VST 1) (SC)There is only one sale, i.e. from
subcontractor to employer and not multiple transactions.
IMPORTANT JUDGEMENTSSilpi Construction (Kerala HC 2009)Timber
and plywood are not used in the same form but in other form .Kone
Elevators (140 STC 22)Contract of erection and installation of lift
is a contract of sale and not works contract. Matushree Textile
(132 STC 539)Property in goods (colour shade) transferred while the
process of dyeing of textiles. L & T Limited V/s State of
Karnataka (2009), Depreciation and other expenses are allowed as
deduction.
IMPORTANT JUDGEMENTSNCC SMS Unity JV (MSTT , SA No.-127 of 2010,
dated 04/02/2012)Composition method , once opted , can not be
changed by revised return and pure profit of contractor is taxable
under composition, if subcontractor opts for composition.Nikhil
Comforts (MSTT , SA No. 3 of 2010, dated 31/03/2012)The amount of
Service tax is treated as a part of sale price in case of
composition.DDQ- M/s. Sujata Painters, Dt. 20.01.2012 - Service Tax
forms part of sale price and taxed accordingly.
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