Recent Issues in works Recent Issues in works contract under KVAT lawcontract under KVAT law

S Venkataramani

Chartered Accountant

Mangalore Branch – 20.08.2010

Recent DevelopmentsRecent DevelopmentsThe Honourable High Court of Karnataka in the

case of Suman Enterprises Vs State of Karnataka (WP No.10183/2007 (T-RES) dated 16.06.2010 has held that section 18A of the KVAT Act, 2005 is violative of Article 19(1)(g) of the Constitution of India and is ultra-vires the provisions of the Act.

Subsequent to the said judicial pronouncement the Commissioner of Commercial Taxes has issued an order withdrawing all the notification issued under section 18A of the KVAT Act, 2003 (Order no. KSA.CR.178/09-10, dated 05.08.10.)

Recent DevelopmentsRecent Developments Every registered dealer is required to file the monthly / quarterly

return in Form VAT 100 / VAT 120 electronically as follows:

a) Regular dealer – commencing from the month ending on 31st July 2010 onwards (Refer KSA/CR-60/2010-11 dated 05.08.2010)

b)Composition dealer – for the quarter ending June 2010 (Refer KSA/CR-60/2010-11 dated 12.07.2010)

Further, the registered dealer is required to file the hard copy of the consolidated statement of all such electronically submitted monthly / quarterly returns within 30 days after the close of the corresponding period of six months in case of point (a) or 12 months in case of point (b)

Recent DevelopmentsRecent Developments Amendment to Rules (Notification no. FD 236 CSL 2009

dated 22.07.2010):– Rule 4 (iv) - To amend the registration certificate (if

there is any change in the details of Form VAT 1), the registered dealer is required to file Form VAT 1 instead of Form VAT 2;

– Dealers are no longer required to upload details of purchases and sales in the notified website (Rule 33(3) substituted – New Rule mandates dealers other than composite dealers to maintain a VAT account for input / output and debit / credit notes issued during the tax period).

Recent DevelopmentsRecent Developments

Substituted Rule 38(1) - Dealers are required to submit monthly or quarterly returns along with proof of payment of taxes including TDS certificate(if any) and a statement containing the details of purchases and sales effected to registered dealers.

Recent DevelopmentRecent DevelopmentAmendments to Rules:

– The Commissioner is empowered to issue notification in respect of directing the dealer to effect the payment electronically. (Till date the Commissioner has not issued any notification in this regard.) (Rule 50)

– Dealers who fail to file the return / pay the taxes electronically, shall not be entitled to adjust the input tax credit / claim refund. (Rule 127 & 128)

– Procedure for filing an application with the Advance Ruling Authority has been prescribed.

– Clause 14 of Part II to the Form VAT 240 relating to details of returns filed has been amended.

Important definitionImportant definition Sale ………..includes “a transfer of property in goods

(whether as goods or in some other form) involved in the execution of a works contract;

Works contract – includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property;

Is building / manufacture a works contract?

Place of sale / Time of salePlace of sale / Time of sale In respect of transfer of property of goods (whether as

goods or in some other form) involved in the execution of WC if the goods are within the State at the time of such transfer irrespective of where the agreement is made / whether the assent of other party is prior or subsequent to such transfer (20th Century – 119 STC 182 – SC)

The sale of goods is deemed to have taken place at the time of incorporation of goods in the course of execution of any WC whether or not there is receipt of money. If Tax Invoice is issued within 14 days – sale deemed to have taken place at the time of issue of Tax Invoice. Alternately – Tax Invoice or payment – earlier of the two events will determine the time of sale.

Works contract – Regular schemeWorks contract – Regular scheme In terms of the Section 4(1)(c) - works contracts (subject

to section 14 and 15 of the CST Act, 1956) would be liable to tax at the rates indicated in the Sixth schedule to the KVAT Act. (Durga Projects – Advance Ruling)

Explanation to Rule 3(1) – “the amount paid as advance to a dealer as a part of consideration for transfer of property in goods involved in execution of works contract shall be included in his total turnover in the month in which execution of such works contract commences”

It means advances received prior to commencement of works contract shall not be liable to tax under the Act.

Labour and other like chargesLabour and other like charges

The Government has substituted the Explanation – I to Rule 3(2)(l). On a reading of the substitution of Explanation I to rule 3 of the KVAT rules the following facts emerge:

– It appears that the amendment restricts the amount of “labour and other like charges” actually expended on a proportionate basis to the value of goods used in the execution of works contract.

– The balances of unutilized deductions will be permitted to be carried forward.

