VAT ON WORK CONTRACTS IN ASSAM
1. What is WORKS CONTRACT:
Commercial transactions are generally of three types:
transactions involving transfer of property in goods, which we call 'SALE';
transactions involving transfer of labour or skills, which we call 'SERVICE' ;
transactions involving transfer of both, i.e., property in goods as well as labour or skills. These hybrid types of transactions where transfer of both property in goods as well as labour or skills are involved are known as WORKS CONTRACT. So, WORKS CONTRACT is a blend of Sale and Services.
Under the Assam Value Added Tax Act, 2003, both Sales and WORKS CONTRACT are liable to Tax.
Section 2(57) defines WORKS CONTRACT as " any agreement for carrying out for cash, deferred payment or other payment or other valuable consideration, the building, construction, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property."
It follows from the definition that there can be no transfer of property in goods unless the goods themselves exist. Lets take a look at some court cases as to the definition of WORKS CONTRACT.
In the execution of a contract for eradication of pests, rodents, termites, although chemicals are used, the chemicals are sprayed through machines so that when the process ends the chemicals are consumed and nothing tangible remains in which property is transferred. Such a transaction does not involve transfer of any goods as understood in sub-clause (b) of clause (29A) of article 366 of the Constitution. Such a contract is a pure service contract, and no sales tax is leviable in relation thereto. This was held in Pest Control India Ltd. Vs. Union of India (1989).
In "Vanguard Rolling Shatter & Steel Works Vs. CST (1977), the Supreme Court observed that "it is difficult to lay down any rule of universal application to decide whether a contract is a WORKS CONTRACT or contract for sale of goods." Nature of a transaction depends upon three elements, viz., facts contained in the contract, objective and intention of the parties to contract and surrounding circumstances.
In "State of TamilNadu Vs. Anandam Viswanathan (1989)", The Supreme Court held that where finished product supplied to a particular customer is not a commercial commodity in the sense that it cannot be sold in the market to any other person, transaction is only a WORKS CONTRACT.
If property in final article passes only after it is completed, the contract will be for sale, even if raw material is purchased on behalf of buyer. Union of India Vs. Central India Machinery Manufacturing Co. Ltd. (1977) (SC).
The word "manufacture" as used in the definition of WORKS CONTRACT in Sec. 2(57) includes making, altering, extracting, ornamenting, finishing, assembling, treating or adopting any movable or immovable property. Thus, manufacture and supply of Railway coaches out of the material purchased from advance received is a WORKS CONTRACT. CCT Vs. Hindustan Aeronautics Limited (1972) (SC).
2. Taxability of WORKS CONTRACT:
Sec. 7 of the Assam Value Added Tax Act, 2003, creates the liability to pay Tax in the case of WORKS CONTRACT at the rates as specified in Sec. 10. So, Sec. 7 is the charging section for WORKS CONTRACT and a contractor has to pay output tax on his taxable turnover at the rates specified in sec. 10.
As per se. 7, a contractor who was registered under the erstwhile AGST Act, 1993 are liable to pay tax under the Assam Value Added Tax Act, 2003 and a contractor who was not previously registered but whose turnover in any year after the appointed day, i.e., 1st May, 2005 first exceeds the taxable quantum shall be liable to pay tax under this Act.
The basic exemption limit for WORKS CONTRACT under sec. 7(6) is Nil which is 4 lacs for other dealers. Hence, it boils down to the fact that all WORKS CONTRACT are subject to VAT in accordance with the provisions of this Act.
Under Sec. 10 of the Assam Value Added Tax Act, 2003 read with entry no. 2 of Fifth Schedule, the WORKS CONTRACT are taxable @ 13.5% w.e.f. 31.10.2009 VIDE Notification No. FTX.55/2005/Pt-III/118 DTD.31/10/2009.
This rate is leviable on the taxable turnover of a contractor.
Lets find out what is Taxable Turnover of a Contractor :
The description of Taxable turnover is contained in Sec. 11 and Rule 10. Lets dissect Sec. 11 and Rule 10.
Taxable Turnover as per sec. 11 means gross turnover during the prescribed period, which remains after deducting therefrom the charges towards labour, services and other like charges. Now what is deductible from the gross turnover is given in Rule 10.
Rule 10 of The Assam value Added Tax Rules, 2005 prescribes the method of determination of sale price in respect of sale by transfer of property in goods involved in the execution of WORKS CONTRACT. As per Rule 10, 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 far as the amounts relating to the deductions pertain to the said works contract:-
labour charges for execution of the works;
amounts paid by way of price for the entire sub-contract to
charges for planning, designing and architect’s fees;
charges for obtaining on hire or other wise, machinery and tools
used for the execution of the works contract;
cost of consumables such as water, electricity, fuel, etc. used in the execution of the works contract, the property in which is not transferred in the course of execution of the works contract;
cost of establishment of the contractor to the extent it is relatable to the supply of labour and services;
other similar expenses relatable to the supply of labour and services; and
profit earned by the contractor to the extent it is relatable to the supply of labour and services.
