KAEFER Group

Indirect Tax System in India

KAEFER Company Profile 2007 - 2008

Corporate Communications_2008-05

More than good ideas.

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Proposed Indirect Tax System in India

By Central Govt
*Excise Duty CENVAT System *Service Tax CENVATSystem (Input Credit available towards goods & Services

By State Govt
*VAT has replaced State Tax from 1st April 2005, (Sales Tax, WCT, Lease Tax, TOT, SC but not octroi)

Corporate Communications_2008-05

Indian Goods & Services Tax Act (Central GST) st April, 2010 From 1

State Goods & Services Tax Act (State GST) - Merger of all state taxes including octroi - Service Tax Levy to the state. (From 1st April, 2010)

*On the same goods or services Central Govt. would collect Central GST & the states would collect state GST.
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Constitution of India (Empowers State Govt. to Levy, Collect & Retain Sales Tax)
Movement of goods is deciding factor State transactions of purchases/sales * "A" State VAT Act & Rules - Liability/Registration - Scheme of Taxation - VAT Credit - Works Contract - Departmental Processdings - Penalty/Recovery - Returns/Payments / Forms * State Sales Tax Act CST ACT State VAT Act State VAT Act State * "B" * State Sales Tax Act - Registration - Interstate Sales - Interstate Transfers - Rate of CST - Penalty - Declared Goods - Forms - C, EI - EII, F, H, etc CST Act, 1956 & Rules State Interstate - Import/export Transactions

Corporate Communications_2008-05

* Local Movement - State VAT Act * Interstate Movement - CST Act

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What is a Indivisible Works Contract?

1. It is a works contract(WC) & Not a Normal Sale 2. The indivisible works contract : Composite Turnkey Jobs (Labour & Material is involved) Breaking of Price for supply(Material) & Labour may not be separate sale of materials & Labour contract. Whether the contractor/seller gets the order from the customer for definite goods or for WC 3. The clauses in the agreement between the contractor and the contractee are the key factors for determining whether the contract is of sale of goods or WC.
Corporate Communications_2008-05

4. If the contract is divisible then, the supply of material is a sale contract and the labour portion is WC. If in the labour portion, material is also used then VAT (WC) is applicable.
5. The concept of local & Inter-state WC . Local WC are covered under the Local VAT Act & Inter-state WC are covered under the central sales tax act.
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Sale Vs. Works Contract (Concept)

In a contract of sale, the main object is the transfer of property and delivery of the possession of chattel as a chattel to the buyer, where it is not so, it is a contract of works & labour (Hindustan Aeronatics Ltd. 55-STC 314-SC) The Contract between a Photographer and his Customer is not a contract of sale but is work of Art & Labour (B C Kame 39 STC 237 SC) The test therefore is as whether in a particular case, it is a contract of sale (Chattel as a chattel) or WC, neither the ownership of the material not the value of skill or labour as compared with the value of the material is conclusive, although such matter may be taken into consideration of the particular case.

Corporate Communications_2008-05

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Sale Vs. Works Contract (Concept)

Contd

IF the thing to be delivered has any individual existence before the delivery as the property of the party who is to deliver it, then it is a sale. If the main object of the work undertaken is not the transfer of a chattel qua chattel, the contract is one for work & labour (Hindustan Shipyard 119 STC 533 SC). It is made clear that contract of building buses, ships are that of the sale even if they are manufactured as per the specifications and under strict supervision of the buyer. (Hindustan Shipyard 119 STC 533 SC)
Corporate Communications_2008-05

The activity is a sale or WC depends upon the facts, the terms and conditions and intention of the parties. (McKenzis Ltd. 165 ST C -58-SC)

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What is Deemed Sale?

1. The scenario before the 46th constitutional amendment (Before 2nd February, 1982) The sales of goods covered under the sale of goods act were only liable for sales tax. The supreme court judgment of Gannon Dunkerely (9 STC 353) The invisible WCs were not covered under the state sales tax laws. The states were not empowered to levy sales tax on indivisible WCs.
Corporate Communications_2008-05

2. The 46th Amendment to the constitution of India: Sub-article (29-4 reads as under (b) a tax on the transfer of property in goods (whether a goods or in some other form) involved in the execution of a works contract.

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What is Deemed Sale?

Contd.

The concept of deemed sale under the state VAT/CST Acts: The sales tax/VAT/CST is applicable only on the value of the goods and not on labour portion of the contract. Alternatives are prescribed for arriving at the material value of the contract.