Labour and other like charges…Labour and other like charges…

What is not clear in the rule is:– “………….and if the total turnover is not

sufficient to cover apart from other deductions, such taxable turnover and such deduction, they shall be determined and allowed proportionately to the extent of the turnover of the dealer in that period, and the balance shall be carried forward to the following tax period or any subsequent tax period to be determined and allowed in the same manner.”

Labour and other like charges…Labour and other like charges…

Let us try and make an effort to understand the explanation through two simple examples:

Example 1– A dealer X receives a sum of Rs. 1,00,000/- from a

customer. The dealer X effects payments to registered sub-contractors at Rs. 60,000/-. Labour and other like charges actually expended is at Rs. 20,000/-. In the same example if the dealer X effects URD purchases of sand / jelly then how does one go about answering the above questions.

Labour and other like charges….Labour and other like charges….

In the above scenario:

– How does one compute the taxable turnover?

– How does one compute the gross profit on labour and

other like charges?

– How does one determine the value of goods, the

property in which has been transferred in the execution

of works contract relatable to sub-contract payments?

Labour and other like charges…Labour and other like charges…

– How does one issue a tax invoice in the amended scenario?

– How does one go about implementing this explanation if

one assumes that 10 flats out of a total of 50 flats remain

unsold?

– In case of advances received and no work is commenced –

is tax payable on full value – will Rule 3(2)(m) become

redundant (say flat rate of deduction)

Works contract – Regular schemeWorks contract – Regular scheme Rule 3(2)(i-1) -“Works contractor shall be eligible to claim

deduction towards any amounts paid / payable to sub-contractor as the consideration from the total turnover”.

No such deduction shall be allowed unless:

– dealer produces documents in proof that the sub contractor is a registered dealer (he can be a regular dealer or a composition dealer);

– Such sub-contractor is liable to pay tax under the Act;

– the turnover of such amounts are shown in the monthly return of sub-contractor”.

Composition dealer – Section 15Composition dealer – Section 15Works contractor - A dealer executing works contracts opting to pay

tax under the composition scheme:– In terms of section 15(2) of the KVAT Act, 2003 a

registered dealer can opt to pay tax under the composite scheme, even though he carries on different ‘types’ of businesses. Such dealer is required to maintain separate accounts of each type of business.

– Computation: Taxable Turnover (sec 4) = Total turnover – Composition turnover.

Composition dealer Composition dealer – Shall be eligible to purchase or obtain goods from outside

the State / Country and use such goods (whether as goods or in some other form) in the execution of works contract in the State;

– WC cannot purchase capital goods from outside the State;– WC cannot sell goods outside the State but can stock

transfer to a place outside the State [Refer wordings of Rule 135(5)]

– Dealer is liable to pay tax on the value of goods at the appropriate rate specified in section 4 (at 1%, 4%, 5%, 13.5% etc.) and such value of goods shall be deducted from the total consideration of works contracts.

Composition dealer – Section 15Composition dealer – Section 15

– Department contends that value of goods

means “Sale price” of such goods.

– Shall be eligible for deduction in respect of the

amount paid / payable to the sub contractor

(subject to production of proof that such

sub contractor is a registered dealer and

that such amounts are included in the

return filed by the sub contractor).

Composition DealerComposition Dealer

A registered dealer who has opted to pay taxes under the composition scheme is required to pay taxes on ‘purchases from the unregistered dealer’ (at the rate applicable to the commodity). This is in addition to the composition tax payable on total consideration. It may be noted that this provision was introduced in 2007 giving effect retrospectively from 01.04.2006. However, in case of Narayan S Chougale Engineers (WP no. 14034/07 dt: 12.09.07), the retrospectivity has been quashed.

Composition dealerComposition dealer

If a works contractor who has opted to pay tax under the composition scheme subsequently sells away the goods purchased by him (other than by way of transfer of property in such goods [whether as goods or in some other form]) he will be liable to pay tax on the value of such goods at the rate specified in section 4 WITHOUT ANY INPUT TAX SET-OFF.

Works contract - CSTWorks contract - CST

Inter-State works contractor shall be eligible to claim deduction as specified under the local VAT law; (Mahim Patram – 6 VST 248)

Such deduction is not available to a composition dealer, since a composition dealer is not permitted to effect inter-State sale

Circular No. 11 & 12 /2009-10Circular No. 11 & 12 /2009-10

Composition dealer – While determining the taxable turnover, amount

received towards UDI from the customer is claimed as deduction;

– The department has clarified that in case of Joint Development Agreement, UDI portion will not be allowable as deduction while computing the taxable turnover

– In the circular it is stated that the agreement between the land owner and the developer towards construction of building(s) amounts to works contract

Circular 11, 12 & 13Circular 11, 12 & 13Both Regular and Composition dealers are subject

to tax in respect of Joint Development agreement to the extent of land obtained from the land owner(dealt separately).

