JUNE 26, 2010

Works Contract
Anil Chauhan
&
Keval Parikh
2
Background
Works contract under VAT
Inter-State Works contract
Works contract under Service Tax
Upcoming Legislation GST
Contents
3
Background Background
Constitutional Amendment
46th Amendment made to the Constitution from February 2, 1983
Outcome of the above:
Permitted the States to levy tax on the Sale of goods
involved in execution of all work contract.
States have been given power to separate the contract
between work and the labour and services
Identifying whether the goods retained their original
identity after the work was executed or had been merged,
integrated or becoming part and parcel of the works,
buildings etc.
All the States to power under this Constitution Amendment and made
Amendments in their respective Sales Tax Law to levy tax on such sale either by
making separate legislation or by amendment in existing sales tax law
4
Basic Sale of Goods vis--vis Works Contract
Sale of Goods Works Contract
Taxed as actual Sale : Seller & Buyer Taxed as Deemed Sale : Contractor &
Contractee
Absolute property of the maker when
produced / manufactured. Later on sold
to buyer
In WC, it is never an absolute property
of the maker. Materials used in WC
may be makers absolute property
The sale is chattel as a chattel i.e.
goods are sold as goods
In WC, article produced becomes the
property of buyer without first
becoming property of the maker.
Primary function - supply of materials
Incidental - work or service
Primary function - work and labour
Incidental - materials are supplied
TDS provisions are not applicable TDS provisions are applicable
5
Supply of Materials and Labour
Works Contract (e.g. Construction of a building, roads, bridges, dams
etc.)
Supply of labour and supply of materials is incidental to the contract
Not a Works contract (e.g. Painting, cleaning, overhauling, lubricating,
greasing of an old machinery etc.)
Pure Labour Contract may involve materials for executing contract
Not a Works contract (e.g. Semi-finished material supplied to Job-worker
for further processing, tailor doing stitching work)
Types of contract
7
WCT under VAT WCT under VAT
Works Contract under Gujarat VAT
Section 2(23) :
Definition of Sale includes transfer of property in goods, (whether as goods
or in some other form) involved in the execution of a works contract
Government of Gujarat has notified list of works contract
Notified works contractList_of_Works_Contract.pdf
Works Contract under Gujarat VAT Act
Valuation options under
Works Contract
Actual Labour
deduction
Standard Labour
deduction
Composition
Calculation of Sale Price of Works Contract
Actual labour deduction Following deductions are allowed in case books of
accounts are maintained
(a) Labour charges & Service charges
(b) Sub-contract charges
(c) Planning, designing and architect's fees
(d) Machinery on hire and tools used
(e) Cost of consumables, the property in which is not transferred
(f) Cost of establishment to the extent to it is relatable to the supply of
labour and services
(g) Other similar expenses relatable to the supply of labour and services
(h) Profit earned by the contractor to the extent it is relatable to the supply
of said labour and services
Intention of the government is to levy tax ONLY on Material
component
Indivisible Contract in case separate books of A/cs are not maintained
Lump sum deductions are allowed
Calculation of Sale Price of Works Contract

Description of Works Contract Percentage of
Deduction
Construction, improvement, repair of any building, road, bridge, dam,
canal or other immovable property
30%
Installation, fabrication, assembling, commissioning or repair of any
P&M
15%
Installation, fabrication, assembling, commissioning of Air conditioner,
air cooler
10%
Assembling, fitting, re-assembling, improving, producing, repairing,
furniture, fixtures (interior decoration)
20%
Construction, fabrication, assembling, commissioning, repairs of bodies
on chassis of motor vehicles
20%
Overhauling or repairing or dismantling of any motor vehicles, vessels
of every description meant for plying on water or any vessel propelled
by mechanical means, any air craft, etc
20%
11
Indivisible Contract in case separate books of A/cs are not maintained
Lump sum deductions are allowed
Calculation of Sale Price of Works Contract
* Amount to be deducted from the contract price (expressed as a percentage of contract pri
Description of Works Contract Percentage of
Deduction
Fitting out, assembling, altering, ornamenting, re-assembling, blending,
finishing, furnishing, improving, processing, otherwise treating,
adapting or fabricating of any goods
15%
Erection, installation and commissioning of wind turbine generator 30%
Fixing of marble, slabs, polished granite stones and tiles other than
mosaic tiles
20%
Fixing of sanitary fittings and plumbing 15%
Painting and polishing 20%
Laying of pipes excluding plumbing 20%
Tyre retreading 30%
12
Indivisible Contract in case separate books of A/cs are not maintained
Lump sum deductions are allowed
Calculation of Sale Price of Works Contract
Description of Works Contract Percentage of
Deduction
Supply of goods in providing know-how, designs, labour, supervision,
inspection, training or other services with any of the operations
specified above
20%
Dyeing and printing of textiles 30%
Printing contracts 30%
Any other works contract 20%
To arrive at Taxable turnover above rates are applied after deducting
payment made to specialised contractor, sub contractor (discharging
liability separately)
13
Calculation of Sale Price of Works Contract
Composition Scheme For contractors who do not wish to pay tax based on
the specific formula or after considering the lump sum deductions
Rate of tax is 0.6% or 2% of the total contract value as under:
0.6%- Construction contracts relating to roads, buildings,
bridges, pipeline laying, dams, etc.