3. The states are empowered to levy sales Tax/VAT/CST on such deemed sales only after the 46th Amendment to the constitution of India.
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Divisible Works Contracts

State A Contractor X
State A Contractor X or X1
Corporate Communications_2008-05

Supply Normal Sale

VAT 4%/12.5%

State A Contractee Y
State A Contractee Y

Erection & Commissioning

Labour Job(WC) (if material used, the WC provisions are attracted, otherwise pure labour job)

Two separate contracts, one for supply portion and other for labour work, two separate companies, preferable. No artificial break of sale price to avoid VAT (WC) on labour portion. The clauses in the agreement and intentions of the two parties, important.
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Indivisible Works Contracts

State A Contractor X
Deemed Sale (WC)

VAT (WC) is applicable on contract value as per the three options availble

State A Contractee Y

Corporate Communications_2008-05

Only one indivisible WC The clauses in the agreement and intentions of the two parties, important. VAT (WC) applicable only on the material value of the contract determined by the three methods (options) under State VAT Act.

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Activities Covered Under works Contracts

1. Construction Jobs 2. Civil Work 3. Erection of Plant and Machinery 4. Processing conversion jobs 5. Repair Jobs 6. Annual Maintenance Contracts 7. Customized Printing Jobs 8. Building of bodies on chassis 9. Electrical Fittings 10. Installation of lift/elevator in the building 11. Air Conditioning Installations 12. Painting Jobs 13. Repairs of Vehiicles 14. Re-treading of old tyres 15. Electro-plating, electro-galvanizing, anodizing and the like
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Corporate Communications_2008-05

Indivisible Works Contracts Various Types

Indivisible Composite Works Contracts Construction Contracts Erection of Plant & Machinery EPC Contracts Installation and Commissioning of lifts/elevators Civil Works Job Works Processing Conversion Jobs Printing Jobs Repair Jobs Electro-plating, electro galvanizing, anodizing and like Customized printing jobs Pure Labour Jobs Pure labour jobs where no own material is used by the contractors (consumables, chemicals which evaporate during the process are allowed. Art Works Works of Art & Labour (Art Work) Photography Paintings by the artist

Corporate Communications_2008-05

VAT Applicable

VAT Applicable

No VAT Applicable

No VAT Applicable
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Basic Concepts of Levy of VAT/CST on works contracts (Deemed Sale)

1. No VAT/CST is applicable on pure labour jobs where no material of his own is used/added by the job worker(vendor). 2. VAT/CST is applicable on material value (Deemed Sale) of the WC. 3. To arrive at the material value in the contract, three methods are adopted under the state VAT Acts namely: Actual Non-material Deduction Method Standard Deduction Method Composition Tax Method (Non Legal Method) 4. VAT Setoff/Credit is available under the State VAT Acts to both the Contractors and contractees except for the negative list items purchased. 5. For divisible contract, supply of material is a normal sale contract and the labour contract is subject to VAT(WC) provisions, only if the own material is used by the contractor. 6. If the contractor dispatches his own materials from one state to another, directly to the customer under the indivisible WC, then it is a deemed inter-state sale of material subject to levy of CST by the state of dispatch.
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Corporate Communications_2008-05

Maharashtra VAT Act, 2002 (MVAT Act) WC Provisions

1. Definition of Sale under Section 2(24) explanation (ii): The transfer of property in goods (whether as goods or in some other form) involved in the execution of - #(WC namely an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing fabrication, erection, installation, fitting out, improvement, repairs or commissioning of any movable or immovable property). # The Amendment from 20th June, 2006 2. For the WC carried out inside the state of Maharashtra only. 3. Applicable provisions under MVAT Act & Rules: Rule 58 Actual Labour Deductions Option, Rule 58 Proviso Standard Labour Deduction Option. Section 42 Composition (WC) Tax Section 31 & Rule 40 TDS (WC) Provisions Rule 52 Setoff, Rule 53 Reductions of Setoff, Rule 54 Negative List (No VAT Setoff)
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Corporate Communications_2008-05

Works Contract Taxation Under State VAT Act

Contractor [Maharashtra] When Contractor Bills to the contractee for the Works Contract Carried out by him in the state Option A (Legal) Option B Composition VAT Paid on Inputs Rs. 2.00 (Credit 64%) Rs. 1.28 Contract Price @8% Composition Tax on Rs. 100.00 Rs. 100.00 Rs. 8.00 Rs. 108.00

A1 [VAT Paid on Inputs Rs. 2.50

Contract Price (-) Actual Non-Material Value Material Value
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A2 [VAT Paid on Inputs Rs. 2.50 Rs. 100.00 Rs. 25.00 Rs. 75.00 Rs. 9.38 Rs. 100.00 Rs. 9.38 Rs. 109.38 VAT Payable (Rs. 9.38 - 2.00) Rs. 7.38