3. INPUT TAX CREDIT : Sec. 14
Whether Input Tax Credit is available to a work Contractor?
We know that any registered dealer who makes purchases from another registered dealer of taxable goods other than the goods specified in the Fourth Schedule within the State, shall be eligible for input tax credit unless none of them have opted for composition scheme. Sub-sec. 3 of Sec. 14 says that the input tax credit shall be allowed to the extent of the amount of tax paid by the purchasing dealer on his purchase of taxable goods other than the goods specified in the Fourth Schedule, made in the State, from a registered dealer holding a valid certificate of registration, which are intended for the purpose of,— sale or re-sale by him in the State.
Lets see the definition of Sale so far it relates to WORKS CONTRACT which is given in Clause (ii) of Sec.2(43) of the Assam Value Added Tax Act, 2003.
"sale" with all its grammatical variations and cognate expressions means every transfer of the property in goods (other than by way of a mortgage, hypothecation, charge or pledge) by one person to another for cash or for deferred payment or other valuable consideration and includes,— a transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. So, it appears that execution of WORKS CONTRACT falls within the definition of Sale.
Since works contract falls within the definition of "Sale" as per Clause (ii) of Sec. 2(43), we can conclude that Input Tax Credit is available to a Work Contractor.
4. Provisions relating to TDS in case of WORKS CONTRACT:
Sec. 47(1) of the Assam Value Added Tax Act, 2003 provides for deduction of tax at source in respect of transfer of property in goods involved in WORKS CONTRACT.
Now, I discuss the requirements of Sec. 47 briefly :
The deduction is to be made by the contractee (other than individual, HUF, Firm, Company not under Govt.'s control). This means the contractee is usually a Govt. company. Sec. 47(1).
Tax is to be deducted at the rate of 13.5% at the time of credit to the account of the contractor in cash, by cheque, by adjustment or in any other manner. Sec. 47(1).
The contractee shall apply for tax deduction account number in Form 33 within 30 days of the introduction of Vat if liable for deduction of TDS or within 15 days of entering into contract and obtain the Tax deduction Account number in Form 34. Sec. 47(5) and Rule 28(5).
The contractee shall ensure that the contractor is registered under the Assam Value Added Tax Act, 2003 before any payment is made to him. Sec. 47(4).
The contractee shall furnish an intimation of the contract entered into to the prescribed authority within 15 days in Form No. 32. sec. 47(1)(c).
The contractee shall deposit the tax deducted at source within 10 days from the expiry of the month in which tax is so deducted in challan in Form no. 24. Sec 47(6).
The contractee shall issue a certificate of deduction of tax at source in Form No. 29 to the contractor within 7 days of the deposit of the amount of Tax so deducted. Sec 47(7).
The contractee shall furnish an annual return to the Prescribed Authority in Form No. 35 within 2 months of the end of the year; Sec 47(9) ; and
The contractee shall maintain a register in Form no. 36 for each year. Rule 28(5)(c).
The contractor may make an application for grant of certificate of deduction of tax at source for a lower amount or the application for no deduction of tax under clause (b) of sub-section (1)of section 47 shall be made by the contractor in Form-30 to the Prescribed Authority who is having jurisdiction over the dealer and obtain a certificate in Form no 31 from such authority. On the basis of such certificate, the shall deduct tax at a lower amount or shall not deduct tax at all, as the case may be. Sec 47(1)(b) and Rule 28(2).
5. Liability of Contractor and Sub-contractor to Tax : Sec. 69, Rule 39 :
Sec. 69 (1) Where a dealer carries on the business of transfer of property in goods involved in the execution of a works contract (hereinafter referred to as a contractor) through another such dealer (hereinafter referred to as a sub-contractor) directly or otherwise, and the sub-contractor executes such works contract and each or either of them is liable to pay tax under this Act, then notwithstanding anything contained in this Act, the contractor and the sub-contractor shall be jointly and severally liable to pay tax in respect of transfer of property in goods whether as goods or in some other form involved in the execution of such works contract.
(2) If the contractor proves in the prescribed manner that the tax has been paid by the sub-contractor on the taxable turnover of the goods involved in the execution of the works contract, executed by such sub-contractor, the contractor shall not be liable to pay tax again on the taxable turnover of such goods.
(3) If the sub-contractor proves in the prescribed manner that the tax has been paid by the contractor on the taxable turnover of goods involved in the execution of the works contract, executed by such contractor, the sub-contractor shall not be liable to pay tax again on the taxable turnover of such goods.
When a sub-contract is given by a contractor executing a WORKS CONTRACT there is no privity of contract between the contractee and the sub-contractor. Part of the contract may be given for the purpose of execution to a sub-contractor but that does not absolve the contractor of his liability to pay tax. Sub-section 1 of Sec. 69 accordingly provides that in such a situation the contractor and sub-contractor shall be jointly and severally liable to pay tax in respect of transfer of property in goods whether as goods or in some other form involved in execution of works contract.
Rule 39. Liability of contractor or sub-contractor to tax.— (1) A contractor shall not be liable to pay tax under sub-section (2) of section 69, if he produces documentary evidence as to the payment of tax on the taxable turnover of the goods involved in execution of works contract, by the sub-contractor along with a declaration from such sub-contractor to this effect.
