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Wednesday, September 3, 2014

Taxation of Works Contracts under TN VAT Vs Profit maximization in project execution.


Taxation of Works Contracts under TN VAT
Vs
Profit maximization in project execution.

Meaning of Works Contract in TN VAT:  Sec 2(43) defines as “Works Contract” includes any agreement for carrying out for cash, deferred payment or other valuable consideration, building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.

It need to be very careful while reading these lines that the act has not given the exact and exclusive definition but the definition specifically includes the activities/ nature of transactions covered under the Works Contract. In the absence of the exclusive definition for the words/ phrase “Works Contract” one need to refer the definition of works contract under the General Clauses Act and relevant judicial pronouncements from time to time.

Taxation under TNVAT! The works contract is been governed by two different methods and the option is left to the choice of the dealer.

First Method: This method is also known as Method of Composition or Composite method of tax payment. In this case the dealer is liable to pay tax on the total value of the works contract at the applicable rates. The applicable rates are 2% for civil works and civil maintenance works & 5% (4% till the amendment on 13/2/2012) for all other works. And the highlighting points under this method are (a). The dealer has to present his option of payment of tax under this method with the assessing authority before 20th of May of the financial year or along with the first month return after commencement of the works contract execution, as the case may be,  (b) The dealer is not required to maintain books of accounts under this act., and it does not mean that he/ she need not maintain books of accounts under the other law(s) in the land, and (c) The dealer cannot take Input Tax Credit on the purchases or on the inputs, and more importantly (d) the tax has to be paid out of his margin earned or to be precise he has no rights to collect the tax portion from his customer(s). The reader may mark these facts/ points are covered under sec.  6 of the TNVAT  Act.

Second Method: It is opposite to the first method and it is known as Non-composition in general and the properties are:
(a)  the dealer is not liable to pay tax on the total value of the works contract/ total turnover at the applicable rates but on the taxable turnover only and again the percentage of tax payable on the said turnover is based on the form of the property and its applicable rate as listed in the different parts of the First Schedule of the Act.
                                                                                                 
(b) Unlike the other method the dealer need not place his/her option of payment of tax liability under Non-composition. Once the dealer fails to present the option, it is automatic that he is liable to pay tax under Non-composition method.

(c) The dealer is required to maintain books of accounts under this act and to produce the evidence(s) with the appropriative authorities, as and when required by them.

(d) The dealer is entitled for Input Tax Credit on the purchases or on the inputs, subject to certain restrictions, as prevalent from time to time.

(e) The dealer cannot take Input tax credit on the purchases under CST act.

The reader may mark these facts/ points are covered under sec.  5 of the TNVAT  Act.

Common for both the cases/ Methods:  The option opted as above is final and binding and the dealer has no option to switch over to other method with in the financial year. However switching from one method to another is possible from the next financial year, even if the project is continued to be in execution and this switch over is subject to the fact that the dealer may have to forgo if the dealer who want to switch over from Non-composite method to Composite method and not vise versa.

Difference between (i) Value of the Works Contract under the first method and (ii) Taxable Turnover under the second Method:
The total consideration received or receivable in future in respect of the works contract agreement, accounted under the regular accounting practice of the dealer whether on Mercantile or  an accrual basis. To say the value received plus receivable plus escalation if any due in future is called Value of Works Contract.

The Taxable Turnover means, the value of the works contract adjusted by the component of exempted goods and services included or inbuilt in execution of the works contract. To cover an example(s) is/are: labour charges paid on execution of the civil works, equipments or apparatus covered under Part-B of Fourth Schedule (Sec. 15). It is to be noted that the value of VAT charged in the Invoice is not part of the value of the works contract, for the purpose of taxable turnover.

Assessment of Tax Liability on Taxable Turnover:  The dealer is liable to pay tax at the rates specified in the First Schedule on the taxable turnover. If the inputs/ purchases for execution of the projects are covered by more than one tariff category/ group of goods and services fall under more than one rate of tax, then the taxable turnover is divided in to more than one group in the same ratio of the inputs category/ group.  Now the splited taxable turnover be charges on the respective tax rates as per the first schedule to arrive the tax payable.

