Workshop On: Taxability of Works Contracts

Slide 1
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RAKESH GARG, FCA
Workshop on
Taxability of
Works Contracts
by
NIRC of ICAI
0n 12.01.2010
Slide 2
Taxability of Goods & Services involved in
execution of works contract
- Judgment by the SC in Gannon Dunkerley in
1958 holding all ingredients of Sale of Goods
Act must be satisfied to tax a sale transaction
- Amendment in Constitution in 1982; Definition of
sale widened; scope expanded; Indivisible
works contract transactions made divisible by
fiction of law.
- Held constitutionally valid in Builders India
- Gannon Dunkerley in 1992 on taxable event &
Measures of tax.
- Amendment in CST Act w.e.f. 11.5.2002
History of Works Contract
Delhi VAT on Works Contract by Rakesh Garg, FCA
Slide 3
Divisible only through fiction of law.
Property in the goods is transferred while
executing works as per theory of accretion
(Immoble.) or accession (moble.)
Every Composite Contract is not Works Contract.
Material already incorporated cannot be taken
back in case of breach of contract.
Taxable to the extent of material involved
Merely job work, e.g., job of blasting, leveling,
etc., which doest involve any material, is not
taxable in VAT.
No standard formula. Depends upon facts.

Indivisible Works Contract
Slide 4
Sale vs. Works Contract
Specification theory has been ruled out by the Courts for
determination of any transaction as WCT except in
special circumstances, to illustrate:
Supply of lifts has been held as a sale transaction by
the SC in Kone Elevators [(2005)140 STC 22 Now
before the larger bench];
Supply of ship held as sale by SC in Hindustan
Shipyard [(2000) 119 STC 533];
Supply of printed corrugated boxes by Delhi HC in CIT
vs. Dabur India 198 CTR 375 and supply of printed
labels by Maharashtra HC - held as sale for the
purpose of sec. 194C of I.T. Act.
However, Madras HC held as WCT- (2009) 26 VST 205.
Slide 6
Meaning (DVAT): Works contract includes any
agreement f or carryi ng out f or cash or f or def erred
payment or f or val uabl e consi derat i on, t he
building construction, manufacture,
processing, fabrication,
erection, installation,
fitting out, improvement,
repair or commissioning
of any moveabl e or i mmovabl e propert y.
However, t axabi l i t y onl y on mat eri al s i nvol ved
t herei n.
DVAT and Works Contract
Slide 7
Maintenance Contracts
Maintenance Contracts including AMC
Not Taxable under VAT if does not involve any material
such as pest control, cleaning contracts, etc.
-Taxable under VAT if involve material to be transferred
from contractor to contractee Exemptions available
-Advisable to specify the sale and service separately in
the contract / order to avoid double taxation.
Slide 8
S.C. in Imagic Creative
A distinction must be borne in mind between an
indivisible contract and a composite contract
The court must also bear in mind that where the
application of a Parliamentary and a legislative Act
comes up for consideration; endeavours shall be made to
see that provisions of both the Acts are made applicable
Payments of service tax as also the VAT are mutually
exclusive. Therefore, they should be held to be applicable
having regard to the respective parameters of service tax
and the sales tax as envisaged in a composite contract
as contradistinguished from an indivisible contract.
Slide 9
Computation of Taxable Turnover - STEPS
1. Whether the contract is divisible or indivisible
3. If divisible - Pay local / central tax on supply portion
4. If partly divisible, e.g., (1) supply and (2) installation
(WCT) - Pay tax on supply portion and compute material
involved in the installation portion
2. Whether it is taxable under local Act or CST Act
5. If indivisible - Reduce labour & services from contract value
Computation of VAT Turnover
Slide 10

Identify whether transaction is governed under
the CST Act or under the DVAT Act
If sal e i s made i n t he course of i nt er -
St at e t rade; t hen t axabl e under t he CST
Act
If sal e i s made wi t hi n Delhi t hen t axabl e
under t he DVAT Act
Slide 11
Inter-State transfers to third party for job work

Sale pertains to those goods which are used in the
contract and transferred to the contractee.

CST shall be charged by the contractor in the
other State

However, if the contractee move the goods at its
own, then reduction in ITC and further, to be
supported with form F.

