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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