Rs. 100.00 Contract Price Rs. 80.00 Rs. 20.00 Standard Deduction (NonMaterial) Material Value @ 12.5% VAT on Rs. 75.00

@ 12.5% VAT on Rs. 20.00 Rs. 2.50 Tax Invoice

Invoice
Contract Price
@8% Composition Tax

Rs. 100.00 Tax Invoice Vat @ 12.5% on Rs. 75.00

Rs. 100.00
Rs. 8.00

Vat @ 12.5% on Rs. 20.00 Rs. 2.50 Rs. 102.50 VAT Payable (2.50 - 2.00) Rs. 0.50

@5% Composition Tax(20-06-06) Rs. 108.00 VAT Payable (Rs. 8.00 - 1.28) Rs. 6.72
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2% TDS Deduction by Contractee

2% TDS Deduction by Contractee

2% TDS Deduction by Contractee

Works Contract Taxation Under State VAT Act

Contd..

Corporate Communications_2008-05

1. Setoff will be available to contractor on VAT paid on local purchases. Partial setoff(64%) for composition scheme only in Maharashtra. For 5% Composition Tax (Construction Contracts), setoff available is in excess over 4% of inputs VAT paid. 2. Composition option may continue to be available under VAT act (Separate rates in states). No Credit available for composition contractor in the state other than Maharashtra. 3. If contractee (customer) purchases goods for erection of immovable property, no setoff is available to him. 4. Ongoing Contracts Tax liability would not exceed under VAT which was determined as per earlier law.

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Illustrations Option A1, A2 & B

Option "A1" (Actual Non-Material Deduction) Option "A2" (Standard Deduction) Material Purchase(All Local) Rs. 30.00 ED 16.32% Rs. 4.90 12.5% VAT on Rs. 34.90 Rs. 4.36 Less: 12.5% VAT Setoff Rs. 4.36 Less: CENVAT Credit Rs. 4.90 Material Cost Rs. 30.00 Option "B" (Composition Tax)

Corporate Communications_2008-05

Material Purchase(All Local) ED 16.32% 12.5% VAT on Rs. 34.90 Less: 12.5% VAT Setoff Less: CENVAT Credit Material Cost 20% margin on Material Cost Material Value Labour (Profit) Contact/Sale Price Add: ED 16.32% of Rs. 36.00 Add: ED 16.72% of Rs. 64.00 Add: 12.5% VAT on Rs. 41.87 [36 + 5.87 (ED)] Less: CENVAT Credit Less: VAT Setoff Cost to the contractee Cost to the contractee without VAT Setoff VAT Payable = (O) - (I) = Rs. 5.23 - Rs. 4.36

Rs. 30.00 Rs. 4.90 Rs. 4.36 Rs. 4.36 Rs. 4.90 Rs. 30.00 Rs. 6.00 Rs. 36.00 Rs. 64.00 Rs. 100.00 Rs. 5.87 Rs. 10.45
Rs. 5.23

Material Purchase(All Local)

ED 16.32% 12.5% VAT on Rs. 34.90 Less: VAT Credit (64% of 4.36) Less: CENVAT Credit Material Cost

Rs. 30.00
Rs. 4.90 Rs. 4.36 Rs. 2.79 Rs. 4.90 Rs. 31.57

Labour (Profit) Contact/Sale Price Add: ED 16.32% Add: 12.5% VAT on 80% of Rs. 116.32 i.e. on Rs. 93.06 Less: CENVAT Credit Less: VAT Setoff Cost to the contractee

Rs. 70.00 Rs. 100.00 Rs. 16.32 Rs. 11.63 Rs. 16.32 Rs. 11.63 Rs. 100.00 Labour (Profit) Contact/Sale Price Add: ED 16.32% 8% Composition Tax Less: CENVAT Credit Less: VAT Setoff(Full) Cost to the contractee Cost to the contractee if No VAT Setoff Rs. 70.00 Rs. 101.57 Rs. 16.58 Rs. 9.45 Rs. 16.58 Rs. 9.45 Rs. 101.57 Rs. 111.02

Rs. 16.32 Rs. 5.23 Rs. 100.00 Rs. 105.23

Rs. 0.87

Cost to the contractee if No VAT Rs. 111.63 Setoff VAT Payable = (O) - (I) = Rs. 11.63 Rs. 7.27 - Rs. 4.36

