8/18/2012
BASIC PROVISIONS RELATING
TO WORKS CONTRACT & TDS
Presented by – CA Vijay Shroff
August 18, 2012
At Study Group Meeting
of J. B. Nagar CPE Study Circle
Andheri, Mumbai
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Agenda
 Definition of Works Contract
 Types of Contract
 Examples
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of Various Works
Contract
Determination of SP of Works
Contract
Set-off Provisions relating to
Works Contract
Sub-contracting
TDS Provisions
Issues
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Definition
of Works
Contract
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Definition of Works
Contract
 Normal Sales & Works Contract
 Works Contract is defined under the MVAT Act,
2002 –
Explanation (b) to section 2(24) – Deemed Sales –
“a tax on the transfer of property in goods (whether
as goods or in some other form) involved in the
execution of a works contract including Building,
construction, manufacture, processing, fabrication,
erection, installation, filling out improvement,
modification, repair or commissioning of any moveable
or immoveable property.”
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Definition of Works
Contract (Contd..)
 Works Contract is defined under the CST Act,
1956 –
Section 2(ja) –
“a contract for carrying out any work which includes
assembling,
construction,
building,
altering,
manufacturing, processing, fabricating, erection,
installation, fitting out, improvement, repair or
commissioning of any movable or immovable
property.”
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Types of
Contracts
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Types of Contract
 Contracts can be divisible or indivisible. Where the
value of materials can be identified separately, it is a
Divisible Contract - e.g. Sales and after sales service
contract
 When Contract awarded for a lump sum amount, it
is an Indivisible Contract - e.g. turnkey contract
 There can be more than one contractors involved in
the job. Even Contractors can further pass on the job
to other contractors. Known as sub-contractors
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Examples
of Various
Works
Contract
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Examples of Works Contracts
 Construction of civil structures and repairs, maintenance,
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etc. thereof
Repairs and maintenance of contracts including Annual
Maintenance Contracts for computers, air-conditioners,
etc.
Printing contracts such as printing of stationery,
brochures, pamphlets, etc.
Tailoring contracts for staff uniforms, dresses, etc.
Electrical contracts
Photocopying contracts
Waterproofing contracts
Interior decoration contracts
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Determination
of SP of Works
Contract
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DETERMINATION OF SP FOR WORKS
CONTRACTS –
RULE 58 - Gannon Dunkerly & Co. v/s. State of Rajasthan
(1993) 88 STC 204 (SC)
Total Contract Value (Value of Entire Contract)
100
Less: Allowable Deductions:
XX
1. Sub – Contract Value paid to Registered Contractor
XX
2. Labour Charges for execution of WC – subsequent to trf
XX
3. Planning, Designing & Architect’s fees
XX
4. Hire Charges or otherwise, for obtaining Machinery & Tools for WC
XX
5. Cost of Consumables in which there is no transfer of property
e.g.: Water, Electricity, Fuel, etc.
XX
6. Cost of Establishment relatable to supply of labour & services
XX
7. Similar other expenses relatable to supply of Labour & Services
XX
8. Profit relatable to supply of Labour & Services
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Balance sales Price ----- Deemed Sale Value of Goods involved in execution of
WC, in which transfer of property takes place
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DETERMINATION OF SP FOR WORKS
CONTRACTS (contd..) –
If accounts not maintained or Commissioner do not
accept accounts – lump sum deductions
Total contract value
100
Less: sub contract
XX
Less: Lump sum deduction rule 58 – proviso
XX
Balance taxable
XX
The value of goods so arrived at shall be the SP relating to the
transfer of property in goods involved in execution of WC, for
the purposes of levy of tax@ 0 / 1% /4%/5% / 12.5%, as
applicable
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DETERMINATION OF SP & PP FOR
WORKS CONTRACTS (Contd.)