2% - Other contracts including contracts for erection,
installations etc.
Restrictions:
ITC not available on purchases
Contractor not eligible to issue VAT Invoice and also can not charge
tax in the invoice - Therefore, no ITC is available to the employer
Cannot import goods on interstate basis or branch transfer basis
TDS Rate under GVAT
TDS Rate : 0.6% in case of construction contract and 2% in case of others
Works Contractor is mandatorily required to obtain TAN No. from
Commercial Tax Department.
Pay the tax to the Government within statutory due date in Form-207 and
issue certificate in Form-703 to the contractor evidencing the deduction of tax
at source.
File a return within 30 days of end of quarter in Form-704 and also file a
annual statement within 30 days from end of financial year.
Person responsible for payment exceeding Rupees 1 crore for works contract
is responsible for deduction of tax at prescribed rates
Gujarat VAT Compliance at a Glance
16
TDS Rate 0.6% in case of construction contract and
2% in case of others
Remittance of tax deducted To be deposited to within 22 days in Form
207 from the end of the respective month
TDS Certificate to be issued Certificate to be issued in Form 703
Records to be maintained for TDS
by Contractee
In Form 705 on monthly basis
TDS Return to be submitted In Form 704 within 30 days from the end
of the quarter
Monthly Return to be submitted In Form 201 within 30 days including e
return for specified dealers
Annual Return to be submitted In Form 205 within 9 months from the end
of the year including e return for specified
dealers
Gujarat VAT Input Tax Credit
ITC available on all inputs used in works contract other than composition method
subject to fulfilment of conditions
Broad Restrictions on ITC:
CST purchases
Capital goods used in works contract
Lease goods
Goods purchased from Lump sum dealer
Goods not connected with business
Vehicles, equipments, accessories or spare parts
Fuel used in motor vehicles
Goods used as fuel in generation of electrical energy
ITC to be reversed by 4% in case of branch transfer
17
18
Inter State Works Contract Inter State Works Contract
Inter-State Works Contract
Finance Act 2002, had made certain amendment in the Central Sales Tax
Act 1956, to include inter-state sales of goods involved in the execution of
works contract taxable fromMay 11, 2002
clause (ja) in Section 2 of the CST Act was inserted which define work
contract as:-
Acontract for carrying out any work Which includes assembling,
construction, building, altering, manufacturing, processing, fabricating,
erection, installation, fitting out, improvement, repair or commissioning
of any movable or immovable property.
Citus of taxation will come only when:
(a) Contractor executes works in another states and
(b) The property over the goods passes from him to his customer either
by transfer of document of title over the goods when they are in
transit from his state to another state or directly on their
incorporation in the works.
19
How to determine the taxable turnover?
Proviso to Section 2(h) of the CST Act provides the meaning of sale price as under:-
sale price in relation to transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract, shall be determined in the
prescribed manner by making such deduction from the total consideration for the works
contract as may be prescribed and such price shall be deemed to the sale price for the
purpose of this clause.
However no deductions has been prescribed under the CST Act .
Section 8A of the CST Act does not prescribe any mechanism regarding how to
determine the turnover in case of a works contract.
Section 13 (1)(aa) of the CST Act empowers the Central Government to make rules
providing for the manner of determination of the sale price and the deductions from
the total consideration for a works contract under the proviso to Section 2(h).
However no rules has been framed by the Central Government in this regard.
Section 13 (3) the CST Act empowers the State Government to make Rules, not
inconsistent with the provisions of this Act and the Rules made under sub-section (1),
to carry out the purpose of this Act
20
How to determine the taxable turnover?
However no specific rules have been made by the State Government in
respect of an inter-state works contract.
So, what are the remedies available in this matter -
Recourse needs to be taken to the Supreme Court judgment in the case
of M/s. Mahim PatramPrivate Limited v. Union of India (2007).
