AWARENESS, APPLICATION AND

CHALLENGES OF VAT IN
CONSTRUCTION CONTRACTS
CA VISHNU MOORTHI H
VISHNU DAYA & CO, Blore, Chennai

CONTENTS
Fundamental concept of sales, works contract vs
Sale
Issues regarding sale/ turnover
Issues regarding deductions- SC; LC; GP
Tax schemes for works contractors
Input credits
Purchases- URD, C form
Collection of taxes
Issues regarding URD/ IS purchases; COT;

What is Sale
Transfer of property in goods by one person to another in
the course of trade or business for cash or for deferred
payment or other valuable consideration
Specifically includes.-

Non-contracted transfers.
Transfer of property in goods (whether as goods or in some other
form) involved in the execution of a works contract.
A delivery of goods on hire purchase or any system of payment by
installments.
A transfer of the right to use any goods.
Transfer from Association to members and by Govt;
Supply of food or beverages as a part of service.
WHAT IT EXCLUDES? Barter; going concern; sale incidental to
service?

Goods
Goods means all kinds of movable property (other than
newspapers, actionable claims, electricity, stocks and shares
and securities) and includes livestock, all materials, and
articles (including goods, as goods or in some other form)
involved in the execution of works contract or those goods to
be used in the fitting out, improvement or repair of movable
property) and all growing crops, grass or things attached to, or
forming part of the land which are agreed to be severed before
sale or under the contract of sale.

Goods- continued
Goods also includes intangibles. Hence,
software is a goods. Patent, trade mark, know
is goods.
When license is given in respect of these
intangibles, whether it would be a case
involving a transfer of right to use the goods?

Local Sales
VAT is payable under the KVAT Act only in
respect of local sales.
Inter State sale and exports/ imports are
covered under the CST Act.
How to determine a sale as a local sale or an
inter state sale?
Movement of goods originating in one State
and getting terminated in the same State is a
local sale.

Levy of Tax

Tax is levied at every stage of sale

Input credit is given for the tax paid on purchases;
Certain restrictions on input credit;
Purchase tax is payable if goods are bought from unregistered
dealers.
Even if the sub-contractor is an unregistered dealer, purchase
tax is still payable.

WORKS CONTRACTS
Principals
Materials

Labour
Charges

Labour

Principals
Materials

Own
Materials

Own
Materials

Labour

Labour

Sales

Material VAT
Labour Service Tax ; landstamp duty

Works
Contract

Works
Contract

Works contracts
Free Supplies from owner

Owner
contractee

Local Purchases

Contractor

Principle of
accretion/
accession

Inter-State Purchases
Imported Purchases
Interstate movement of own
goods

Used or consumed
Registered In the local
in the execution
State
of the works contract

Works contacts can be broadly divided into two

Works Contracts
parts

Goods

i) Local Purchases

Non-Goods

ii) Interstate Purchases

iii) Imported Purchases
iv) Sale-in-transit

i) Cost of Labour
ii) Cost of Outsourced labour (contract
labour)
iii) Cost of Labour Like
Charges/establishment
iv) Cost of Designs, Drawings, etc

v) Inter

v) Cost

of Testing fees, certification fees etc

vi) Cost

of Architect fees /Eng fees

state movement of
contractors own goods
vi) Free Supplies

vii) Cost of Consumables which cease to

ExistPLUS FAIR SHARE OF PROFITS

Issues that arise in resolving

conflicts in works contract
Theory of dominant intention.
Theory of accretion or accession.
Determination of value of goods vis a vis
service.
State in which works contract tax would be
payable if goods moved from one State to
another pursuant to a works contract.
Determination as to whether a transaction is a
sale simpliciter or works contract or service
contract.

Rate and Schedules to K-VAT

Section 4 of the K-VAT Act, governs the rate of Tax to be paid by a dealer
for the levy under section 3 of the K-VAT Act. As per this section, the rates
of Taxes for sale of goods is as follows.
Particulars

Rate of Tax

First Schedule

Exempted from Tax

Second Schedule

1%

Third Schedule

5.5%

Fourth Schedule

20%

Declared goods under CST Act, 1956 Maximum rate as per CST Act
Cigarettes, Cigars, Gutkha and other

17%

Tobacco products
Transfer of Property in goods

As per the rate mentioned in the sixth

involved in the execution of W.C.

schedule

Other goods

14.5%

CONCEPT OF SALE
Whether developer who outsources the work
completely is said to be a works contractor?
State of AP VS L & T (65 KLJP 252A SC)Deemed sale happens when the goods is
incorporated into the contract and hence, it
can happen only once. When the subcontractor is registered and taxes are paid, no
deemed sale can be presumed again. In
practice, sub-contractor turnover is excluded.
State still considers as two sales.

