2/15/12 Untitled Document

1/7 .bcasonline.org/articles/artin.asp?543
Login ID:
Passord:
Login
Forgot Password?
New user? Free SignUp
Compounding of
Contraventions under
FEMA, 1999
Lecture meeting on
Value Creation through
Sustainability
Management
Imperatives in a CFOs
Journey
Lecture meeting on
Direct Tax Provisions of
the Finance Bill, 2012
More Events...

BCA Journal
January
2012,
Journal
Index
Jan 12

Archies

Latest
Publication
Nani
Palkhivala -
The
Courtroom
Genius

B Soli J. Sorabjee
Arvind P. Datar
Price: Member Rs.420/-
Students Rs.420 /-

Other Publications
Maharashtra VAT Taxation of Works Contracts
Sbjec : Indirect Taxes
Monh-Yea : Aug 2005
Aho/ : Govind G. Goyal
Chartered Accountant
Topic : Maharashtra VAT Taxation of Works Contracts
Aicle Deail :
Taxation of works contracts has always been a matter of curiosity,
controversies and complications. Ever since evolution of the concept of
deemed sales under the sales tax laws, it has remained a mystery as to which
transactions are liable to tax under the guise of works contract.
The 46th amendment to the Constitution of India, amending Article 366 in the
year 1983, gave power to the States to levy tax on the transfer of property in
goods (whether as goods or in some other form) involved in the execution of a
works contract. Various States all over India very happily amended their sales
tax laws to expand the coverage of tax net by incorporating the above referred
coined words in the definition of sales. However, most of them fail to define
what a works contract is. In the absence of a definition of works contract, it
is not possible to find out whether a particular transaction involving transfer of
property in goods, is liable for sales tax or not ? But for last more than 22
years the tax is being levied by the Government and paid by the dealers,
sometimes without any argument and sometimes after battling through the
Courts.
High Courts of various States as well as the Honble Supreme Court of India
have to intervene time and again to decide whether a particular transaction
can be taxed or not under the sales tax laws of a particular State. There are
number of judgements pronounced by the most knowledgeable and honorable
judges of the highest courts of the States as well as the Apex Court. And there
are number of judgements which are contradicted by another judgement of
the same court and there are many cases still awaiting justice.
It was expected that with the introduction of Value Added Tax (VAT), the
controversy and complications about the taxation of works contracts will get
resolved, but it seems that the Courts may still have to guide all of us to
understand what is a works contract.
Be that as it may, lets try to understand the provisions contained in the
Maharashtra VAT Act for levy of tax on works contracts.
Assuming that a particular contract is a works contract, tax can be levied by
the State Government on the value of the transfer of property in goods
(whether as goods or in some other form) involved in the execution of such a
contract. It may be noted that under the sales tax laws, tax can be levied on
the sale price of goods. The term goods has been well defined to include all
kinds of movable properties (with certain exceptions). However, immovable
properties are not considered goods, hence cannot be taxed under the sales
tax laws. For example, sale of land or a building standing thereon is not liable
to tax. But cement and bricks, etc. used by a contractor, in a construction
contract, may be considered as passing of property in goods .e., cement and
bricks, etc., being movable goods, hence may be subjected to tax as works
contract. But such a contract is normally a composite contract wherein the
contractor is required to use his material as well as labour and skill. It is not
just a contract for sale of cement and bricks. But a contract for constructing
building, in the execution of which, property in certain goods passes from the
contractor to the contractee. The State can levy tax only on the value of goods
and not on the labour and service portion of the contract. In all such cases of
composite contracts, the question that arises is what is the value of goods on
which tax can be levied ?
Resource
Material