Works contractors are not permitted to carry forward the sub-contractor deduction available under KST regime to VAT regime;

All goods used in works contract are not transferred in the same form therefore for the period 2005-06 and thereafter the rate of tax as applicable on works contract is at 12.5% or 13.5%.

Circular No. 11 & 12 /2009-10Circular No. 11 & 12 /2009-10

– The amount received from the customer towards UDI shall be construed as amount received from the land owner towards construction of his share in the project;

– In case the UDI portion is not determinable then the value declared with the appropriate authorities should be considered;

– In case the value of UDI is not declared separately at the time of registration, then the amount fixed under the relevant law should be considered.

Circular No. 11 & 12 /2009-10Circular No. 11 & 12 /2009-10In the hands of the Land Owner:

– The aggregate amount received from his customer by the developer on behalf of the land owner

– The aggregate amount declared by the developer to be the value of UDI land transferred to the customers with whom he has entered into an agreement;

– The aggregate amount fixed under the relevant law as the value of UDI land transferred to the customer with whom he has entered into construction agreement;

Circular No. 12 /2009-10Circular No. 12 /2009-10

Agreements for sale of constructed buildings – Department has clarified that any kind of agreement entered by the developer before completion of construction would amount to works contract. – K Raheja Judgement still holds good. L & T

judgment has not been considered in the circular

Circular No. 11/2009-10Circular No. 11/2009-10

Sub-contractor deduction – The dealer is entitled to carry forward the sub-contractor deduction from KST regime to VAT regime

Deductions towards labour and other like charges – The profit relating to sub-contractor deduction can also be claimed as deduction from the total turnover.

Amounts collected as BWSSB and KPTCL deposits, stamp duty etc do not form part and parcel of the total turnover and accordingly not liable to tax.

Circular no. 13/2009-10Circular no. 13/2009-10Rate of tax applicable to goods involved in the

execution of civil works contract– It is clarified that for the year 2005-06 – the goods involved

in the execution of works contract changes its form and therefore liable to tax at the rate of 12.5%;

– For the year 2006-07 onwards, the rate of tax would as prescribed under sixth schedule;

– In respect of declared goods, one needs to identify whether such goods are used in the same form or otherwise. In case if it is used in the same form then the same shall be taxed at 4%/ 5% else 12.5% / 13.5%.

IssuesIssues A works contractor involved in construction of building

or other civil works either by himself or through another required to file a copy of the agreement before the end of the subsequent tax period.

What is civil works? (refer TNGST Act / UP Trade Tax Act)

What is civil works in case of plant and machinery installation?

What is civil works in case of a contractor who is involved in sanitary contracts?

Does a landscaper need to file an agreement?

IssuesIssues

Who is required to file this agreement – builder or contractor?

Whether a builder has to file the agreement entered into with his prospective buyer?

Whether an interior decorator needs to file the agreement?

Whether a factory (a registered dealer) which constructs for itself is required to file the written agreement?

Tax Invoices - IssuesTax Invoices - Issues

Issues – How does one compute the taxable turnover based

on the substitution of explanation I to rule 3(2) of the KVAT Rules, 2005?

– How does one maintain accounts, books and records as normally works contractors maintain a cash system of accounting?

– Is the Government proposing a hybrid system of accounting for tax purposes?

TDS – Section 9ATDS – Section 9A

The provisions relating to deduction of tax at source on

works contracts by Government / Quasi Government and

certain other specified / notified undertakings

– The dealer can make application to such officer for certificate in

respect of computation of tax

– Such officer is required to issue the said certificate within 10

days from the date of application

– Failure to issue such certificate, then the deduction shall be made

as per the dealer’s calculation till the issue of certificate

– The amount deducted can be adjusted against any amount

payable by the contractor

Reference Under CST Act Under KVAT Act

Payment to Sub-contractors

Not eligible for deduction. However, if the sub-contractor is in destination State, then the Principal contractor is required to get registered and pay tax after claiming deduction of payment made to sub-contractor or input tax credit.

Deduction is allowed in respect of all amounts paid to sub-contractors as the consideration for execution of works contract whether wholly or partly subject to furnishing of proof or some States allows input tax credit. In some State input tax credit is permitted

VAT vs CSTVAT vs CST

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