VAT Payable = (O) - (I) = Rs. 9.45 - Rs. Rs. 6.66 2.79
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Tax Deducted at Source on Works Contract (MVAT Act)

1. In all the three options, the contractee/customer has to mandatorily deduct 2% TDS [2% of net price excluding VAT (WC) & Service Tax amounts) and pay the same to the government Treasury within the prescribed period. 2. In case the contractor is not Registered Dealer under MVAT Act, then 4% TDS to be deducted and paid by the contractee/customer. 3. Those contractee which are notified, only would deduct TDS like: R. D. under MVAT Act Governments State or Central Co-operative Housing Societies 4. The contractee would: Issue TDS Certificate to the contractor Would maintain register in form Obtain TAN form Sales Tax deptt. (Provision is deleted) 5. In most of the states TDS provisions are incorporated in the state VAT laws.

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Negative List MVAT Rules (Rule 54) (WC)

1. Purchases effected by way of WC where the contract results in immovable property [Rule 54(g)]. 2. Purchases of building material which are not resold but are used in the activity of construction. 3. Purchases of office equipment, furniture & fixtures, if such goods purchased are treated by the claimant dealer as Capital Assets [Rule 54(I) Setoff in excess over 4% from 8th September, 2006]
Corporate Communications_2008-05

4. Any purchase of consumables or of goods treated as capital assets by the claimant dealer where the dealer is principally engaged in doing job work or labour work and is not engaged in the business of manufacturing of goods for sale by him and incidental to the business of job work or labour work any waste or scrap goods are obtained or sold. [Rule 54(d)]
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VAT Transactions between Main and Sub Contractor

Sub Contractor State A
VAT Calculations
VAT Form (Sub-Contract) Exchange of VAT Forms between MC and SC)

Main Contractor State A

VAT Calculations

Works Contract VAT Under legal & Composition Options

Customer State A

Sub Contract Value

30% Standard Deduction Material Value @12.5% VAT on Rs. 42.00
Corporate Communications_2008-05

Rs. 60.00
Rs. 18.00 Rs. 42.00 Rs. 5.25

Total Contract Value

(-)Sub Contract Value

Rs. 100.00
Rs. 60.00 Rs. 40.00

1. If customer buys building material (Steel, Cement) in construction contract, no VAT Credit is available to the customer. 2. TDS is deductible against advance payments received towards contract value

30% Standard Deduction

Material Value @ 12.5% VAT on Rs. 28.00

Rs. 12.00
Rs. 28.00 Rs. 3.50 Rs. 100.00

Invoice @12.5% VAT on Rs. 42.00 Total

Rs. 60.00 Rs. 5.25 Rs. 65.25

Tax Invoice

+ @12.5% VAT on Rs. 70.00 Rs. 8.75 Total Rs. 108.75

Full credit is available of the VAT paid on the input by the Main/Sub Contractor under legal option

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VAT Transactions between Main and Sub Contractor

1. No TDS by the Main Contractor from the sub-contractors Invoice

Contd

2. Exchange of VAT Forms between Main (VAT Form 406) & Sub-contractor (VAT Form 407) for the payment of VAT. 3. 8% composition on Rs. 60 at the hands of sub-contractor and on Rs. 40 at the hands of main contractor. 64% of VAT credit is available under composite scheme.
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VAT Local Works Contracts

The taxation of construction contractor in Maharashtra. V1 (State B)
3% CST

Works Contract VAT (B)

C Form (No Setoff)

State A Contractor

Legal Option

Composition

V2 (State A)
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State A Contractee (Customer)

4% or 12.5% VAT (A)

Rs. 100.00

(-) Rs. 30.00

Full VAT Credit is available under legal option & in excess over 4% under composition Option, VAT = (B) (A) Rs. 70.00 4% & 12.5% VAT(B)

5% on contract Value (B) (Construction) No Credit available to customer, being erection of immovable property

Please refer to the notification dated 30th Nov06 on Construction Contracts from 20th June06
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Works Contracts Free Issues by the Customer

A Gross Price (including value of free issues) charged by the customer
OPTION A
State "A" Vendor Price Rs. 60.00 Free VAT @ 12.5% Rs. 7.50 Issue Rs. 67.50
State "A" Customer Cost Rs. 67.50 Free 0% VAT

State "A" Contractor Price Rs. 100.00 Sale VAT @ 12.5% Rs. 12.50 Sale Price Rs. 112.50

Customer VAT Cost A Rs. 7.50 Rs. 12.50 Rs. 112.50

OPTION B
State "A" Vendor Price Rs. 60.00 Free VAT @ 12.5% Rs. 7.50 Issue Rs. 67.50 State "A" Customer Cost Rs. 67.50 Free 0% VAT