Articles and
Features

More...
Circulars

More...
Drafts, Forms

Tribunal Board

Holidays for
BCAS

Budget 2011

Annual Report

BCAS Brochure

BCAS IFRS
Month

Recent Case
Laws

Representations

Supreme Court
cases

Advance ruling

Tribunal-Rept.
Cases

Tribunal-
Unrep.Cases

High Court
Cases

Tribunal -
International
Tax Decision

BCAS Hall
Booking


Disclaimer
Privacy Policy
Food for
Thought
2/15/12 Untitled Document
2/7 .bcasonline.org/articles/artin.asp?543
Under the earlier law, which was prevalent in the State of Maharashtra, till
31st March 2005, .e., Maharashtra Tax on the Transfer of Property in Goods
involved in the Execution of Works Contracts (re-enacted) Act 1989, a simple
method was used whereby the purchase price of the goods was considered as
the sale price for the purposes of levying tax under the said Act and there
were specific rates of tax for such goods so used in the execution of works
contract. However, in the VAT law of Maharashtra, there are no such
provisions. Instead it provides for the determination of sale price of goods in a
particular manner.
Works Contract Sale Price :
Works contracts, involving transfer of property in goods in the execution of
such contracts, are liable to tax under the provisions of the Maharashtra Value
Added Tax Act 2002 (MVAT Act). The rate of tax shall be the same as
applicable to the commodity as per Schedules A to E. The sale price of goods
liable to tax, has to be determined in accordance with Rule 58 of the
Maharashtra VAT Rules 2005, which states :
58. (1) The value of the goods at the time of the transfer of property in the
goods (whether as goods or in some other form) involved in the execution of a
works contract may be determined by effecting the following deductions from
the value of the entire contract, in so for as the amounts relating to the
deduction pertain to the said works contract :
(i) Labour and service charges for the execution of the works
where the labour and service done in relation to the goods is
subsequent to the said transfer of property;
(ii) Amounts paid by way of price for sub-contract, if any, to sub-
contractors;
(iii) Charges for planning, designing and architects fees;
(iv) Charges for obtaining on hire or otherwise, machinery and
tools for the execution of the works contract;
(v) Cost of consumables such as water, electricity, fuel, used in
the execution of works contract, the property in which is not
transferred in the course of execution of the works contract;
(vi) Cost of establishment of the contractor to the extent to
which it is relatable to supply of the said labour and services;
(vii) Other similar expenses relatable to the said supply of labour
and services, where the labour and services are subsequent to
the said transfer of property;
(viii) Profit earned by the contractor to the extent it is relatable
to the supply of said labour and services :
Provided that where the contractor has not maintained accounts which enable
a proper evaluation of the different deductions as above, or where the
commissioner finds that the accounts maintained by the contractor are not
sufficiently clear or intelligible, the contractor or, as the case may be, the
Commissioner, may in lieu of the deductions as above, provide a lump sum
deduction as provided in the Table on the next page and determine
accordingly the sale price of the goods at the time of the said transfer of
property.
It may be noted that a dealer, executing works contract, is eligible
for full input tax credit as per the normal provisions. (The provisions
regarding Input Tax Credit are discussed elsewhere in this issue of BCAJ,
hence not reproduced here.)
He is also entitled to collect tax separately by issuing a Tax Invoice.
(2) The value of goods so arrived at under sub-rule (1) shall, for the purposes
of levy of tax, be the sale price or, as the case may be, the purchase price
2/15/12 Untitled Document
3/7 .bcasonline.org/articles/artin.asp?543
of levy of tax, be the sale price or, as the case may be, the purchase price
relating to the transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract.
Rate of Tax :
After determining the sale price through any one of the above methods, the
contractor is required to pay tax at the rate at which such goods (used in the
execution of works contract) is liable to tax as per Schedule A to E (see Table
below).
Schedule A Essential commodities (Tax-free) Nil
Schedule B Gold, silver, precious stones, pearls, etc. 1%
Schedule C Declared goods, industrial inputs, and such
other specified goods
4%
Schedule D Foreign liquor, country liquor, Motor Spirits,
etc.
20% at specified
rates
Schedule E All other Goods (not covered by A to D) 12.5%
Thus if the goods used in the execution of a works contract are, falling under
say, Schedule A, the rate of tax shall be Nil, if falling under Schedule C, the
rate of tax shall be 4%, and likewise if they are Schedule E goods, the rate of
tax is 12.5%.
TABLE
Works Contract Sale Price
Sr.
No.
Type of Works Contract
*Amount to be
deducted from
the contract
price (%)
1 Installation of plant and machinery 15%
2
Installation of air conditioners and
air coolers
10%
3
Installation of elevators (lifts) and
escalators
15%
4
Fixing of marble slabs, polished
granite stones and tiles (other than
mosaic tiles)
25%
5
Civil works, like construction of
buildings, bridges, roads, etc.
30%
6
Construction of railway coaches or
under-carriages supplied
by Railways
30%
7
Ship and boat building including
construction of barges, ferries,
tugs, trawlers and dredgers
20%
8
Fixing of sanitary fittings for
plumbing, drainage and the like
15%
9 Painting and polishing 20%