Brief facts of the case:-
Appellant was engaged in the printing of question papers for various
universities and boards situated outside the State of Uttar Pradesh;
As the goods have moved from one State to another, it was an inter-
state works contract;
The appellant had contended that in absence of the provisions for
determining the sale price; taxable turnover cannot be computed
under Section 8A and CST cannot be levied.
21
How to determine the taxable turnover?
The learned Supreme Court decided as under:
Section 9(2) of the CST Act empowers the assessing officer to assess,
reassess, collect and enforce payment of tax, including any interest or
penalty payable by a dealer under this Act as if the tax, interest or
penalty payable by such dealer under this Act is a tax, interest or
penalty payable under the general sales tax law of the State.
Thus the powers conferred and the procedures laid down under the
State sales tax laws would, therefore be applicable for the purpose of
carrying out the assessment under the CST Act.
22
How to determine the taxable turnover?
In view of the above ruling, provisions made in a particular State (from
where the goods are moving) for determining the taxable turnover and
the sale price in case of a works contract would be applicable accordingly
in case of an inter-state works contract .
23
Rate of Tax Applicable
After determining the sale price and the turnover as per the
provisions of the State Act, rates of CST prescribed under Section 8 of
the CST Act would be applicable.
Section 8 of the CST Act provides the following rates in case of an inter-
state sale
If sale is made to a registered dealer against Form C 2%
If sale is made to a registered dealer without form C rate applicable
in the respective State
If the sale is made to an un-registered dealer rate applicable in the
State fromwhere the goods are moving in the course of inter-state trade
or commerce.
24
25
Works Contract under Service Tax Works Contract under Service Tax
Following are relevant taxable services involved in
the Works Contract
Description of Service Taxable w. e. f
Commercial or Industrial Construction services 10/9/2004
Erection, Commissioning or Installation Services 1/7/2003
Construction of Complex Residential services 18/4/2005
Works contract services 1/6/2007
Works Contract service Inserted from 1
st
June 2007
Section 65(105)(zzzza) of the Finance Act defines taxable service as:
any service provided or to be provided to any person by any other person
in relation to the execution of a works contract, excluding works contract in
respect of roads, airport ports, railways, transport terminals, bridges,
tunnels and dams
Explanation to this sub-clause defines works contract :
Works contract means a contract wherein Transfer of property in goods
involved in the execution of such contract is leivable to tax as sale of goods
and such contract is for the purpose of carrying out specified works.
Works Contract service Inserted from 1
st
June 2007
Specified works are:
(a) Erection, commissioning or installation of plant ,machinery equipment or
structures, whether pre-fabricated or otherwise, installation of electrical and
electronic devices, plumbing, drain laying or other installations or transport of
fluids. heating ,ventilation on air-conditioning related pipe work, duct work and
sheet metal work, thermal insulation, sound insulation, fire proofing or water
proofing, lift and escalator ,fire escape staircases or elevators or
(b) Construction of a new building or a civil structure or a part thereof or of a
pipeline or conduit ,primary for the purpose of commercial or industry or
(c) Construction of a new residential complex or a part thereof or
(d) Completion and finishing services, repairs, alteration, renovation or restoration of
or similar services in relation to (b) and (c)
(e) Turnkey projects including, engineering, procurement and construction or
commissioning (EPC) projects.
Works Contract service Inserted from 1
st
June 2007
Two essential conditions for taxability under works contract service are
There must be transfer of property in goods involved in the execution of
specified works contracts
Such transfer is leviable to tax as sales of goods.
Appropriate Classification under Service Tax Legislation
If the specified work contract involves transfer of property and on which
VAT/Sales tax is payable the service will be taxable under Works contract
Service
If the Contract is a simple service contract i.e. no material is involved or
even if some material is involved, VAT/Sales tax is not payable the service
would be classified under respective category of Construction or Erection and
Commissioning Service
Works Contract Service
Valuation options
Computation
as per
Valuation Rules
Composition
Valuation of works contract service
Computation as per Valuation Rules
Value of works contract shall be equivalent to gross amount charged for the works
contract less value of transfer of property in goods involved in execution of the said
works contract. Along with value of Material VAT/CST paid to be deducted.
Following to be included :
(a) Labour charges & Service charges
(b) Sub-contract charges
(c) Planning, designing and architect's fees
(d) Machinery on hire and tools used
(e) Cost of consumables, the property in which is not transferred
(f) Cost of establishment to the extent to it is relatable to the supply of labour and
services
(g) Other similar expenses relatable to the supply of labour and services
(h) Profit earned by the contractor to the extent it is relatable to the supply of said
labour and services
(i) Other similar expenses relatable to supply of labour and services
(j) Profit earned by the service provider relatable to supply of labour and services.