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State "A" Contractor Price Net Off Free Material Sale Sale Price Rs. 40.00 Vat 12.50% Rs. 5.00 Sale Price Rs. 45.00 State "A" Contractor Price Rs. 60.00 VAT @ 12.5% Rs. 40.00 Sale Price Rs. 100.00

Customer

Total Cost
B

Rs. 7.50 Rs. 5.00 Rs. 12.50

OPTION C
State "A" Vendor Sale Price Rs. 60.00 VAT @ 12.5% Rs. 7.50 VAT Rs. 67.50 State "A" Customer Cost Rs. 60.00 Customer 100 + 12.5% VAT VAT Cost C Rs. 12.50 Rs. 12.50
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Sale Cost to Cost

7.5%-7.5%=0%

Summary MVAT (WC) Provisions

1. For any WC carried out by the contractor/seller, three options are available to levy VAT/Composition Tax namely: Actual Non-material Value Deduction Standard Non-Material Value Deduction Composition Tax(Non-Legal) 2. In all the options VAT Setoff/Credit is available to both the contractor (seller) and the contractee(buyer). For Composition Tax option, the contractor gets 64% in excess over 4% credit of the total VAT paid. 3. No VAT credit/setoff available on purchase of negative items. 4. 2% TDS Deduction of net sale price (excluding VAT & Service Tax) charged by the contractor and payment of same to the government within the prescribed period by the contractee (if the contractor is unregistered dealer, the TDS deduction is 4%) 5. VAT forms are provided for the transactions between main and sub-contractors. 6. Specific provisions for WC in MVAT Act and rules.

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VAT and Service Tax

1. While rendering Taxable Service, if there is a deemed sale of goods/materials also, then both Service Tax and VAT(WC) is applicable. 2. The supreme court & the High Courts have confirmed that both Service Tax and Sales Tax (VAT) is payable by the service provider, if the goods are also used in such service contracts. e.g. Construction contracts, Annual Maintenance Contracts. 3. If in the taxable service Value, if the value of actual material sold can be determined, then VAT(WC) would be payable on the material value and service tax on the balance value. 4. If the value of materials used in the taxable service is on the presumptive basis then on total contract value VAT (WC) would be calculated by 2 options available under the MVAT Act (Standard Deduction & Composition) and service tax would be calculated as per the service Tax Law (Abatement Method). 5. The credit of both VAT(WC) and service tax paid is available subject to certain conditions to the service recipent.
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Corporate Communications_2008-05

Annual Maintenance Contract (AMC) Illustration Working of VAT (WC) & Service Tax Payable AMC (Predominant Service Contract but parts also would be replaced) VAT (Works Contract)
A1 (Actual Non-Material Deduction) Rs. Contract Value 100.00 Rs. Non Material 80.00 Rs. Material 20.00
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SERVICE TAX
B (Composition Tax) Contract Rs. Value 100.00 S1 (Actual Material Deduction) Contract Value Rs. 100.00 Material Sold Rs. Material 100.00 8% Comp. Tax Rs. 8.00 Rs. 20.00 S2 (Abatement Method) Contract Value Rs. 100.00 Abatement Rs. 67.00

VAT @ 12.5%

Rs. 2.50

A2 (Standard Deduction) Contract Rs. Value 100.00 Std. Rs. Deduction 40.00 Rs. Material 60.00 VAT @ 12.5% Rs. 7.50

Material Service Tax @12.36%

Rs. 80.00
Rs. 9.89

Material Service Tax @12.36%

Rs. 33.00
Rs. 4.12

Fully VAT Credit available to service provider in A1 & A2 options but only 64% VAT credit in option B The customer can get VAT Credit if the goods are not in the negative list.

CENVAT Credit is not available to service provider in S1 option & in Option S2 The customer can get service tax credit under CENVAT Credit rules

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Annual Maintenance Contract (AMC) Illustration Working of VAT (WC) & Service Tax Payable

Contd

Invoice Contract Value VAT (A1 Option) Service Tax (S1 Option)
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Note: Rs. 100.00 Rs. 2.50 Rs. 9.89 Rs. 112.39 If the actual material value is available, then VAT (WC) would be calculated on that value and on balance value Service Tax would be calculated, otherwise separate workings as per VAT (WC) and Service Tax Provisions

Total

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Works Contracts Certain Specific Issues

