By G. G. Goyal | Chartered Accountant
C. B. Thakar | Advocate
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VAT
Works Contracts are in the nature of composite contracts. The
entire value of a works contract cannot be made liable to tax under the sales
tax (VAT) laws. The Supreme Court, in the case of Builders’ Association of
India v. Union of India, (73 STC 370) (SC), held that taxable quantum in a
works contract is the value of goods (in which transfer of property takes place
in execution of works contract). It is, therefore, necessary to find out the
value of the goods from the total contract value. The contractor can find out
the same by taking various deductions towards labour charges, etc. However,
sometimes it may be difficult to decide the deductions. Therefore, there are
schemes for standard deduction. There are also alternative composition schemes.
A brief discussion about various methods of discharging liability on works
contract under the Maharashtra Value Added Tax Act, 2002 may be as under.
(i) If in the contract itself the value of the goods and
labour is shown separately, then such values of goods will be taxable at
appropriate rates. In this respect reference can be made to the judgment in the
case of Imagic Creative P. Ltd. (12 VST 371) (SC), where such division is
upheld by the Supreme Court.
However, if the values are not separately specified but only
one aggregate value is mentioned, then the contractor can discharge tax
liability by any of the modes discussed hereunder.
(ii) As per Statutory Provisions :
Under this system tax payable on the value of goods can be
arrived at by adopting Rule 58 of the MVAT Rules, 2005, which reads as under :
“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, insofar as the amounts
relating to the deduction pertain to the said works contract :
(a) labour and service charges for execution of the
works;
(b) amounts paid by way of price for sub-contract, if
any, to sub-contractors;
(c) charges for planning, designing and architect’s fees;
(d) charges for obtaining on hire or otherwise, machinery
and tools for execution of the works contract;
(e) cost of consumables such as water, electricity, fuel
used in execution of works contract, the property in which is not
transferred in the course of execution of the works contract;
(f) cost of establishment of the contractor to the extent
to which it is relatable to supply of the said labour and services;
(g) 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;
(h) profit earned by the contractor to the extent it is
relatable to the supply of said labour and services : . . . . . .”
In the alternative, i.e., if dealer cannot ascertain the
labour portion on its own as per the above, the dealer can adopt the standard
deduction given in Table in Rule 58(1). The said Table is reproduced on the next
page.
(2) The value of the 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 relating to the transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works
contract.”
Table: Deduction from contract price towards labour charges
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Table:
Deduction from contract price towards labour charges
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Sr.
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Type of works contract
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*Amount
to be deducted
from the contract
price
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(expressed as a
percentage of the contract price)
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(1)
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(2)
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(3)
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1
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Installation of plant and machinery
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15%
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2
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Installation of air conditioners and air
coolers
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10%
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3
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Installation of elevators (lifts) and
escalators
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15%
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4
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Fixing of marble slabs, polished granite
stones and
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25%
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tiles (other than
mosaic tiles)
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5
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Civil works like construction of buildings,
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30%
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bridges, roads, etc.
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6
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Construction of railway coaches on under
carriages
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30%
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supplied by Railways
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7
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Ship and boat-building including
construction of barges,
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20%
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ferries, tugs,
trawlers and dragger
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8
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Fixing of sanitary fittings for plumbing,
drainage and
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15%
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the like
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9
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Painting and polishing
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20%
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11
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Laying of pipes
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20%
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12
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Tyre re-treading
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40%
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13
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Dyeing and printing of textiles
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40%
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14
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Annual maintenance contracts
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40%
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15
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Any other works contract
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25%
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It can be seen, from the above, that as per Rule 58(1) — main provision, the contractor can determine his own labour portion and take deduction of the same from gross contract value. The balance will be liable to tax. The said taxable portion is to be divided between 0%, 4%/5% and 12.5% goods and tax payable shall be worked out accordingly.
iii) In the alternative, i.e., if the contractor cannot ascertain the labour portion on his own, he can adopt the standard deduction given in the Table. The remaining portion, after applying deduction, will be liable to tax at applicable rates i.e., 0%, 4%/5% and 12.5%, as the case may be.
It may also be mentioned here that if one follows any of the above methods, he can avail the full set-off on goods purchased under VAT from local RD, subject to other conditions of set-off.
Composition Schemes:
iv) In the alternative, contractor can pay tax by the Composition Scheme and in that case, he will be required to pay tax on full contract value 8%. No deduction of labour charges, etc., will be available. If one pays tax as per the above composition scheme, he will be entitled to set-off 64% of the normal set-off otherwise available. The reduction will apply to the goods which get transferred and not to other goods. In other words, for those goods (other goods) full set-off will be available.
v) One more method of composition is available i.e., in case of Notified Construction Contracts. The list of notified construction contract (as per Notification issued by the Finance Department of Maharashtra on 30th November 2006) is as under:
NOTIFICATION
The Maharashtra Value Added Tax Act, 2002.
“No VAT.1506/CR-134/Taxation-1 — In exercise of the powers conferred by clause (i) of the Explanation to sub-section (3) of section 42 of the Maharashtra Value Added Tax Act, 2002 (Mah. IX of 2005), the Government of Maharashtra hereby notifies the following works contracts to be the ‘Construction Contracts’ for the purposes of the said sub-section, namely:
A) Contracts for construction of:
1. Buildings,
2. Roads,
3. Runways,
4. Bridges, Railway overbridges,
5. Dams,
6. Tunnels,
7. Canals,
8. Barrages,
9. Diversions,
10. Rail tracks,
11. Causeways, subways, spillways,
12. Water supply schemes,
13. Sewerage works,
14.Drainage,
15. Swimming pools,
16. Water purification plants, and
17. Jettys
B) Any works contract incidental or ancillary to the contracts mentioned in paragraph (A) above, if such work contracts are awarded and executed before the completion of the said contracts.”
If a contract is covered by the above list, then the dealer (contractor) can discharge liability by paying 5% on total contract value. If the dealer pays by this composition scheme, then set-off on purchases will be granted after reduction @ 4% of purchase price of goods.
vi) 1% Composition Scheme:
This scheme is prescribed by section 42(3A) for builders and developers who, along with construction, transfer immovable property like land. The Notification prescribing the scheme is issued on 9-7-2010. The Notification contains various conditions. (Desiring dealer should go through the same for further information.)
The dealer (contractor) may adopt any of the above modes as may be suitable in its case, and, contractwise choice can also be made. The choice of method will depend upon factual position of each case. One can adopt the method which works out for minimum tax liability.