 RD can collect the tax separately, to the extent
payable, on any sale of goods [Sec. 60(2)]
 Where RD has not collected the tax separately, the
tax element can be reduced from the `Sale Price’ for
the levy of tax [Rule 57(1)]
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COMPOSITION SCHEME FOR WORKS
CONTRACTS –[Sec. 42(3)]
Option to contractors – contract-wise
Total contract value
XX
Less: sub contract
XX
Balance contract value Tax @8% or @5%
XX
 Such composition sum can be collected separately, to the
extent payable by a registered dealer, on any sale of goods
[Sec. 60(2)]
 If Composition Sum is not collected separately - it is payable
on the contract value without any reduction of composition
element, as per Rule 57(1), however if contract provides that
contract value is inclusive of taxes and duties then it is
payable after reduction as per rule 57(1)
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Composition scheme u/s 42(3A)
for Builders & Developers
 For builders & developers issued u/s 42(3A) of the
MVAT Act, 2002 vide notification dt. 9.7.2010
 Features of composition scheme  Available only to the registered dealer
 Composition amount payable is @1% of the aggregate
amount specified in the agreement or the values specified
for stamp duty in respect of agreement, whichever is higher
 Agreements registered on or after 1.4.2010 covered by the
scheme
 Composition amount to be paid by making E-payment &
include turnover of ‘sale’ in the sales tax returns
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Composition scheme u/s 42(3A) for
Builders & Developers (Contd..)
 No set off in respect of the purchases.
 Concessional interstate purchase agst Form C is not
allowed if composition is opted.
 Developers cannot issue Form 409 to subcontractor
but charge applicable VAT @5% on its billing to the
developers.
 Developers to not to issue tax invoice. Once the
methods of computation of tax liability in respect of
the contract is opted, the same cannot be changed
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Set-off
Provisions
relating
to Works
Contract
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Set-off Provisions
Works Contract
relating
to
 Where the dealer has opted to pay composition at 5% on
Notified Construction Contracts, Setoff shall be reduced
by 4% (u/r 53(4)(b)) of such Purchase price
 Notified
Construction Contract (Not No. VAT1506/CR-134/Taxation-1 w.e.f. 20/06/2006)– Buildings,
Roads, Runways, Bridges, Railway over bridges, Dams,
Tunnels, Canals, Barrages, Diversions, Rail Tracks,
Causeway, Subways, Spillways, Water Supply Schemes,
Sewerage Works, Drainage, Swimming Pools, Water
Purification Plant and Jettys - Incidental or Ancillary to
the contracts
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8/18/2012
Set-off Provisions relating
Works Contract (Contd..)
to
 For
other WCs covered under composition (Rule
53(4)(a)) - Corresponding Setoff be reduced by 36% (No
reduction on Capital Assets and on goods in which
Property is not transferred)
 Full set-off in case of Rule 58(1) as well as Proviso to
Rule 58 (1)
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Ineligible Set-off – Rule 54
 Rule 54(g): No set-off in respect of purchases effected by way
of works contract which results in immovable property
 Under this sub-Rule, the set-off is denied to purchaser of goods;
i.e., contractee. The contractor will get the set-off as per the
provisions of law
 Sub-rule (g) is substituted from 8.9.2006 it shall not be disallowed
in case of plant and machinery
 Rule 54(h): No set-off on purchases of any goods in which
property is not transferred (either in same form or any other
form) to any person and which are used in erection of
immovable property other than plant and machinery
 This is corollary of earlier clause
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Subcontracting
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Sub-contracting
 Main contractors & Sub contractors - Relationship
shall be deemed to be that of the Principal & Agent
[Sec.45(4)]
 Their liability to pay tax shall be joint & several
 Main Contractor not liable on corresponding ‘turnover of
sales’ if sub-contractor has paid taxes – Forms 407 & 408
 Sub-contractor not liable if Main Contractor has paid taxes
– Forms 406 & 409
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TDS
Provisions
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TDS UNDER VAT – [ Sec. 31 /
Rule 40]
 TDS provisions applicable to payments made for Works Contracts, or
other purchases, as notified
 Persons/employers as notified [VAT-1505/CR-123/Taxation/dt.1.4.05]
 No TDS:
 on Sub-Contracts
 On contract covered u/s 8 viz; Interstate works contract etc. [8(5) Not No.
