Works Contract Final ICAI-Rajkot 26-062010

8/4/2019 Works Contract Final ICAI-Rajkot 26-062010

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JUNE 26, 2010

Works Contract

Anil Chauhan

&

Keval Parikh


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Background

Workscontractunder VAT

Inter-State Workscontract

WorkscontractunderService Tax

Upcoming Legislation GSTContents


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BackgroundBackground


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Constitutional Amendment

46th Amendment made to the Constitution from February 2, 1983

Outcome of the above:

PermittedtheStatestolevytaxontheSaleofgoods

involvedinexecutionofall workcontract.

Stateshave beengiven powertoseparatethecontract

between workandthelabour andservices

Identifying whetherthegoodsretainedtheiroriginal

identityafterthe workwasexecutedorhad beenmerged,

integratedor becoming partand parcelofthe works,

buildingsetc.

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 SaleofGoodsvis--vis WorksContract

SaleofGoods WorksContract

Taxed as actual Sale : Seller & Buyer Taxed as Deemed Sale : Contractor &

Contractee

Absolute property of the makerwhen

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 buyerwithout first

becoming property of the maker.

Primary function - supply of materialsIncidental - work or service

Primary function - work and labourIncidental - materials are supplied

TDS provisions are not applicable TDS provisions are applicable

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SupplyofMaterialsand Labour

WorksContract(e.g. Construction of a building, roads, bridges, damsetc.)

Supplyoflabour andsupplyofmaterialsisincidentaltothecontract

Nota Workscontract(e.g. Painting, cleaning, overhauling, lubricating,greasing of an old machinery etc.)

Pure LabourContract mayinvolvematerialsforexecutingcontract

Nota Workscontract(e.g. Semi-finished material supplied to Job-worker

for further processing, tailor doing stitching work)

Typesofcontract


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WCT under VATWCT under VAT


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WorksContractunder Gujarat VAT

Section 2(23) :

DefinitionofSaleincludestransferofpropertyingoods, (whetherasgoods

orinsomeotherform) involvedintheexecutionofa workscontract

GovernmentofGujarathasnotifiedlistofworkscontract

Notified workscontractList_of_Works_Contract.pdf


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Works Contract under Gujarat VAT Act

Valuationoptionsunder

WorksContract

Actual Labour

deduction Standard Labour

deduction

Composition


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CalculationofSalePriceofWorksContract

Actuallabourdeduction Following deductionsareallowed incasebooksof

accountsare maintained

(a) Labour charges & Servicecharges

(b) Sub-contractcharges

(c) Planning, designingandarchitect'sfees

(d) Machineryonhireandtoolsused

(e) Costofconsumables, the propertyin whichisnottransferred

(f) Costofestablishmenttotheextenttoitisrelatabletothesupplyof

labour andservices

(g) Othersimilarexpensesrelatabletothesupplyoflabour andservices

(h) Profitearned bythecontractortotheextentitisrelatabletothesupply

ofsaidlabour andservices

Intentionofthegovernmentistolevytax ONLY on Material

component


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IndivisibleContract incaseseparate booksofA/csarenotmaintained

Lump sumdeductionsareallowed


*Amounttobedeductedfromthecontractprice(expressedasapercentageofcontract

Description ofWorksContract Percentageof

Deduction

Construction, improvement, repair of any building, road, bridge, dam,

canal or other immovable property

30%

Installation, fabrication, assembling, commissioning or repair of anyP&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 ofwind 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 otherworks contract 20%

To arrive at Taxable turnover above rates are applied after deductingpayment made to specialised contractor, sub contractor (discharging

liability separately)

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CalculationofSalePriceofWorksContractCompositionScheme Forcontractors whodonot wishto paytax basedonthespecificformulaorafterconsideringthelump sumdeductions

Rateoftaxis 0.6% or 2% ofthetotalcontractvalueasunder:

0.6%- Constructioncontractsrelatingtoroads, buildings,

bridges, pipelinelaying, dams, etc.

2% - Othercontractsincludingcontractsforerection,

installationsetc.

Restrictions:

ITCnotavailableon purchases

Contractornoteligibletoissue VAT Invoiceandalsocannotcharge

taxintheinvoice- Therefore, no ITCisavailabletotheemployer

Cannot importgoodsoninterstate basisor branchtransfer basis


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TDSRateunder GVAT

TDSRate : 0.6% incaseofconstructioncontractand 2% incaseofothers

WorksContractorismandatorilyrequiredtoobtain TAN No.from

Commercial Tax Department.