10
Construction of bodies of motor
vehicles and construction of trucks
20%
11 Laying of pipes 20%
12 Tyre re-treading 40%
13 Dyeing and printing of textiles 40%
14 Any other works contract 20%
* The percentage is to be applied after first deducting from the total contract
2/15/12 Untitled Document
4/7 .bcasonline.org/articles/artin.asp?543
* The percentage is to be applied after first deducting from the total contract
price, the amounts paid by way of price for the entire sub-contract to sub-
contractors, if any.
!f in a particular contract, there are several commodities used, which may be
falling under more than one schedule, then it would be necessary to divide the
sale price in the same proportion in which the goods of various categories
have been used in the execution of such a contract.
For eample : !n a textiles processing contract, the goods used are mainly
colour and chemicals. Some of the items may be falling under Schedule C and
some others may be in Schedule E. Say, the total contract value is
Rs.100000f-. The goods used (the property which is considered to be passed
on to the contractee), say, dyes (purchase value Rs.20000, liable to tax @ +)
and chemicals (purchase value Rs.10000, liable to tax @ 12.5), labour
charges and other similar expenses incurred by the contractor Rs.50000.
!n such a case, the contractor has two options :
!. Determine the sale price under sub-rule (1) i.e., by deducting from the
contract value the amount of labour charges and other similar expenses as
well as profit margin on such labour charges. As there is no definite formula to
determine the profit margin, it will have to be worked out on proportionate
basis. Considering, for the time being, that there are no other expenses, the
net profit of the contractor in this example is Rs. 20000, which may have to be
apportioned in the ratio of the cost of material : labour charges, i.e., Rs.30000
: 50000 = 7500 : 12500. Thus, the sale price of this works contract for the
purpose of levy of tax will be Rs. +7500 (i.e., 100000-50000-12500).
On this sale price, tax payable shall be worked out as follows :
@ + on Rs.31667 (+7500*20000f30000) Rs. 1267
@ 12,5 on Rs.15833 (+7500*10000f30000) Rs. 1979
Total Tax payable Rs.
32+6
The contractor is entitled to claim input tax credit i.e., set-off of tax paid on
purchases amounting to Rs.2050 (i.e. + on 20000 + 12.5 on 10000).
!!. Determine the sale price, under sub-rule (2), by adopting the Table.
According to which, the deduction permitted for such types of contract is +0
of the contract value. Thus, the sale price under this method shall be
Rs.100000 - +0000 = 60000.
Ta paable :
@ + on Rs.+0000 (60000*20000f30000) Rs. 1600
@ 12,5 on Rs.20000 (60000*10000f30000) Rs. 2500
Total Tax payable Rs. +100
!n both these methods, it may be observed, that the sale price has to be
apportioned in the ratio of purchase value of the material used in the
execution of such contract. !t may not be an easy exercise, particularly when
the contractor has undertaken several contracts and the material purchased
during a period, may have been used in various contracts.
Further, in certain labour-intensive contracts, the contractor would like to
adopt the first method which is certainly beneficial to him, but whether the
assessing officer will agree with such a determination of sale price ? There
are serious doubts about the same. !n all such cases, it is feared that the
assessing officers will raise one or other objection and the contractors may be
forced to adopt the Table.
Whether it is Table or reduction method, one thing is certain that the
contractors would not be able to quote the exact amount of tax they will
charge to their customers. !n large contracts running over several months or
several years, it may be very difficult for the contractors to collect correct
2/15/12 Untitled Document
5/7 .bcasonline.org/articles/artin.asp?543
several years, it may be very difficult for the contractors to collect correct
amount of tax from their customers and much more difficult to discharge their
exact tax liability on periodic basis.
It may be noted that under the Maharashtra VAT Act, a dealer is required to
file periodic returns, which may be monthly, quarterly or six monthly,
depending upon the total tax liability of the dealer during the previous year. All
such returns are required to be filed correct and complete in all respect. An
incomplete or incorrect return may lead to stringent penalties and even
prosecution.
Works Contract Composition Scheme :
S. 42(3) of the MVAT Act provides for a Works Contract Composition Scheme,
whereby a dealer, at his option, may choose to pay tax @ 8% on the total
contract value. (After deducting therefrom the amount paid towards sub-
contract, if any.)
If a contractor chooses to opt for the composition scheme, then the set-off is
restricted to 64% of the total eligible set-off in respect of such goods used in
the execution of such works contract. However, he is eligible to collect tax by
issuing a Tax Invoice.
A contractor is free to choose either the sale price method or the
composition scheme, as he ma deem fit, qua each contract. There is
no requirement of an prior approval, etc.
Looking into the difficulties of determining the sale price under Rule 58(1) and
(2) and paying tax through such most complicated and litigation-prone
method, the dealers may like to opt for the composition scheme. The scheme
is simple wherein the total contract value is considered as the sale price of
goods and tax is levied at a fixed percentage. There is no difficulty in giving a
quotation or charging tax through the running bills and there should not be any