VAT-1507/CR-93/Taxation-1 dt. 31/03/08 and 8(3c) Not. No. VAT1507/CR-70/Taxation -1 dt. 25/09/08]
 Advance payments liable to TDS only when it is adjusted against the
amount payable
 No deduction if amount payable in a year is less than Rs. 5 lakhs – If it
exceeds deduct TDS @2% in case of RD and 4% upto 31/03/2012 and
5% w.e.f. 01/04/2012 in case of URD
 Co-op. Housing Societies to deduct if contract awarded exceeds Rs. 10
24 lakhs
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TDS UNDER VAT – [ Sec. 31 /
Rule 40] (Contd..)
 Contractor may apply to Authority for either No TDS or
lower TDS, in prescribed manner
 If Tax is not deducted, still TDS is payable. Interest is
payable for late payment of TDS
 TDS – important due dates
 TDS E-payment in MTR 6 – by 21st of next month
 TDS certificate (form 402) – issue immediately on deduction /
payment
 Maintain register (form 404)
 Yearly TDS Return has to be filed in Form 405 within 3 months
from the end of Financial year
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Issues
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8/18/2012
Issues
 Whether
VAT is payable on material supplied by
Contractee to Contractor at a value or free of cost?
 N.M. Goel & Co – 72 STC 368(SC)
 Rastriya Ispat Pvt. Ltd. – 109 STC 425 (SC)
 Works contract – delay due to non-availability of site –
compensation received for loss of overheads, idle
machineries and loss of profit- whether form part of sale
price and liable to VAT?
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Sub-contracting
 Main contractors & Sub contractors -Relationship shall be
deemed to be that of the Principal & Agent [Sec.45(4)]  liability to pay tax shall be joint & several
 deductions will be given to either, based on producing
prescribed certificates
 Can a dealer award work contract “against form 406/409 –
no tax” for a future anticipated contract?
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Set-off
 Is Set off available if supplier charged @ 12.5% instead of
4%/5%?
 Is set off available even if TIN no. of Purchasing Dealer not
mentioned on Purchase Invoice?
 Is full set off available to sub-contractor who charges and
pays full tax through Principal Contractor opts for
Composition @ 5%/8% ?
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Inter-state Works Contract
 What is it?
 When is works contract said to be covered by CST Act?
 SC Builders Assoc. [88:STC:248] – 20th Century [119 STC 182]
 Inter-state movement of
 Raw material/processing material / components
 Finished goods – not requiring to work upon
 Is ‘in transit sale’ possible in inter-state Works Contract?
 Very controversial
 Is ‘sale in the course of imports’ possible?
 Is deduction u/r 58(1) – table deduction available? Mahim
Patrem (6:VST:248) (SC)
 Is ‘composition scheme’ available for a inter-state Works
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Composition Scheme
 Is VAT payable on service tax element?
 Sujata Painters DDQ – 11-2007/Adm-3/16/B-1 dt. 20/01/12
 Nikhil Comforts - SA No. 30 of 2010 dt. 31/03/52012 - MSTT
 Is deduction u/r 57(1) available?
 Painterior –LB SA no. 1053 to 1056 of 06 dt 8.5.09
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Adhoc
deduction
as
proviso to Rule 58(1)(a)
per
 Is it upon the dealer to justify such a deduction?
 Is it that the Business Auditor to attempt to calculate
rule 58(1) deduction & then compare with adhoc
deduction?
 Is ‘depreciation’ on plant & machinery’ used at site
available as deduction u/r 58(1)? – refer L & T [34 VST
53 (kar)]
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Works contract - TDS
 Claim of credit
 TDS certificates – formats
 For earlier periods – amended sec 31(4)
 If on sale/supply contract TDS is deducted?
 Deduction of TDS
 Indivisible contracts
 Notification – employer
 Interstate W/C – no TDS deductible
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Works
Contract
TDS
Non Deduction by Employer
–
 What is the fall out?
 Levy of interest & penalty
 If contractor has paid tax. Can it be said that no further
liability on ‘employer’? [Refer Hindustan Coca Cola
Beverages P Ltd (SC) 293 ITR 226]
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THANK YOU !!
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