Paythetaxtothe Government withinstatutoryduedatein Form-207 and

issuecertificatein Form-703 tothecontractorevidencingthedeductionoftax

atsource.

Fileareturn within 30 daysofendofquarterin Form-704 andalsofilea

annualstatement within 30 daysfromendoffinancialyear.

Person responsible for payment exceeding Rupees 1 crore for works contract

is responsible for deduction of tax at prescribed rates


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Gujarat VAT Complianceata 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 704within 30 days from the end

of the quarter

Monthly Return to be submitted In F

orm 201w

ithin 30 days including ereturn for specified dealers

Annual Return to be submitted In Form 205within 9 months from the end

of the year including e return for specified

dealers


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Gujarat VAT Input TaxCredit

ITC available on all inputs used in works contract other than composition method

subject to fulfilment of conditions

Broad Restrictions on ITC:

CST purchases

Capitalgoodsusedin workscontract

Leasegoods

Goods purchasedfrom Lump sumdealer

Goodsnotconnected with business

Vehicles, equipments, accessoriesorspare parts

Fuelusedinmotorvehicles

Goodsusedasfuelingenerationofelectricalenergy

ITCto bereversed by 4% incaseofbranchtransfer

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InterState WorksContractInterState WorksContract


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Inter-State WorksContract

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 ofworks 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

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How todeterminethetaxableturnover? 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 theprescribed 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 rulesproviding for the manner of determination of the sale price and the deductions fromthe 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, notinconsistent 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 todeterminethetaxableturnover?

However no specific rules have been made by the State Government inrespect 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 ofUttar 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 fordetermining the sale price; taxable turnover cannot be computedunder Section 8A and CST cannot be levied.

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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.

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How todeterminethetaxableturnover?

In view of the above ruling, provisions made in a particular State (fromwhere the goods are moving) for determining the taxable turnover andthe sale price in case of a works contract would be applicable accordinglyin case of an inter-state works contract .

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RateofTax Applicable

After determining the sale price and the turnover as per the

provisions of the State Act, rates ofCST prescribed under Section 8 of

theCST 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 Crate 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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WorksContractunderService TaxWorksContractunderService Tax


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Followingarerelevanttaxableservicesinvolvedin

the WorksContract

DescriptionofService 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


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WorksContractservice Insertedfrom 1st June 2007

Section 65(105)(zzzza) ofthe Finance Actdefinestaxableserviceas:

anyservice providedorto be providedtoany person byanyother person

inrelationtotheexecutionofa workscontract, excluding workscontractin

respect ofroads, airport ports, railways, transportterminals, bridges,

tunnelsanddams

Explanationtothissub-clausedefinesworkscontract :

Workscontractmeansacontract wherein Transferofpropertyingoods

involved intheexecutionofsuchcontractisleivable totaxassaleof goods

andsuchcontractisforthe purposeof carryingoutspecified works.


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Specified worksare:

(a) Erection, commissioningorinstallationofplant ,machineryequipmentor

structures, whether pre-fabricatedorotherwise, installationofelectricaland

electronicdevices, plumbing, drainlayingorotherinstallationsortransportof

fluids.heating ,ventilationonair-conditioningrelated pipe work, duct workand

sheetmetal work, thermalinsulation, soundinsulation, fire proofingor water

proofing, liftandescalator ,fireescapestaircasesorelevatorsor

(b) Constructionofanew buildingoracivilstructureora partthereoforofa

pipeline orconduit ,primaryforthe purposeofcommercialorindustryor

(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.


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Twoessentialconditionsfortaxabilityunder workscontractserviceare

Theremust betransferofpropertyingoodsinvolvedintheexecutionof

specified workscontracts

Suchtransferisleviable totaxassalesofgoods.


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AppropriateClassificationunderService Tax Legislation

Ifthespecified workcontractinvolvestransferofpropertyandon which

VAT/Salestaxis payabletheservice will betaxableunder Workscontract

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 ofConstruction or Erection and

Commissioning Service


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WorksContractService

Valuationoptions

Computation

as per

Valuation Rules

Composition


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Valuationofworkscontractservice

Computationas per ValuationRules

Valueofworkscontractshall beequivalenttogrossamountchargedforthe workscontractlessvalueoftransferofpropertyingoodsinvolvedinexecutionofthesaid

workscontract. Along withvalueofMaterial VAT/CST paidto bededucted.