Illustration:  Dealer Company ‘A’ has accepted an assignment of Design, Development, Commissioning of sewerage water treatment plant from Govt. department ‘B’ for a consideration of Rs.100 lakhs plus applicable VAT.  In this case the contractor company ‘A’ has spent labour expenses in construction a sum of Rs.32.00 lakhs, Design charges a sum of Rs.1.50 lakhs, Purchase of Pumps from the dealer situated in other state a sum of Rs.10.00 lakhs, Purchase of Pumps & motors from the dealer situated within the state a sum of Rs8.50 lakhs, Purchase of cements from the dealer situated within the state a sum of Rs.8.50 lakhs, Purchase of bricks, blue metals etc from the dealer situated within the state a sum of Rs.8.50 lakhs  and Purchase of Electrical goods from a dealer situated outside the state a sum of Rs.7.00 lakhs and dealer situated with in the state a sum of Rs.15.00 lakhs. Based on this stimulated data’s lets assess the tax liability of the dealer to the VAT authorities.                                                                                                                                      
(1)If the dealer wishes to pay tax on composition/ first method, the tax payable is 5% on the total contract value of Rs.100.00 lakhs. (ie 5 .00 lakhs) PLUS applicable purchase tax on all the interstate purchases, to the extent of the opportunity revenue loss to the state government, since the dealers are not permitted to buy the goods from a dealer who located outside the state of Tamil Nadu, as he/she has opted composite method.

(2)If the dealer wishes to pay tax on Non-composition/ second method, the process of assessment of tax liability is illustrated bellow:
A
Value of works contract
100.00
lakhs
B
Input services considered for execution of contract
Labour & Design charges
33.50
lakhs
C
Input goods covered under  Part B of first Schedule
(inputs covered under 5% TN VAT)
Value  Rs. In Lakhs
Gross
Basic
VAT
CST
Purchase of pumps (CST)
10.00
9.80

0.20
Purchase of pumps & motors
8.50
8.10
0.40

Purchase of bricks, blue metals etc
8.50
8.10
0.40

Purchase of electricals (CST)
7.00
6.86

0.14
Purchase of electricals
15.00
14.29
0.71

Sub total:
49.00
47.15
1.52
0.33
Value of good covered under Part B of first schedule
47.48
D
Input goods covered under  Part C of first Schedule
(inputs covered under 14.5% TN VAT)
Value  Rs. In Lakhs
Gross
Basic
VAT
CST
Purchase of Cements
8.50
7.42
1.08

sub total:
8.50
7.42
1.08

Value of good covered under Part B of first schedule
7.42
Cost of execution of the project       = 33.50 + 47.48 + 7.42 = 88.40 lakhs
Ratio among the exempted and taxable goods would be  33.50 : 47.48 : 7.42
Accordingly the exempted turnover and the taxable turnover would be assessed as under:
Turnover Exempted under Rule 8(5)(d) (30%)
30.000
Lakhs
Turnover Taxable @ 5% = (70*47.48)/(47.48+7.42)
60.535
Lakhs
Turnover Taxable @ 14.5% = (70*7.42)/(47.48+7.42)
9.465
Lakhs
Total Turnover
100.000
Lakhs
Assessment of tax to be collected
Basic
VAT
Turnover Taxable @ 5%
60.535
3.027
Lakhs
Turnover Taxable @ 14.5%
9.465
1.372
Lakhs
Total value of TN VAT to be collected from the customer
4.399
Lakhs
Assessment of Tax to be paid to VAT authorities
Total of VAT collected from the customer
4.399
Lakhs
Less: input credit eligible
2.600
Lakhs
Balance of Payment to be made to VAT authorities

1.799
Lakhs


Considering the relevant provisions in the act and in the agreement the maximum billing could be possible under composite method is Rs.100.00 lakhs and under non-composite method is Rs.103.903, in the given hypothesis. The table given bellow is the illustrative comparisons on the changes in profit element owing to the option excised by the dealer, in the given hypothesis:

 
Rs in Lakhs
Comparisons of results with key factor of tax liability
U/s  5
U/s 6
Total turnover
100.000
100.000
Add: Tax collected from the customer
4.399
0.000
Total receipts
104.399
100.000
Less : Payments made to vendors/ others
91.00
91.000
Less : Payments made/ to be made to VAT authorities
1.799
5.000
Less: Purchase tax paid/ to be paid to VAT authorities
0.000
0.850
Profit/ Margin element
11.600
3.150
           











Notes to the hypothesis considered:
(i) being the nature of works falls under electro mechanical works, the dealer will get the deduction under rule 8(5)(d) is 30%  (ii) TDS under VAT act a sum of Rs.5.00 lakhs to be made by the customer to be adjusted against the dues to the dept, has not been considered in the illustration exhibited above, as the issue been dealt in a separate article as “TDS under TN VAT Rules ( revised)” (iii) if the agreement/ works order specifically says that the rates quoted is inclusive of VAT, then the entire workings need to be done separately and the author may be reached for professional supports in this regard.