ITC already reversed can be reclaimed if goods
come back to Delhi for sale in whatever form.
Inter-State Works Contract
Slide 12
12
S.C. in A&G Projects
dt. 11.12.2008 (Read with Kar. HC)
A
(Manufactr.)
(UP)
B
(contractor)
(supply + Installation)
or (Supplier) (Delhi)
C
(Contractee/
End User)
(Delhi)
Transaction of SPECIFIC goods or
Standard Goods with prior contract between B & C
or Goods dispatched by A directly to C
Sale by B to C is not 3(b) sale, Sec.6(2) not applicable
Sale by B is also 3(a) sale, taxable in U.P. (not in Delhi)
Sale by A to B is 3(a) sale, without dispute
Slide 13
13
A
(Manufactr.)
(UP)
B
(contractor in Delhi)
(supply + Installation) or
(Supplier in Delhi)
C
(Contractee/
End User)
(Delhi)
Transaction of STANDARD goods No prior contract
between B & C; Goods sold in transit
B can issue Form C to A
Sale/WC by B to C is taxable in Delhi as inter-State sale;
However can be exempted thr. E-I
Sale by A to B is 3(a) sale, without dispute
S.C. in A&G Projects Contd
Slide 14
Computation of VAT
1. Calculate Total Turnover
2. Reduce Deduction u/r 3
Aggregate of contract price
Computation of VAT (WCT)
3. Compute Output Tax
Cost of land+labour & Service
Declared goods & printing- 4%
Otherwise - 12.5%
4. Reduce Input Tax Credit
Tax paid on local eligible pur-
chases of goods+capital goods
5. Result is Net Tax Payable
Aggregate of B/F Tax, TDS
and self assessment challan
Depends upon State Provisions
Slide 15
(i) labour charges for execution of works; - means direct labour
(ii) charges for planning and architects fees;
(iii) Hire charges for mach./tools used for the works contract;
(iv) cost of consumables, e.g.,water,fuel, etc., which get consumed;
(v) cost of establishment of the contractor to the extent it is relatable
to supply of labour and services;
(vi) other similar expenses relatable to supply of labour & services;
(vii) profits earned by the contractor to the extent it is relatable to
supply of labour and services
Taxable VAT Turnover
2. Reduce Labour & Services
Slide 16
Methods of
Computation of
Labour & Services
Actual Basis
Percentage prescribed
Where amount not
ascertainable from
books of accounts
DVAT-15% to 30%;
General-20%; Civil-25%
Maintain records
for satisfaction of
A.A.
Labour & Services - VAT
Composition
Basis
Slide 17
Tax on goods supplied by contractee (Section 11A)

Not taxable if supplied free to the contractor by the
contractee without transfer of ownership in goods.
Ownership of the goods shall be deemed to be transferred
from the contractee to the contractor and liable to pay
DVAT in the following cases : -
If the value of such goods is included in the total value
of contract;
If the consideration of material supplied is deducted
from the total value of contract; and
If material is not supplied with the condition that such
supply is on bailment.
Slide 18
Computation of Output Tax
Calculate amount of tax on taxable turnover
applying the rate of tax, i.e. 12.5%; (4% on printing
contracts).
Declared goods used in the works and transferred
in the same form are taxable 4%.
Many states, like U.P., have prescribed the rate as
applicable to the respective commodity. In such a
case, after reducing the labour and services,
inputs shall be taxable proportionately at the
applicable rate.
Output Tax
Slide 19
Declared Goods used in the execution of Works
Declared Goods, used in the execution of works contract,
if transferred in the same form, are taxable @4%
Declared goods are defined u/ s 14 of CST Act, containing
16 category of items and includes iron & steel, cotton
fabric, man-made fabric, woven fabric, oil-seeds, crude oil,
cereals, pulses, hides & skins etc.
Declared goods must be transferred in the same form,
then only rate of tax is 4% and that will be calculated on
cost plus reasonable profit.
The phrase in the same form held unreasonable by the
AP HC because most of the times goods are transferred
after fabrication. But contrary views by Bombay HC
Output Tax
Slide 20
Declared Goods used in the execution of Works
Transferred in the same form How to ascertain

Necessary to see nature of goods transferred by
contractor

Only the material involved in the execution of contract
is taxable.

I t should be the same at the time of transfer, as were at
the time of purchase

Purchase of iron and steel and transfer in the form of
rolling shutter Different Commodity.

Cutting of iron rod - Cut piece is not a different
commodity

Thread is tfd. I n same form even after fabrication.
Output Tax
Slide 21
Input Tax Credit

Works contractors can claim ITC on following
purchases:
Raw Material
Consumables which do not get destroyed
Packing Material
Capital Goods other than those specified in
Sch.VII
VAT paid on hire charges and consumable which get
destroyed can not be claimed as ITC since these are
allowable deductions as labour and services and are
exempted sales.
Slide 22
Input Tax Credit
TRANSFER TO OTHER STATES

