CMA Mrityunjay Acharjee - Institute of Cost Accountants of ...icmai.in/upload/PPT_Chapters_RCs/Patna-09082015-04.pdf · Basic Sale of Goods vis-à-vis Works Contract Sale of Goods

WORKS CONTRACT TAX

CMA Mrityunjay Acharjee ICAI - Patna

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Background

Works contract under VAT

Inter-State Works contract

Works contract under Service Tax

Upcoming Legislation – GST Contents

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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

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Basic Sale of Goods vis-à-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

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• 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

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WCT under VAT

Works Contract under VAT Act

• 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

List_of_Works_Contract.pdf

Works Contract under 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/c‟s 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

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%

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* Amount to be deducted from the contract price (expressed as a percentage of contract pri


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%

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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)

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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 VAT

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

VAT – Compliance at a Glance

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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

Input Tax Credit under VAT

• 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

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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 from May 11, 2002

clause (ja) in Section 2 of the CST Act was inserted which define work

contract as:-

A contract 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

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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 Patram Private 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.

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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.

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• 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 .

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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 from where the goods are moving in the course of inter-state trade

or commerce.

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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 1st 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.


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.


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.


Computation as per Valuation Rules - Tax rate and CENVAT

-Service Tax @ 14% to be paid on taxable value arrived

-CENVAT credit on Input services and Capital goods can be availed


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

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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

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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

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The Gist of GST: Uniformity in structure

• 1st Discussion paper on GST released by the Empowered

Committee on 10th Nov‟2009

• 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

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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

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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

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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

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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

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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

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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

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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

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Documents

CMA Mrityunjay Acharjee - Institute of Cost Accountants of ...icmai.in/upload/PPT_Chapters_RCs/Patna-09082015-04.pdf · Basic Sale of Goods vis-à-vis Works Contract Sale of Goods