WELCOME to

Discussion meeting on Tamil Nadu Value Added Tax Act

at

Hotel Savera, Dr. Radhakrishnan Salai, Chennai-600004

28th February 2012

- Mr P R Subramaniyan Head- Indirect Taxes L&T Construction, & Co-Chairman, Expert Committee on VAT, MCCI

Works contract – Computation of VAT Liability Composition Scheme TDS Scheme & ProceduresIssues of Concerns Suggestions for simplification - Mr P R Subramaniyan

Head- Indirect Taxes L&T Construction, & Co-Chairman, Expert Committee on VAT, MCCI

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If a contract is awarded for manufacture & supply of Boiler & accessories for agreed price,

-- Transaction construed as Sales

Instead the contract is for manufacture, transportation, loading / unloading, installation, commissioning & handing over the installed boiler plant for an agreed contract price.

-- Transaction construed as Works Contract

Sales Vs Contract Tax

SALE DEEMED SALE

(Conventional sale)

( 46th Amendment

SALE > DEEMED SALES

1. TRANSFER OF PROPERTY IN GOODS - INVOLVED IN WORKS

2. DEEMED SALE -

• Contractor & contractee / client.

• Project execution – Goods & services.

• Transfer of goods on the theory of accretion.

• Price agreed for the project execution

1. SUPPLY & SALE OF ‘GOODS’

2. SALE – RESALE- RESALE

• Buyer & Sellers

• Supply of Goods

• Transfer from sellers to buyers

• Price agreed by parties for the Goods

Art. 366 (29-A)- Tax on sale or purchase of goods

Works Contract

46th CONSTITUTION AMENDMENT ACT (Art.366 (29-A)

DEEMED SALES

Controlled Commodities

HirePurchase

Right to use Goods

Supply of food & Drink in

Restaurants

Supply toMembers

CONSTITUTION OF INDIA

Article - 246

VII Schedule

LIST - 2(State List)

LIST 1(Union List)

ENTRY 92 ATaxes on the Sale or Purchase of goods other than news papers. Where such sale or purchase takes place in the course of inter-state trade or commerce.

ENTRY 54Taxes on the Sale or Purchase of goods other than news papers, subject to provisions of Entry 92 A of List 1

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SPECIMEN OF WORKS CONTRACT

SEPARATE DOCUMENTS

SUPPLYErection

Installation&

Commissioning

Service Including civil work

(I)

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COMPOSITE CONTRACT

SUPPLYService

Including civil work

(II)

BOQ for Supply BOQ for Service

SPECIMEN OF WORKS CONTRACT

8

LUMPSUM CONTRACT PRICE

SUPPLY &

Service EPC – turnkey

(III)

• Payment - milestone or• Payment - work done per unit or• Payment - percentage completion

SPECIMEN OF WORKS CONTRACT

CONTRACTUAL TERMS & CONDITIONS – SUPPLY & SALE OF GOODS

Specific schedule for supply & sale of described goods.

Clients agreeing to to issue of C-form for above supplies

Contract providing for approved List of vendors / manufacturer

Inspection by clients at vendor’s premises prior to despatch of goods – pre-despatch Inspection.

COMPOSITE CONTRACT

CONTRACTUAL TERMS & CONDITIONS – SUPPLY & SALE OF GOODS

Clients providing dispatch instructions eg.,

Title clause: Transfer of title to goods thro’ transfer of documents of dispatch documents eg., Lorry Way bill / Railway receipt/ entry permit.

Invoicing / payment for supply of specific goods as per schedule.

COMPOSITE CONTRACT

“SERVICES”

“SUPPLY OF GOODS”

WORKS CONTRACT. APPLICABLITY OF INTER STATE SALES

IN WORKS CONTRACT TRANSACTION

88 STC / 204 - PAGE 235

Gannan Dunkerly & Co case

132 STC / 272 – (AP – HC)L&T’s caseDept.’s SLP

(civil) 22445-22447/2003dismissed

AS PER CST ACT 1956

U/s 3(a) or (b) of CST Act, read with section 6 (2) (b).