1. The supreme court judgment in the case of K. Raheja development corporation (141 STC, 298): The Ratio of the judgment Maharashtra Amendment to the Definition of works contract from 20th June, 2006 Maharashtra trade circular No. 12 T of 2007 dated 07-02-2007 Amendment to Delhi rules from 7th Sept06 to provide for deduction of Land Cost from the contract price. 2. Service Contracts AMC Contracts in the states by the company/contractor VAT & CST Registration in the State where work is carried out by the main contractor and the sub contractor? 3. Replacement of warranty Parts under the warranty period Replaced by the dealers/distributors from their own stock or Directly replaced by the manufacturer 4. Sale in Transit (E-1 Sales) under indivisible works contract Allowable only if proper documentation/transaction is made by the contractor.
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Corporate Communications_2008-05

Software Companies & VAT

1. Software Packages are intangible goods subject to VAT under the VAT laws. 2. As per the recent judgement of TCS (137 STC 620 SC), the supreme court observed that: In the case of software, both canned and un-canned, all these are possible. Intellect property when it is put on a media becomes goods Software may be intellectual property but the property contained in a medium is bought and sold, it is an article of value and such software can be described as goods subject to sales tax. It was not dealing with unbranded/customized software and no opinion there on was being expressed because in case of unbranded software other questions like situs of contract of sale and / or whether the contract was a service contract may arise.

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Software Companies & VAT

Contd

3. The state governments started levying VAT on the unbranded/customized softwares after the said judgment of TCS of the supreme Court. Recently the commissioner of sales tax, government of Maharashtra has passed DDQ order wherein it has been decided that the sales tax (Now VAT) is applicable on unbranded/customized software in the case of MASTEK Ltd., As certain clauses in the agreement with the client were confirming that it was a sale of software product. No VAT credit is available on softwares goods being included in the negative list, in Maharashtra.

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Agreement of WC Proper Clauses of VAT/CST

1. Whether the contract is a sale contract or WC is dependable on the facts of the transactions, terms and conditions and the intention of the two parties. All such clauses in the agreements should be incorporated to avoid litigations. 2. In cases of individual WC, following clauses should be incorporated: The contractor and contractee intend to treat the whole contract as indivisible WC, all the time. The transfer of property of the contractors goods to the contractee shall take place as soon as the said goods are used in the execution of the contract. VAT, is applicable, under the provision of VAT Act, shall be leviable only on the value of goods used in the execution of said contract. The Contractee shall remain the owner of the material supplied him to the contractor for use in the execution of WC, all the time. There shall not be transfer/sale of such goods to the contractor at any time. No VAT is applicable on the said contract being a pure labour job as no material of his own used by the job worker Processor.

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Agreement of WC Proper Clauses of VAT/CST

Contd...

3. It is advisable, if the best option under the MVAT Act is decided before entering into the agreement by the contractor and the contractee, the same should be incorporated in the clauses of the agreement.

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Works Contracts Important Judgment

1. 2. 3. Sarvodaya Printers (114 STC 242-SC) Rainbow Colour Labs Ltd. (118 STC 9 SC) ACC Ltd. (140 STC 22-SC) Customized Printing Jobs are WC The state cannot tax, if marginal material is used for producing work of art Smaller transfer of properties in goods subject to tax in works contract It is a sale and not WC (CKD Packs) Textile Dying is WC (in other form) Sale of Vessel Not a WC Tax on material value of the contract 46th Amendment brings Fictional Break up of contract value Deductions available from total contract value Photocopying is not a sale but contract of work and labour In AMC, Contract of maintenance of Xerox machine there is implied sale of parts(WC)
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4. Kone Elevators (I) Ltd. 5. Matoshree Textiles 6. 7. 8. 9. Hindustan Shipyard Ltd. (119 STC 533-SC) Builders Association of India (73 STC 370-SC) Gannon & Dunkerley & Co. (1993) (88 STC 204 SC) Everest Copiers (103 STC 36 SC)

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10. Modi Xerox (114 STC 424 Karnataka)

Work Contracts Provisions State wise Comparison

1. Actual Non-Material Deduction Method Uniform an all the VAT States

2. Standard Deduction Method

3. Composition Tax Method

Mostly uniform in the states. In certain states Contractee does not get the VAT Credit.
Available in most of the states. Generally, the rate is 4% (Except in Maharashtra - 8%). In no state contractor and contractee avail the VAT Credit except in Maharashtra Composition is available. 12.5% VAT is payable in few states. Available in most the states but TDS percentages differ. Definitions differ, in states.
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4. Purchases from other states 5. TDS Provisions 6. Plant and Machinery