Valuation of works contract service
Computation as per Valuation Rules - Tax rate and CENVAT
-Service Tax @ 10.3% to be paid on taxable value arrived
-CENVAT credit on Input services and Capital goods can be availed
Valuation of works contract service
Computation as per Composition scheme
Optional Composition scheme
Service Tax (including Ed. Cess and SHE Cess) is 4.12 % of the total
value of the works contract.
Intimation to the department for availment of this option prior to
execution of Works Contract.
Once opted, can not change the option till completion of the contract.
Value of free issue items also to be included in Gross Value
- CENVAT credit on Input services and Capital goods can be availed
Goods & Services Tax(GST)
Indicated roll-out date is April 1, 2011
35
The Gist of Proposed GST: Taxes to be
subsumed
State Levies
Central Levies
Value added tax
Excise duty
Entertainment tax
Additional excise duties
Luxury tax
Excise duty under Medicinal and
Toiletries Preparation Act
Tax on lottery, betting & gambling
Service tax
Entry tax
Additional and special additional Surcharges and cesses
customs duties
Surcharges and cesses
Central GST
State GST
36
What prompted the GST?
Several indirect taxes at Central and State level
Tax on tax in current Central Excise and State VAT mechanism
No harmony in rates of VAT on similar commodities from one State to another
CENVAT credit & VAT input tax set-off not comprehensive due to restrictive
provisions
Break in credit chain in inter-State transactions
Multiple taxes leading to complexity in compliance
37
The Gist of GST: Uniformity in structure
1st Discussion paper on GST released by the Empowered
Committee on 10
th
Nov2009
As far as practicable there will be uniform procedures across
various statutes concerning:
- Chargeability
- Taxable event
- Taxable person
- Valuation
- Classification
Rules for taking and utilisation of credit for CGST and SGST would
be aligned, but no cross utilisation of credit between these two taxes
38
The Gist of GST: Scope and coverage
CGST and SGST would be applicable on all transactions of
goods and except:
- Exempted goods and services
-Transactions which are below the prescribed threshold -
Goods outside the purview of GST:
Goods Treatment under GST
Products containing Outside the purview of GST, State Government to
alcohol levy taxes as at present
Central Government to levy excise duty on tobacco
Tobacco Products
products over and above GST
Outside the purview of GST, will be subject to sales
Petroleum Products tax / value added tax Levied by State Governemnt
and to cess, excise duty by Central Government
39
The Gist of GST: Rates and thresholds
Two-tier rate structure for both CGST and SGST
- Standard rate for most goods and services
- Lower rate for essential commodities and precious metals
Threshold limits:
Threshold limits for :
Tax Goods Services
CGST Rs. 150 Lakh Yet to be decided
SGST Rs. 10 Lakh Rs. 10 Lakh
Composition scheme with floor rate of 0.5% to be
available for taxpayers having annual turnover below
Rs. 50 Lakh
40
The Gist of GST: Input tax credit Mechanism
Input Tax Credits (ITC)
CGST
CGST
IGST
SGST
SGST
IGST
IGST
IGST
CGST
SGST
against
against
against
41
The Gist of GST: Inter-State transactions
Inter-State sale of goods and services will be taxed under
the innovative Integrated GST (IGST) model
IGST model would work as follows:
- The Central Government would levy IGST at the rate of CGST
+ SGST on all inter-State sale transactions
- To pay this IGST, the inter-State seller may use credit of CGST,
SGST and IGST on his inputs
- The inter-State purchaser may use the credit of the IGST paid on
his purchases to discharge the output tax liability on his taxable
supply of goods or services
42
The Gist of GST: Exports and imports
Exports would be zero-rated
Exports to processing zones of SEZ will also be zero rated
- No benefit would be allowed for the sales from SEZ to
Domestic Tariff Area
Imports of goods and services would be subject to CGST
and SGST based on destination principle:
- SGST revenue will accrue to the State where the imported goods
and services are consumed
- Both CGST and SGST paid on import of goods and
services will be available as credit
43
Impact on businesses: Decision matrices
Product Pricing needs to reflect GST efficiency
Stock level to be maintained as on transition date
Timing of acquisition of assets
Review impact on existing contracts
Focus on core activities vs. backward / forward
integration
Ascertain change in documentation and processes
Identify changes to ERP system to be GST compliant
Assess need to re-engineer tax management function
44
New dual GST: Transition matters
Treatment of unutilised tax credit balance as on transition
date
Tax credit on capital goods where only partial tax credit taken in
pre-GST regime
Treatment of tax already paid on goods lying in stock as on the
transition date
Sales return of goods sold in pre-GST period
Taxation of contracts and services spread over pre-GST &
post-GST period

Change-in-law provisions in existing and new contracts

45
46