CONCEPT OF SALE
Developer- whether he sells a real estate or he is a works
contractor executing the contract of construction. Whether
single agreement/ charging a consolidated amount/
changing the terms of the agreement can alter the
character of the transaction?

K Raheja Development corporation (141 STC 298 (SC)

Assotech Reality Pvt Ltd Vs State of UP( 8 VST 738)- only
allotment letter was given. Right to mortgage retained by
the developer.
This aspect is pending before SC in the case of L & T where
the case is placed before the chief justice as Raheja case
requires reconsideration.

Place and time of sale

The sale shall be deemed , for the purpose of this Act, to have
taken place in the sate irrespective of the place where the
contract of sale or purchase is made, if the goods are within the
state(a) in the case of specific or ascertained goods at the time the
contract of sale or purchase is made
(b) in the case of unascertained or future goods at the time of
their appropriation to the contract by the purchaser or the
seller whether assent of the party are prior or subsequent to
appropriation
Inter state transactions cannot be converted into local sales.

Time of sale-sec 7
The sale of goods shall be deemed to have taken place at
- the time of transfer of title or possession or
- incorporation of the goods in the course of execution of any
works contract whether or not there is a receipt or payment.
If the dealer issues a tax invoice in respect of such sale within
14 days from the date of the sale , the sale shall be deemed to
have taken place at the time the invoice is issued. Otherwise,
technically, dealer has to take a permission of the
commissioner.
Advance collected ?

Turnover
Charges for premium location
Bifurcation of amount between land and
construction- whether value for land/ UDSshould it be at cost of purchase or
guidance value or
market rate or
agreement value?

Turnover
Service tax collected separately- whether
constitutes turnover in the hands of a COT
dealer? Commissioner has clarified to a dealer
that service tax can be excluded.
Apportionment of collection between UDS
agreement and construction agreementwhether should be proportionate or one can
collect land amount first?

Turnover
Free issue of materials to the contractor- if the value is
excluded from the contract value, it will not be a sale of
material by the developer.
Optional supply of materials to the contractorwhether it is a sale by the developer to the contractor
and once again, a sale by the contractor to the
developer? If the contract value includes the material
and then supplied and deduction is given, it would be a
sale of material by the developer to the contractor and
back again.N M Goel & co(72 STC 368 SC); ACCT Vs
Nandanam Construction Co (115 STC 427 SC)

Turnover
Whether separate value for materials and
labor can be shown and whether taxes can be
paid based on such a bifurcated value? Is it
possible to divide the composite contract and
assign separate value for materials and labor
and pay taxes under the two Acts accordingly?
VAT authorities are likely to question if the
value of the materials is less than 70%/ 75%.

Turnover
Sales returns after six months- whether time
period is really applicable to deemed
transactions? Practically considered so,
though, legally, this can be challenged.
Advance received- whether liable to be taxed
at the time of receipt- Nagarjuna construction
Co Ltd Vs State of karnataka (june 2010)explanation to Rule 3 is unconstitutional.
Amendment to section 30- credit note option
is deleted- implications

taxability methods

Option

Regular Scheme

Composition
Scheme

Calculation of Taxable Turnoverregular

Total Turnover less :
Export and Interstate sales
Interstate stock transfer other than sale
Regular discount provided in the invoice?
Sales Returns within a period of six months of delivery of goods.
URD purchase returns
Exempted sales
Tax collected including service tax. Excise duty?
Agent tax paid turnover
Sub-contractor turnover subject to conditions
Labour and other like charges as per actual, if not, ad hoc deduction as per
rule 3

Regular scheme- concept

Gross consideration to be reckoned XXXX

Less : Labor charges
- on ad hoc basis as per rule 3 or XX
-Actual labor and other charges XX
Gross Profit on actual labor
XX XXX
Balance taxable turnover
XXX
Classification- declared goods XX
Others
XX

Regular scheme- contd

Taxable turnover- declared goodsconcessional rate OF 5%
Others- 14.5%
Input credit can be availed

Turnover- classification
Whether turnover attributable to the transfer of
property in steel has to be separately offered for tax?
Rate of tax applicable on turnover pertaining to iron
& steel Nagarjuna Constructions Ltd.- steel can be
subjected to special rate. Usage in the same form ?
Interior works contracts executed optionally with
selected purchasers- whether part of civil works
contract or separate works contract? Since this
would be an independent contract, should be
treated separately and only 25% labor can be
deducted.