Additional facts:
If the dealers opt to pay tax on the first method/ composition method of tax liability, he can not apply for Form S with the authorities, the tax liability and the VAT TDS are one and the same. In the absence of Form S, the employer contractor (customer) is bound to deduct 5% on the works contract value. In case if the dealer wishes to avoid this, he has the option to pay the VAT taxes billed in the invoice in advance to the assessing authorities and obtain the Form S and avoid the TDS process.


Interpretation(s): 
The VAT Rules provides the fact that if the sub-contractor is registered dealer filing the returns under VAT Act., the main contractor turnover to the extent of the payment made to the subcontractor is exempted from works contract value/ taxable turnover.  The VAT Act or Rules has not given effect of exemption in the hands of sub-contractor, even if the main contractor has opted to pay tax under non- composition method (under sec 5 of the act.),  and in addition to this the Rule 8(5)(d) provides to assess the exemption from the taxable turnover in the absence of data’s in the books of accounts, but the rule has failed to restrict the allowance subject to the maximum amount as calculated under this rule or actual amount spent, whichever is lower, so as to tax the profit element behind the project.









The readers are informed to note that the facts and information’s stated in this article is only the opinion of the author and assesses can use the concepts and logical used in this article in support of their cases.


Definition
Section 2(43) of the Tamil Nadu Value Added Tax Act, 2006 (‘Act’ for short) defines the term ‘works contract’ which includes any agreement for carrying out for cash, deferred payment, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property.
 Taxable turnover
 Section 5 of the Act provides for levy of tax on the transfer of property in goods involved in the execution of works contract. Rule 8(5) provides the method of computing the taxable turnover of the dealer liable to pay tax. The taxable turnover in respect of the transfer of property in goods involved in the execution of works contract shall be arrived at after deducting the following amounts from the total turnover-
  • all amounts involved in respect of goods involved in the execution of works contract in the course of export or import of goods or interstate trade or commerce;
  • all amounts relating to the sale of any goods involved in the execution of works contract which are specifically exempted from tax under the Act;
  • all amounts paid to sub contractors provided the dealer claiming deductions produces the proof that the sub contractor is a recognized dealer liable to pay tax and that the turnover of such amount is included in the return filed by the sub-contractor;
  • all amounts towards labor charges and other charges not involving any transfer of property in goods. If such charges are not clearly ascertainable from the books of accounts, then the same shall be calculated at the rate specified in the table appended to the rule;
  • all amounts including the tax collected and refunded to the customer or adjusted in respect of unexecuted portion of the contracts provided the turnover was included in the return and tax paid and the amount including the tax collected from customer is adjusted or refunded within a period of 6 months from the due date for filing of the return in which the said account was included and tax paid.
Dealers paying tax are entitled to input tax credit on goods mentioned in the I schedule purchased within the state and use in the contract.
Discharge of tax liability
The tax liability on works contract as per the provisions of the Act may be discharged in any of the following three methods:        
In the first method if the dealer is able to ascertain actual amount spent in respect of labour/service portion, then he may deduct such amount from the total value of the contract and for the balance which attributes the value of goods being sold is the taxable turnover.
Total value of the Contract                                          =       A
Labor Charges for execution of works contract
Amount paid to sub contractors for labor and
Service charges
Charges for Architect’s fees
Charges for machines, tools etc., on hire
Cost of consumables in which property does not
Pass to contractee
Cost of establishment relating to supply of labor
 And services
Other expenses
Profit of contractor
                                               TOTAL                         =       B