difficulty in discharging the correct tax liability on all or any such contracts
during any given period. A composition scheme may be considered the safest
way for a contractor. Under the earlier Law also that was the most preferred
path. But, it seems, the lawmakers do not believe in simple laws. This may be
the best example how simple VAT has been made so complicated.
The real difficulty, under the newly drafted composition scheme, arises with
respect to the quantum of tax, with such a high rate of composition coupled
with an artificially restricted input tax credit. Under the earlier Law, the rate of
composition was just 4%, of course without any facility of set-off. But there
were no hassles; it was the easiest method whether for the contractor or for
the employer (contractee). 4% on the total contract value and no deductions
except payment made to sub-contractor. Now it is 8%, which by any standard
of a composition scheme is too high. If we just compare the tax liability of a
contractor with reference to the earlier example of textile processor, the tax
payable under the composition scheme works out to Rs.8000 (8% on the total
contract value of Rs.100000). Further, the amount of set-off, under the
composition scheme, will be restricted to Rs.1312 (64% of the eligible input
tax credit Rs.2050).
Lets now consider the net amount of tax payable by a contractor under each
of the above methods :
I. Sale Priceu/r 58(1)
Method 3246 - 2050 = 1196
II. Sale Price Table
Method 4100 - 2050 = 2050
III. CompositionScheme 8000 - 1312 = 6688
In the light of the above, one may imagine the plight of dealers as well as of
the employers.
The above example may be an extreme example and may not hold good for
2/15/12 Untitled Document
6/7 .bcasonline.org/articles/artin.asp?543
The above example may be an extreme example and may not hold good for
various other contracts. The calculations will differ from case to case, contract
to contract and dealer to dealer. There may be cases where the material
value may be much higher or there may be totally different proportion of
taxable purchases at different rates. But the basic steps will remain the same.
The dealers may have to work out all the options in their own cases before
deciding to adopt any one or more than one method in respect of contracts
undertaken by them.
Ongoing contracts :
Contracts, which have already commenced before 31st March 2005 and are
ongoing, are liable to tax as per the provisions of the MVAT Act with effect
from 1st April 2005. However, it has been provided that total liability in respect
of such contracts shall be restricted to the total liability as per the earlier law.
Works Contract TDS :
S. 31 of the MVAT Act provides that the Commissioner may, by notification,
require any dealer or person or class of dealers or persons (hereafter referred
as the employer) to deduct tax on such amount payable on the purchases
effected by them, as may be notified. All such employers shall have to :
(a) Take a Tax Deduction Number (Works Contract) from the
Sales Tax Department. Application to be made, in Form 401,
within three months from the day he becomes liable to deduct
TDS.
(b) Deduct tax, at prescribed rate, from the amount paid or
payable to a contractor during a given period.
(c) Deposit the amount so deducted with the Govt. treasury
within 10 days from the end of month in which such tax is
deducted or is required to be deducted.
(d) Issue a certificate of deduction of tax, immediately, in Form
402.
(e) Submit monthly (quarterly) statement of tax deducted at
source, in respect of each of such contractors, to the respective
prescribed officer, in Form 403, within 20 days from the end of
the month.
(f) Maintain necessary records in prescribed format, Form 404.
(g) File an annual return of TDS, in Form 405, within 3 months
from the end of the year.
(h) Attend and produce records before the assessing authority
as and when asked to do so.
Notes :
1. A contractor, awarding sub-contracts, is not required to
deduct TDS from such sub-contractor.
2. TDS provisions are not applicable in respect of works contract
liable to tax under the CST Act.
3. TDS not required to be deducted where the amount or the
aggregate of the amount payable to a dealer by such employer
is less than Rs.5 lakh during any year.
Employers notified for the purposes of TDS :
1. The Central Government and any State Government,
2. All Industrial, Commercial or Trading undertakings, Company
or Corporation of the Central Government or of any State
Government, whether set up under any special law or not, and a
Port Trust set up under the Major Ports Act, 1963,
2/15/12 Untitled Document
7/7 .bcasonline.org/articles/artin.asp?543
Port Trust set up under the Najor Ports Act, 1963,
3. A Company registered under the Companies Act, 1956,
+. A local authority, including a Nunicipal Corporation, Nunicipal
Council, Zilla Parishad, and Cantonment Board,
5. A Co-operative Society including a Co-operative Housing
Society registered under the Naharashtra Co-operative Societies
Act, 1960,
6. A Registered Dealer under the Naharashtra value Added Tax
Act, 2002.
7. An !nsurance or Finance Corporation or Company; and any
Bank included in the Second Schedule to the Reserve Bank of
!ndia Act, 193+, and any Scheduled Bank recognised by the
Reserve Bank of !ndia.
8. Trusts, whether public or private.
Rae of TDS :
The notified employers are required to deduct TDS, from the amount payable
to a contractor @ 2, if the contractor is a Registered Dealer, otherwise @
+.
Add to M Librar
Back o Aicle Liing
Click here to Refer for more Related Items