Input tax credit concepts

Definition of input is very wide and includes
all goods purchased for sale;
Section 11 contemplates several situations of
disallowance of input credit like Stock transfer outside the State;
Use for sale of exempted goods;
Negative list in 5th schedule;
Tax on consumables in the case of works
contractor

Input credit issues

Condition for claiming input creditNo requirement that the goods should have
been received;
No requirement that the supplier should have
been paid;
The dealer should have a Tax invoice in hand.
Whether credit can be taken in the
Subsequent months?

Input tax credit

URD purchases- separate tax has to be paid
and credit can be taken as and when the
goods are put to use.
PRE REGISTRATION PURCHASES
Section 13- Only purchases prior to three
months of the date of registration is eligible
for input credit, so long as such goods had not
been sold before registration.

Negative list of input credit- 5th

schedule- issues
Cranes purchased by a builder;
Bulldozers used by a building contractor;
Computers purchased by a software
development company;
Centering materials of wood; steel;
Computers purchased by a software service
provider;
Mining Lorry- Canara Overseas Ltd- (67 KLJP
161 Kar HC)

Composition Scheme

The salient features of this scheme are There is no upper limit of either the total turnover or
the taxable turnover
He must be the one who is registered or applied for
registration under the Act.
The dealer opting for payment of tax under the
composition scheme shall not hold stock of any
goods brought from outside the State on the date of
exercising such option and shall not effect sale of
goods brought from out side the State after such
date.
Cannot take input credit

Composition Scheme
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 can he 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)]
On inter-state purchases (excluding capital goods) the dealer
is liable to pay tax on the value of goods at the appropriate
rate specified in section 4 (@ 1%, 5%, 5.5%, 14.5% etc) and
such value of goods shall be deducted from the total
consideration of works contracts.

composition scheme
Department contends that value of goods means Sale
price of such goods.
Shall be eligible for deduction in respect of the amount
paid or 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) and also gross
profit thereon.
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.

Composition Scheme
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.

COT DEALER ALSO HAVING PURE

LABOR CONTRACTS
Whether a COT dealer who enters into pure
labor contracts is liable to pay COT on the
pure labor charges also?T H Venkata Gowda Vs
CCT (61 KLJP 289 KAR)- held in the context of
section 17 (6) of KST Act that once opted for
COT, tax has to be paid even on labor
contracts. Wording in section 15(1) and the
notification- 4% on the total consideration for
the works contracts executed.

Issues under Works Contract

Invoicing compliance
Running bills/ Payment bills/ Consolidated Invoice

Collection and Payment of taxwhen?

If there is cancellation of part of work after six months
should it be treated as sales return?

How to treat the difference between Estimation

gross profit at beginning and actual gross profit at
the end of the project?
Reconciliation between Recognition of revenue in
books of Accounts with Turnover offered in local laws
Whether the works contractor is entitled to claim
deduction towards depreciation on capital goods as
part and parcel of labour and other like charges?

Turnover- inter State works contract

If there is any inter state movement of goods
for the purpose of the works contract in the
State, whether it can be an inter state sale in
the other State- a works contractor having
certain manufacturing activity in another State
and bringing the manufactured goods
specifically for the works contract- it would be
an inter State sale from the other State and
cannot be a stock transfer.

Inter State works contracts

Section 3 : A sale or purchase of goods shall be
deemed to take place in the course of inter
State trade or commerce if the sale or
purchase
a. occasions the movement of goods from
one State to another or
b. is effected by a transfer of documents of
title to the goods during their movement from
one State to another.

Theory of accretion or
accession.
Larsen & Toubro Limited vs State of AP (148
STC 616 SC)
execution of works contract through subcontractors property in goods passes by
accretion one taxable event of sale

Whether stock transfer or Inter

State sale?
State of AP vs Bhooratnam & Co (117 STC 371)
Inter-state sale or branch transfer works
contract dealer in Andhra Pradesh despatching
goods to branch in Amaravathi in Maharashtra for
use in contract. The contract did not contemplate
mere supply of pipes. The entire work was treated
as completed only on execution of pipe line work.
Payment was to be made on the basis of
measured work at which stage the goods were
immovable by accretion to the earth. Transaction
is stock transfer.

Sale in transit

Sale by subsequent dealer by transfer of documents of

title to the goods during their movement form one state
to another is exempt under CST Act, subject to
following conditions specified in section 6(2) of the
CST Act.
(i) a subsequent inter-State sale (before taking
delivery);
(ii) effected by transfer of documents of title to the
goods during the movement of the goods from one
State to another; and
(iii) pursuant to an earlier inter-State sale.
(iv) Forms to be exchanged;

Sale in transit
Procedure For E-1 sale
Manufacturer-A
Customer of A- B
Customer of B- C
Material movement: A to C, Bill Movement : A to B, B to C
Manufacturer A will Bill to B and delivery to customer C
Charge 2% CST against C Form mentioning customer Bs CST
number, LR to customer B mentioning delivery to Customer C
B will collect E-1 Form from Manufacturer A and Form C from
customer C
In case customer C does not have CST number, subsequent sales
will suffer CST at the local rate.