73 STC / 370 - Builders

Association case

WORKS CONTRACT Sec 5 of TN VAT Act – levy of tax on

transfer of goods involved in works contract

Tax is payable on taxable turnover relating to transfer of property in goods involved in the execution of works contract- either in same form or some other form

Tax payable at such rates as specified in the first schedule

Total Con-tract

Labour Part

Material Part

VAT Payable

Ser. Tax Payable

VAT on transfer of property - on the theory accretion - WCT Transferrable Value Landed Cost + Profit.

Example (Figure in Rs.)

Material Landed Cost

Profit(10%)

Value Tax rate Tax

Cement 100 10 110 14.5% 15.95

Steel 200 20 220 5% 11.00

ACTUAL BASIS

BAI Vs. Union of India (SC) 73 STC / 370

Deemed as sale and

subject to sales tax

( page 400)

State not to Tax on Gross

Value of goods

“……….. after the 46th Amendment under which by a legal fiction the transfer of property in goods involved in a works contract was made liable to payment of sales tax that they are not governed by article 286 while levying sales tax on sale of goods involved in a works contract? They cannot do so. When the law creates a legal fiction such fiction should be carried to its logical end. There should not be any hesitation in giving full effect to it. If the power to tax a sale in an ordinary sense is subject to certain conditions and restrictions imposed by the Constitution, the power to tax a transaction which is deemed to be a sale under article 366(29-A) of the Constitution should also be subject to the same restrictions and conditions. ------------------------. The contractor becomes liable to pay the sales tax ordinarily when the goods or materials are so used in the construction of the building and it is not necessary to wait till the final bill is prepared for the entire work……..”

COMPUTATION OF VAT LIABILITY- TNVAT ACT

Rule 8 (5) of TNVAT Rules prescribes method for arriving at “Taxable Turnover”

Taxable Turnover to be arrived after deducting the following amounts from total turnover

a) All amounts in respect of goods in the course of export or in the course of import or in the course of inter-State trade or commerce;

b) All amounts towards goods specifically exempted from tax under the Act;

…contd.,

COMPUTATION OF VAT LIABILITY TNVAT ACT

c) All amounts paid to subcontractors for execution of works contract whether wholly or partly;

d) All amounts towards labour charges and other charges not involving any transfer of property actually incurred or at rate specified under the Rules if not ascertainable from books of accounts

e) All amounts including the tax collected from customer, refunded to customer or adjusted towards any amount payable by the customer.

COMPUTATION MECHANISM- issues of concern

I. Specific price II. Cost Plus

III. Composite price

As per the State Act - generally adopting SC guidelines of 88 STC/ 204 – !!!!

Inter State sale - Sec. 13(aa) of CST Act- ????

Subcontractors turnover - conditions?

Labour & Other like charges _-complexity

Profit element –for dealers having multiple operations

COMPUTATION OF TAX LIABILITY

Alternate method in computing tax liability – works contract.

Pre-VAT & Post VAT period

COMPOSITION SCHEME

Scheme differs from State to State

Composition once opted, same for contract period

Dealers cannot issue tax invoice to their customers.

ITC benefit generally not accorded except Maharashtra State.

Works contract – composition

Sec 6 of TNVAT Act deals with payment of tax at compounded rate by Works contractor.

This scheme is available only for the dealers, who do not purchase /procure any materials from outside TN.

In other words, this scheme will not apply to a dealers procures goods from outside the State including stock transfer.

Works contract – composition

The dealer to apply to the assessing authority along with the first monthly return his option to remit tax on composition basis.

The above scheme for a financial period

The dealers exercising above option shall not avail ITC and shall not issue tax invoice.

No need to keep books of accounts.

Works contract – composition

There is no clarity on the availability of exemption on sub-contractor’s turnover when main contractor pays WCT u/s 6 of TNVAT Act.

Dealer to discharge liability on the entire contract value at 2% in case of civil works & 4% in all other works contracts.

ISSUES OF CONCERNi. Scheme does not allow inter-State purchase or

imports

ii. Scheme is for all the works executed in the State – Job to Job basis not available

iii. Input tax credit denied on purchases.

iv. Scheme is for the financial year

v. Works contractor shall not collect any amount by way of tax

SUGGESTION

i. Suggesting to adopt erstwhile 7C of TNGST Act for simplification and to achieve the object of the scheme

Payment of tax on composition basis shall be allowed on job to job basis at the discretion of dealers.