VAT & Inter-State Works Contract

State B
Material Supply - Rs. 80.00 2% CST Against C/D Forms STATE "A" Contractor (XYZ) (Manufacturer of Machinery used in the works Contract State "B" Customer

State "B" Contractor XYZ

State Works Contract VAT (If no material, pure labour job, NO VAT)

Erection & Commissioning - Service Tax / E. Cess = 12.36%

Total Contract = Rs. 80 (material) + Rs. 20 (Labour)
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1. If the contractor is under legal option in state B then VAT payable only on material value of the local purchases (All deductions to arrive at material value are available) 2. If the contractor opts for composition scheme in State B, then on total contract value Composition Tax (VAT) is payable. 3. Inter state works contract when contractor is in one state and contractee is in other state and goods move from one state to other under indivisible works contract.
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Works Contract Job Work

Where job-worker is inside and outside the state & uses some of his own material in the contract:
Material (No CST) 2% CST Against "C" Form Manufacturer State "A" Job Worker State "B"

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Material (No VAT)

VAT (WC) or Composition

Job Worker State "A"

(Credit Available to Manufacturer)

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TAX Structure under the CST ACT Effective from 1st April07
VAT Schedule Rate Applicable in the Sellers State 0.0% 1.0% 4.0% (Declared Goods included) 12.5% CST Rate applicable to the interstate Sales covered under Section 8(5) of the CST Act (issued by the selling state) if CST rate is 0%, 1%, 2% CST Rate CST Rate with without C C Forms Form 0.0% 1.0% 3.0% 3.0% 0% 1% 2% 0.0% 1.0% 4.0% 12.5% 0.0% 1.0% 4.0% 12.5%

Remarks C Form not required for 0% and 1% schedule VAT rate goods

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1. The local VAT rate (schedule) and the CST Rate, if not supported by C Form is equal to local schedule rate of the sellers state (e.g. local rate 12.5% - CST rate without C form would be 12.5%)
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TAX Structure under the CST ACT Effective from 1st April07

Contd.

2. For interstate sales of goods covered under section 8(5) notifications, C Forms are required otherwise full CST rate, equal to the VAT (Schedule) rate of the selling state. 3. D Form (Govt. Sales) is abolished from 1-4-2007

Corporate Communications_2008-05

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Inter-state Sales Sale in Transit [Section 3(b)

Sale is effected by transfer of documents of title to the goods during the movement from one state to another
Inter State Sale(2% CST) Inter State Sale(2% CST)

State "A" SELLER

"E-1" Form

"C" Form

State "B" BUYER 1

"C" Form

BUYER 2

Corporate Communications_2008-05

- 2nd Seller

1st Seller

- Endorses L/R in Favour of Buyer 2

- Takes the delivery of the goods - Total Tax burden 2% CST + 0% CST = 2% (Otherwise - 2% CST + VAT)

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Inter-state Sales Sale in Transit [Section 3(b)

Contd

KEY FACTORS: 1. No delivery by the Buyer 1, endorsement on L/R in favour of Buyer 2 by the Buyer 1 2. Buyer 2 takes the delivery (Interstate Sale Completes)

3. For exemption to buyer 1 E-1 Form from first Seller and C form from Buyer 2.
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High Seas Sales

Cover under Section 5(2) of the CST ACT
"A" Foreign Supplier Import No Sales Tax "B" ABC & Co. Importer In India - Endorsement on B/L in favour of customer - Invoice on 'C' with 0% VAT/CST as sale covered under section 5(2) of CST Act - Proper Documentation High Seas Sales 0% VAT/CST "C" Ultimate Customer In India - Payment of Custom Duty (after B/L endorsement date) - Clearance from the custom station - Proper Documentation

Corporate Communications_2008-05

Issues: Bulk Consignments Endorsement on bill of lading Bonded Warehouse.

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Union Budget[2007-08] Proposed Changes in CST ACT from 1st April07

VAT (B-A) Outside State Vendor V1 Sales of Goods 3% CST - 1/4/07 4% CST Form 'C' State 'A' ABC Mfg. 4% VAT Raw Materials 12.5% VAT Raw Materials (=) Setoff VAT 0% or 4% 3% VAT 8.5% 9.5% or 12.5% Stock Transfers 0% CST Form 'F' 3% CST - 1/4/07 4% CST Form 'C' State 'B' Depot Branch VAT (A) State 'B' Dealer VAT (B) State 'B' Customer

State 'B' Dealer

VAT

State 'B' Customer - 1% Savings on interstate purchase from 1st April07 - 1% Reduction in selling prices from 1st April07 - C/D Forms to continue