High Sea sales

Section 5(2): A sale or purchase of goods shall be deemed to take
place in the course of the import of the goods into the territory of India
only if the sale or purchase either
- occasions such import or
- is effected by transfer of documents of title to the goods.
I
f the agreement for sale stipulates import of goods or import of goods is
incident of contract of sale and goods have entered the import stream,
such import would fall within the expression sale occasions import.Generally ends with a litigation;

Sales before customs clearance

High Sea Sales

The

Supreme Court has rendered a landmark decision in the case

of The Indure Ltd. vs. CTO addressing issues arising out of
Section 5(2) of the CST Act in the context of turnkey works
contracts.

The

Appellant contended that the MS pipes imported from outside

India are sold in the course of import falling under Section 5(2) of
the CST Act.

The Supreme Court has held that the import of the goods into
India was for the completion of the project on turnkey basis of
NTPC and by virtue of Article 286(1), the State cannot impose tax
on a sale which takes place in the course of import into India.

High seas sales precautions

Ensure that Tender/ works order/ contract
envisages specific imports;
Assign separate value in the contract;
Preferably sell while the goods are in the high
seas;
Ensure that the principal files the bill of entry;
Possession in the site for the limited purpose
of installation

Sales occasioning an import

Contract should envisage the specific import;
Inspection by the principal in the foreign
place;
Shipping documents can show the delivery to
the principals site;
Consult if the contractor prefers to file the Bill
of entry and yet plan to claim exemption.

Purchase of goods against C form

For resale (includes use for works contract);
For manufacture or processing of goods for
sale- machineries, Plant, tools, jigs, spare parts
and other items listed in rule 13 of CST (R & T)
Rules.
Packing materials; telecommunication
networks; mining; generation or Distribution
of electricity
Goods must have been listed in the certificate
of registration for the above uses

PURCHASES C form
Whether COT dealer can purchase goods
against C form? Yes- what about capital
goods?
Whether regular dealer can purchase capital
goods against C form? DLF VS State of Kerala
(2008) (14 VST 64 Kerala HC)- purchase of
Batching plant is permitted.
Purchase of goods against C form by a
developer under JD Agreement

Joint development agreements

Revenue sharing agreements
Built up Area sharing agreements
Whether the developer is said to be acting as
contractor to the landlord in so far as his area is
concerned; whether it is a barter contract? Whether
barter is covered in the definition of sale ? Whether it
is a barter of immovable property?
If yes, how the consideration is worked out? Whether
the amount collected by the developer on account of
sale of UDS can be said to be the consideration?

Other issues
New project- yet to be launched- input credit
and sub-contractors turnover in respect of
works being done- can be set off against other
projects or carried over;
Proportionate completion method; turnover
for VAT;

Renting of building and furniture

Renting of properties coupled with furniture
and fit outs- rental for stamp duty purposes
and lease tax on the furniture.
Karthik Engineering works Vs State (119 STC
88 KAR)- Once movable goods is incorporated
into immovable property, such goods becomes
part and parcel of the immovable property
and cease to be goods.

Plotted development
Whether there is a sale when development
charges is collected from the customers, if
entire development takes place in the area
surrendered to the Govt?
There is no transfer of property in goods to
site owners in constructing common facilities
either collectively or individually (continental
builders and developers Vs St of Karnataka
(KAT, Bng) (67 KLJP 359B) and also held that
eventhough application was made for COT, in

Value for stamp duty

Value claimed for land should be the
minimum value on which stamp duty should
be paid;
Whether entire value of land and construction
should be offered for stamp duty? Paying
stamp duty on guidance value and payment of
VAT on construction value is a valid
proposition;

Movement of goods
Movement of goods other than by way of
sale- e sugam is required;
E sugam updation is required for notified
goods when they are sold;
E sugam updation is required for the notified
goods when they are brought to the State;

Sale of scraps
Scrap sales is liable to VAT;

Entry Tax
On machineries and Spares and parts of
machineries
Lifts, elevators and parts and accessories (
SANJAY TO PROVIDE THE DECISION)
Diesel captive generation sets- exempt

Philosophy
Beginning with the end in mind
Accept the presence. Acceptance means
action and no reaction.
Do not see intentions in others behaviourExample- Flower pot.
We are all like a seed of jackfruit.

Questions

THANK YOU