Followingto beincluded :

(a) Labourcharges & Servicecharges

(b) Sub-contractcharges(c) Planning, designingandarchitect'sfees

(d) Machineryonhireandtoolsused

(e) Costofconsumables, the propertyin whichisnottransferred

(f) Costofestablishmenttotheextenttoitisrelatabletothesupplyoflabourand

services

(g) Othersimilarexpensesrelatabletothesupplyoflabourandservices

(h) Profitearned bythecontractortotheextentitisrelatabletothesupplyofsaid

labourandservices

(i) Othersimilarexpensesrelatabletosupplyoflabourand services

(j) Profitearned bytheservice providerrelatabletosupplyoflabourandservices.


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Computationas per ValuationRules - TaxrateandCENVAT

-Service Tax @ 10.3% to be paidontaxablevaluearrived

-CENVAT crediton InputservicesandCapitalgoodscan beavailed


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Computationas perCompositionscheme

OptionalComposition 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 crediton InputservicesandCapitalgoodscan beavailed


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Goods & Services Tax(GST)

Indicatedroll-outdateis April 1, 2011

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The Gist of Proposed GST: Taxes to besubsumed

State LeviesCentral 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 ofVAT on similar commodities from one State to another

CENVAT credit & VAT input tax set-off not comprehensive due to restrictive

provisions

Breakincreditchainininter-Statetransactions

Multipletaxesleadingtocomplexityincompliance

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The Gist ofGST: Uniformity in structure

1st Discussion paper on GST released by the EmpoweredCommittee on 10th Nov2009

As far as practicable there will be uniform procedures acrossvarious statutes concerning:

- Chargeability

- Taxableevent

- Taxable person

- Valuation

- Classification

Rulesfortakingandutilisation ofcreditforCGST andSGST wouldbealigned, butnocrossutilisation ofcredit betweenthesetwotaxes

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The Gist ofGST: Scope and coverage

CGST and SGST would be applicable on all transactions ofgoods and except:

- Exempted goods and services

-Transactions which are below the prescribed threshold -Goods outside the purview ofGST:

Goods Treatment under GST

Products containing Outside the purview ofGST, State Government to

alcohol levy taxes as at present

Central Government to levy excise duty on tobaccoTobacco Products products over and above GST

Outside the purview ofGST, 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 ofGST: Rates and thresholds

Two-tier rate structure for bothC

GST 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 of0.5% to be

available for taxpayers having annual turnover below

Rs. 50 Lakh

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he GistofGST: Inputtaxcredit Mechanism

Input Tax Credits (ITC)

CGST

CGST

IGST

SGST

SGST

IGST

IGST

IGST

CGST

SGST

against

against

against

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The Gist ofGST: Inter-State transactions

Inter-State sale of goods and services will be taxed underthe innovative Integrated GST (IGST) model

IGST model would work as follows:

- The Central Government would levy IGST at the rate ofCGST

+ SGST on all inter-State sale transactions

- To pay this IGST, the inter-State seller may use credit ofCGST,SGST and IGST on his inputs

- Theinter-State purchasermayusethecreditofthe IGST paidonhis purchasestodischargetheoutputtaxliabilityonhistaxable

supplyofgoodsorservices

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The Gist ofGST: 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 toDomestic TariffArea

Imports of goods and services would be sub ject to CGSTand 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 andservices will be available as credit

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Impact on businesses: Decision matrices

ProductPricingneedstoreflect GST efficiency Stocklevelto bemaintainedasontransitiondate

Timingofacquisitionofassets

Review impactonexistingcontracts

Focusoncoreactivitiesvs. backward / forward

integration

Ascertainchangeindocumentationand processes

Identifychangesto ERPsystemto be GST compliant

Assessneedtore-engineertaxmanagementfunction

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New dual GST: Transition matters

Treatment of unutilised tax credit balance as on transitiondate

Tax credit on capital goods where only partial tax credit taken inpre-GST regime

Treatment of tax already paid on goods lying in stock as on thetransition date

Salesreturnofgoodssoldin pre-GST period

Taxationofcontractsandservicesspreadover pre-GST &

post-GST period

Change-in-law provisions in existing and new contracts

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Documents

Works Contract Final ICAI-Rajkot 26-062010