State "A" Vendor V2

VAT (A)

State 'A' Dealer

VAT (B)

State 'A' Customer

Corporate Communications_2008-05

Tax Paid Vat 4% Vat 12.5%

(-) Burden 3% 4%or 0% 3% 4%or 0%

VAT (B-A)

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Union Budget[2007-08] Proposed Changes in CST ACT from 1st April07 Purchase Sales

1. Reduction in rate of CST from 4% to 1. Interstate Sales of goods would be 3% from 1st April07 subject to 3% CST from 1st April07 2. The said rate 3% CST would be 2. The 3% CST rate would be subject to subject to issuance of C/D Forms, collection of C/D Forms, otherwise full otherwise full CST CST10% or 12.5% would be payable. 3. For local purchases VAT setoff would 3. The notifications u/s 8(5) of the CST be reduced by 3% from 1st April07 ACT, for reduction of rate of CST to 0%, (Reduction in VAT Cost/ Burden) 1%, 2% would continue subject to C/D Forms.

Corporate Communications_2008-05

4. VAT Cost % = Rate of CST X Transfer Ratio = 3% X 50% = 1.5% (Earlier 2%)

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How to address Query on Works Contract

Whether Sale or WC, If WC Whether Local or Inter-State WC Which are the options available to the contractor: A1 - Actual Non Material Deduction Method

A2 - Standard Deduction Method

B - Composition Tax Option To Decide best option
Corporate Communications_2008-05

Whether VAT Credit is available to the contractor or contractee? (to refer VAT Negative List) Whether TDS is Applicable? If Yes then to deduct Cost to Customer
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VAT (Works Contract) Important Points

1. Pure Labour Jobs Consumption of lubricants, Oils, Gases, chemicals, water is allowed. No VAT [Works Contract(WC)] is applicable as there is no transfer of property in these goods to the customer. 2. TDS (WC) TDS to be deducted from the Total Value of the contract excluding VAT/Service Tax if charged on the invoice. No TDS deduction on the interstate works contract invoices where CST is charged. 3. Contractor & contractee should decide in advance on the selection of the best option for levy of VAT(WC), before planning the order.
Corporate Communications_2008-05

4. Do not try to break the contract Value/Price Artificially, for making indivisible contract since after introduction of the VAT system, the VAT burden in both type of contracts is mostly equal. In fact, more options are available in indivisible works contract. 5. Inter-state WC with CST is possible but the state govt. (where the contract is carried out) may like to consider it as local WC subject to state tax. 6. Interstate works contract CST is applicable only on the material/goods value of the - 45 / 49 contract.

Works Contract Summary of Important Points

1. WC are taxed under state VAT acts, there are no separate WC Acts. 2. For local WC transactions State VAT (WC) is applicable and for inter-state WC transactions CST is applicable as covered under the CST Act, 1956. 3. No VAT/CST is applicable on pure labour jobs (no material of the job worker/ processor is involved) 4. Under state VAT acts, VAT is applicable only on the material value of the contract (Determined by 3 options) under CST Act also, CST is applicable on material value of the inter-state WC.
Corporate Communications_2008-05

5. In the service contracts (AMCs, constructions, etc.) both VAT & Service Tax is applicable. If the actual material value is not available then it would be calculated by presumption methods, separately under VAT (WC) and services Tax Laws. 6. Clauses in the agreements of WC are essential to avoid litigation 7. VAT setoff/credits are available for both the contractor and the contractee, subject to - 46 / 49 certain conditions.

Demand Areas of VAT/CST

1. Improper legal status of transactions. 2. Improper levy/collection of sales tax/VAT & CST. 3. Non-inclusion of sales tax clauses in the agreements contracts purchase orders. 4. Improper internal system of: Information Documentation Forms collection Computer coding calculation of setoff Record maintenance 5. Improper handling of Site Documentation. No VAT registration at site locations.
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Corporate Communications_2008-05

Sales Tax/VAT - Performance

Statutory Compliance 1. Returns Demand Areas 1. Non-Collection of CST Forms on Quarterly basis. [C, EI, EII, F, H, etc) 2. Non Filing of correct and complete returns Late Payments 3. No Proper records. 4. No proper computation of Setoff

Correct, Complete and self consistent 2. Revised Returns 3. Payments Before Due Dates

4. SETOFF Working Full, Partial and No Credit 5. Works Contract

Corporate Communications_2008-05

TAN, TDS Payments Quarterly/Annual Returns

6. Maintenance of Record
Purchase and sales registers, Tax Invoices etc 7. Refund Claims 8. C A Audit
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Thank You