(2) A sub-contractor shall not be liable to pay tax under sub-section (3) of section 69, if he produces documentary evidence as to the payment of tax on the taxable turnover of the goods involved in execution of works contract, by the contractor along with a declaration from such main contractor to this effect.
6. COMPOSITION SCHEME : SEC. 20 :
A contractor has an option to pay Composite Tax under the Assam Value Added Tax Act, 2003. Under Sec. 20, sub-sec. 2 of the Assam Value Added Tax Act, 2003, the Govt. of assam has framed a composition scheme for contractors under which a contractor has an option to pay tax at a rate of 4% on the total contract value without any deduction towards labour and other expenses. If a contractor opts for composite scheme, he shall not be eligible to input tax credit.
Let me read out Sec. 20(2) :
Notwithstanding anything contained in this Act, the Government may, by notification published in the Official Gazette and subject to such conditions and restrictions, if any, as may be specified therein, permit any dealer liable to pay tax on sales effected by way of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, to pay, at his option, in lieu of the amount of tax payable by him under this Act, an amount by way of composition at the rate specified in the said notification but not exceeding five percentum of the total contract value of the works contract.
The Govt. has come with the notification u/s 20(2) on Composition scheme for works contract. Let me go through the important clauses of the Notification.
Notification no. FTX.55/05/Pt/14 dated 29th April, 2005 :
In exercise of the powers conferred by sub-sec 2 of sec. 20 of the Assam Value Added Tax Act, 2003, the Governor of Assam is hereby pleased to notify the "Composition Scheme for WORKS CONTRACT" which permits a registered dealer who execute WORKS CONTRACT, to pay at his option, in lieu of the amount at the rate of four paisa in every rupee of the total aggregate value of the WORKS CONTRACTreceived by him. The conditions are :
Dealers opting for composition scheme shall apply in Format-WC-1 within 30 days from the commencement of the scheme or within 30 days from the date of the commencement of the WORKS CONTRACT if the WORKS CONTRACT is commence after the commencement of the scheme for permission to pay composition amount.
The application in Format-WC-1 shall be made in every subsequent year within 30th April of such year.
The prescribed authority may on sufficient cause and for reasons to be recorded in writing , condone the delay upto 60 days
The application in WC-1 shall be made by a person competent to sign application for registration under the Act.
The prescribed authority after necessary verification shall permit the dealer to pay tax by way of composition.
Such permission for composition shall be granted within 30 days from the date of the receipt of the application in Format-WC-2 which is valid for a particular year.
The dealer once opted for composition scheme shall not be entitled to opt out of the scheme for a part of the financial year.
The prescribed authority may cancel such permission if the dealer fails to pay tax, file the tax return within the prescribed period, suppress the turnover or contravenes any provisions of the Act or Rules made there under.
Every person responsible for making any payment to any contractor under Sec. 47(1), shall be supplied with the copy of this WC-2 and such person shall deduct tax @ 4% from the amount paid to such dealer.
Dealers opting for composition scheme are eligible to purchase goods from outside the State on the strength of declaration in Form "C" prescribed under CST Rules. The dealer shall also be eligible to make use of "Delivery Note" (Form 61) prescribed under the Assam Value Added Tax Rules, 2005 for the purpose of importing the consignments of goods for being used in execution of WORKS CONTRACT into Assam.
The Govt. may notify the category of WORKS CONTRACT for which the scheme shall not apply.
The dealer who has been awarded more than one contracts in the state, shall have to opt for making payment of tax by way of composition in respect of all the contracts.
Dealers opting for composition scheme shall display the certificate at a prominent place of his business, neither issue nor receive any tax invoice, not claim any input tax credit.
Dealers opting for composition scheme shall pay tax monthly @ 4% of the payments receivable during the month for execution of WORKS CONTRACT. The payment shall be made after reducing there from the amount paid by the contractee u/s 47 for the month on or before the 21 day of the next month.
The dealer shall furnish a tax returnfor each quarter in Format-WC-3 within 21 days from the end of the quarter. The dealer shall also furnish a consolidated anuual return in the same Format within 2 months from the close of the year.
Rule 31(12) requires that a Dealer opting for composition scheme shall maintain the following books and records at his place of business :
Details of the goods purchased and sold by him; and
Cash book, day book, ledger, invoice/bill books and purchase vouchers.
A reading of the Sec. 20(2) which speaks of "Composition Scheme" and the above-mentioned Notification on "Composition Scheme for execution of WORKS CONTRACT" reveals that there is no upper limit of turnover beyond which a Contractor can not opt for Composition scheme which is not the case with a retail trader where beyond a certain limit of turnover, a retail trader can not apply for composition scheme. So, whether provisions relating to audit of accounts apply to a contractor who has opted for composition scheme and whose turnover exceeds Rs. 1 Crore. It appears from the reading of Sec. 20, Section 62 on Audit of Accounts and the above notification that Sec. 62 applies to Contractors who have opted for Composition Scheme.