Taxable turnover Value        C                                  =       A - B
In this method the dealer is required to maintain books of accounts and to produce evidence before the authorities as and when required. The dealer is entitled to take input tax credit on the purchases on the inputs.
In the second method standard deduction as prescribed in the provisions in respect of labor can be deducted from the value of works contract. A standard deduction of 30% is available for civil works contract.   The balance 70% of the value is leviable to VAT. In this method also the dealer is required to maintain books of accounts.
In the third method is the method at compounded rate which is discussed in the next para.
Payment of tax on works contract at compounded rates
The dealer may opt to pay tax at compounded rates in respect of execution of works contract. In case of civil works contract and civil maintenance works contract 2% of the total contract value has to be paid as tax and in case of all other works contract 4% of the total contract value has to be paid as tax.
The option to pay tax at compounded rates must be executed while filing the first monthly return for the financial year or in the first monthly return after the commencement of the works contract. Such an option shall be final for the assessment year and so long as tax is paid under Section 6 the dealer need not maintain books of accounts as stipulated in the act and its rules and it is sufficient if he maintains the records in original of the works contract, the extent of execution of work and payment received/receivable. The dealer should not have procured any material for the purpose of execution of contract from any other than the State of Tamil Nadu. Dealers paying tax in this section are not entitled to input tax credit and cannot collect tax from their customers.
Explanation to Section 6 defines the term ‘civil works contract’ which includes civil works of construction of new buildings, bridges, road, runway, dam or canal including any lining, tiling, painting or decorating which is an inherent part of the new construction and any repair, maintenance, improvement or up gradation of such civil works by means of fixing and laying of all kinds of floor tiles, mosaic tiles, slabs, stores, marbles, glazed tiles, painting, polishing, partition, wall paneling, interior decoration, false ceiling, carpeting and extra fittings or any manner of improvement of an existing structure.
Tax deduction at source
Every person responsible for paying any sum to a contract has to deduct tax at source.   The amount of tax to be deducted is 2% of the total amount payable to the contract in case of civil works contract and civil maintenance works contract and 4% of the total amount payable to the contractor in case of all other works contract. Deduction need not be done where-
  • No transfer of property in goods is involved;
  • Transfer of property in goods is involved in the execution of works contract in the course of interstate trade or commerce or in the course of import;
  • Contractor produces a certificate in the prescribed form from the assessing authority that he has no liability to pay or has paid the tax;
  • The amount paid or credited or likely to be paid or credited during the year to the contractor does not or is not likely to exceed Rs.1 lakh.
The person deducting the amount has to deposit the same with the assessing authority or any authorized officer on or before the 20th of the succeeding month along with Statement in Form R and thereafter within 15 days issue certificate in Form T to the contractor and send a copy of the same to the assessing authority of the contractor. Once the contractor produces the Form T the amount deducted as TDS shall be adjusted towards the liability.
Contravention of the said provision and non deduction of tax at source attracts interest @ 1.25% per month.


Have a nice day.  Good and Nice article about Works Contract under TNVAT Act.
In this regard, kindly clarify and provide your considered opinion.
A registered Civil works contract dealer opts to pay VAT u/s 6 of TNVAT Act (2%) and files Form L.   He purchases sand, jally etc from unregistered dealer and he reports such purchase value in the column 3 (b) of the Form L.  Section 6 is a separate charging section.  The word,” consumes or uses such goods “employed in Section 12 (1a) is dangerous and  "Consumed otherwise"- The expression consumed otherwise came up for interpretation before the Supreme Court in the case of Assistant Commissioner (Intelligence) VS Nandanam Construction Company (1999 115 STC 427). It was held that intention of legislature, it appears to us, is to bring to purchase tax in either event of consumption of goods in the manufacture of goods for sale or consumption of goods in any manner. Once the goods are utilised in the construction of buildings, the goods cease to exist or cease to be available in that form for sale or purchase so as to attract the tax.
The question is whether Section 12 (1) can be invoked for such purchase value , in addition to his regular 2% vat payment ?. 
2) Form S (No liability certificate) is introduced for not deducting TDS. And also amended recently.
3) The rate of VAT is 5% for other works contractor from 13.02.2012. 



Dear Sir,
Section 12(1) can be invoked for such purchase value in addition to his regular 2% VAT payment as per the SC judgment cited by you which has been followed by Tribunal  in 'Dhanalakshmi Paper and Board V. Deputy Commissioner of Tax' - (2001) 124 STC 435 Tribunal.



Dear Sir
As per the TNVAT provision, the taxable turnover in respect of the transfer of property in goods involved in the execution of works contract shall be arrived at after deducting the following amounts from the total turnover-
  • all amounts involved in respect of goods involved in the execution of works contract in the course of export or import of goods or interstate trade or commerce
Gist of  fact of the Case : 
Contractor -A - registered dealer under the TNVAT Act in the state of TN Chennai
Contractee - B  who is also  registered dealer under the TNVATAct  and located in SEZ Zone - Chennai
Contractee B  intend to issue  PO towards provision of AMC and Support Contract work for  their SEZ Unit to the contractor  A 
Query:
Whether the WCT VAT is applicable to the Contractor A who need to  execute their AMC contract  in SEZ Zone to Contractee B 




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