Restriction on inter-State purchase or imports to be removed

Restriction on collection of tax from contractee shall be removed.

TDS IN WORKS CONTRACT Sec 13 of TN VAT Act – deduction of tax at

source

Any person paying any sum to dealer for execution of works contract shall deduct TDS

In case of civil works / civil maintenance works contract – 2% of total amount payable

In other works contracts – 4% of total amount payable

….contd.,

TDS IN WORKS CONTRACT TDS deduction shall not be made where

a) no transfer of property in goods is involved in the execution of such works contract or;

b) Transfer of property in goods is involved in the execution of works contract in the course of inter-State trade or commerce or in the course of import or;

c) The dealer produces a certificate in Form S from the assessing authority concerned that he has not liability to pay or has paid tax u/s . 5

Rule 9 of TNVAT Rules prescribes that tax deducted shall be deposited with the A.O having jurisdiction over the person or to any other authority authorised by DC to receive such payment, on or before 20th of succeeding month with Form R

…contd.,

TDS IN WORKS CONTRACT Certificate for deduction of tax shall be issued in Form

T within 15 days of such deposit and a copy of certificate shall be sent to A.O having jurisdiction over the said dealer

Amount mentioned in certificate shall be adjusted against tax liability of the dealer u/s. 5 or 6

Burden to prove that the amount is deposited already lies with dealer claiming the deduction.

Any person who fails to deduct or deposit TDS, shall in addition pay interest at one and a quarter percent per month of such amount.

.contd.,

TDS IN WORKS CONTRACT Dealer on proving A.O that he is not liable to

pay tax u/s 5, the A.O shall refund the amount deposited after adjusting arrears of tax if any due

Tax deducted or interest shall become due without any notice of demand

If any person contravenes the provision in deduction or deposit of TDS, same shall be recovered along with penalty and interest and the dealer is treated as assesee

ISSUES OF CONCERN

i. TDS is effected even on advance payment

ii. Form S – certification that the dealer has no liability or has paid tax u/s 5 – contradictory since form is obtained before start of job – hence not issued

iii. Burden of proof that TDS is deposited lies with dealer claiming deduction – dealer has to ensure that Tax deducted by client is transferred to their A.O.

ISSUES OF CONCERN

Blockage of working capital/duplication of tax payment Dealers to claim refund on normal

course In the process refund nullified by

arbitrary demands Unproductive litigation starts.

SUGGESTIONS

Abolition of TDS provision multi-point basis

TDS waiver certificate – procedure to be simplified

Waiver certificate to be for the entire contract period and not for any financial period

Automatic waiver certificate for contractor paying tax under sec. 5 and files return regularly with tax payment..

Thank You

INTER STATE SALES & IMPORT SALES

GDC Vs. State of Rajasthan88 STC / 204 (SC)

“…. the legislative power of the State to impose tax on such transfers under entry 54 of the State List will have to be exercised keeping in the view the provisions contained in Section 3, 4 and 5 of the Central Sales Tax Act.……” (p. 228)

Intra State sales

Import sales

Inter State sales

Thomson Press (I) Ltd. Vs.State of Haryana ( P&H) (FB)

100 STC / 417

Indure Ltd. and another V. Commercial Tax Officer [[2010] 034 VST 0509(SC)

It does not, however, ipso facto authorise the State Legislature to levy taxes on the sale or purchase of goods where such sale or purchase takes place in course of inter State trade and commerce. The power in this behalf vests exclusively in the Parliament,

It is also to be noted that the company had admittedly imported the goods into India for completion of the project on turnkey basis of N.T.P.C. Thus, by virtue of article 286(1)(b) of the Constitution, they would not be taxable.

0ther issues on inter State sales & Import sales - Judicial support

INTER STATE SALES • State of AP Vs. Larsen & Toubro Ltd

(132 STC / 272) - State appeal dismissed by SC

• Mahim Patram (6 VST /248) SC –Sec. 13(aa)CST

• Commissioner of VAT, New Delhi Vs State of

Haryana– CST Appellate authority (New Delhi Bench) 23VST /10

• Mitsubishi Corp. - Delhi HC – 34 VST /417

IMPORT SALESIndure Ltd. – SC - 34 VST/509BPL Telecom – Kerala HC – 23 VST/264Embee Corp. – Bombay SC- 107 STC /196