The amount of the tax credit shall be reduced by 2%
(w.e.f. 1.6.2008) of the purchase price if the goods or
goods manufactured out of such goods are to be
exported from Delhi by way of transfer to a
(i) non-resident consignment agent; or
(ii) non-resident branch of the dealer;
ITC will be reduced only in relation to those goods
where it is claimed or is claimable, i.e., no reduction
shall be made in respect of those goods which are
purchased from local unregistered dealers or in the
course of inter-State trade.
Slide 23
Input Tax Credit
STOCK TRANSFER TO OTHER STATES
In addition, the transferor shall obtain Form
F from the transferee to claim exemption
from central sales tax.
Where the goods so transferred are
received back in Delhi either in the original
form or in some other form, tax credit
already reduced can be reclaimed in the tax
period when goods are so received.
Slide 24
HELD by SC
Judgment applicable to civil contracts
Even if there is no privity of contract between the
contractee and the sub-contractor, that would not do
away the principle of transfer of property by the sub-
contractor by employing the same on the property
belonging to the contractee.
This reasoning is based on the principle of accretion
of property in goods.
S.C. in L & T Sub-Contracts
Slide 25
HELD by SC
Thus, in our view, in such a case the work, executed
by a sub-contractor, results in a single transaction
and not as multiple transactions. ...
If the argument of the Department is to be accepted,
it would result in plurality of deemed sales which
would be contrary to Article 366(29A)(b) of the
Constitution.
It may be noted that, in this case, the apex court has
commented upon the taxable event and not the
measure of tax.
Slide 26
However, the Commissioner, DVAT Act in the case of
Doshian recently (23.12.2009) held
Judgment of SC is distinguishable in Delhi
Where, as per the facts of the case, property in the
goods is transferred at the time other than
incorporation, L&T case is not applicable
Where the sub-contractor has opted for the
composition scheme, L&T case is not applicable.
Slide 27
Prepare the project wise (or at least State wise) P&L
Account
Project receipts in Delhi should match with Delhi
VAT GTO
Complete account of exemptions claims
particularly inter-State purchases and sale in the
course of import.
If labour and services are claimed on actual basis, it
must be reconciled with the P&L

Reconciliation with P&L
Slide 28
Special care must be taken when reconciling the
provisions of service tax and VAT.
Income Tax TDS or VAT TDS is deducted without
making actual payment of the bill Service tax is
payable on the amount of TDS deducted by the
contractee.
If adhoc mobilization advance is received for a works
contract at the time of entering into the contract VAT
is not payable since work has not been executed.
Service tax is payable; but on which value is it total
receipt or value relatable to services
Retention money deducted by the contractee Cenvat
credit cannot be claimed on such amount
Precautions
Slide 29

If goods are purchased from other States on the
strength of Form C for execution of works, ensure that
these goods are prescribed in the Central R.C. of
purchaser

Do not claim input tax credit or purchase goods on the
strength of form C which are used in labour contracts
or which are exempted as labour and services.

If the invoice raised by the contractor is passed by
contractee for a lesser amount, and the amount is
subsequently adjusted in the output tax by the
contractor u/ s 8, the contractor must preserve the
correspondence with the contractee to satisfy AA
Precautions
Slide 30
Price Escalation Increase in consideration is
chargeable to tax in the tax period when bill is raised
or when it is received, depending upon the method of
accounting.
If the dealer is engaged in sale as well as WCT, since
labour and services are allowed only for WCT, do not
claim labour & services on the sale component
including sale of capital goods.
Ensure that TDS has been deducted as prescribed and
TDS return has been filed in time. It is separate from
TDS u/ s 194C of the IT Act. VAT TDS can be
deducted on material component but IT TDS should
be deducted on total value.
Precautions
Slide 31

Ensure that debit/ credit note is issued by contractor
for subsequent adjustments in the output tax. It is
mandatory.

Ensure that returns have been prepared and filed
correctly because penalty provisions are severe.

Ensure that records prescribed under the Act or
Rules are properly maintained and retained.
Precautions
Slide 32
Whether to enter into a works contract or
supply (+) labour contracts;
Documents should be drafted in that manner
only; Agreement can be annulled by the Deptt;
No confusion between works contract vs.
supply plus labour contract or works contract
vs. Right to Use contracts;
Be careful in local vs. ISS Transactions;
Analyse the transaction before applying the
provision;
To repeat, be careful in drafting of contracts.

Need for Tax Planning
Slide 33

When making any planning, consider all
four legislatures together, i.e., VAT/CST,
Service Tax, Excise Duty and Income Tax
Sometimes cost of Planning is more than
or almost equal to the cumulative tax
saving.

Need for Tax Planning
Slide 34
THANK YOU
RAKESH GARG, FCA
Author
Introduction to G.S.T.
Delhi VAT Ready-Reckoner
Concepts of Central Sales Tax
Goods under Sales Tax Laws
Works Contract, Right to Use and Delhi VAT
Service Tax Ready Reckoner
Service Tax, CST & VAT on Composite & Works Contract
Directory with Ready Reckoner to Service Tax Classification
phones : 011- 6596 0912-13; 6528 8584
mail: sahaigarg@hotmail.com; sahaigarg@gmail.com

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2004 By Default! A Free sample background from www.awesomebackgrounds.com

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