Presented By
CA Swatantra Singh,
B.Com , FCA, MBA
Email ID: singh.swatantra@gmail.com
New Delhi , 9811322785,
www.caindelhiindia.com,
www.carajput.com
WORKS CONTRACT
TAX
Rajput Jain & Associates
Background
Works contract under VAT
Inter-State Works contract
Works contract under Service Tax
Upcoming Legislation – GST
3
Contents
Background
4
Constitutional Amendment
46th Amendment made to the Constitution from February 2, 1983
Outcome of the above:
• Permitted the States to levy tax on the Sale of goods
involved in execution of all work contract.
• States have been given power to separate the contract
between work and the labour and services
• Identifying whether the goods retained their original
identity after the work was executed or had been merged,
integrated or becoming part and parcel of the works,
buildings etc.
All the States to power under this Constitution Amendment and made
Amendments in their respective Sales Tax Law to levy tax on such sale either by
making separate legislation or by amendment in existing sales tax law
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Basic Sale of Goods vis-à-vis Works Contract
Sale of Goods
Works Contract
Taxed as actual Sale : Seller & Buyer
Taxed as Deemed Sale : Contractor &
Contractee
Absolute property of the maker when
produced / manufactured. Later on sold
to buyer
In WC, it is never an absolute property
of the maker. Materials used in WC –
may be makers absolute property
The sale is ‘chattel as a chattel’ i.e.
‘goods’ are sold as ‘goods’
In WC, article produced becomes the
property of buyer without first
becoming property of the maker.
Primary function - supply of materials
Incidental - work or service
Primary function - work and labour
Incidental - materials are supplied
TDS provisions are not applicable
TDS provisions are applicable
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Types of contract
• Supply of Materials and Labour
– Works Contract (e.g. Construction of a building, roads, bridges, dams
etc.)
• Supply of labour and supply of materials is incidental to the contract
– Not a Works contract (e.g. Painting, cleaning, overhauling, lubricating,
greasing of an old machinery etc.)
• Pure Labour Contract – may involve materials for executing contract
– Not a Works contract (e.g. Semi-finished material supplied to Jobworker for further processing, tailor doing stitching work)
WCT under VAT
8
Works Contract under Gujarat VAT
• Section 2(23) :
Definition of Sale includes transfer of property in goods, (whether as goods
or in some other form) involved in the execution of a works contract
Government of Gujarat has notified list of works contract
Notified works contractList_of_Works_Contract.pdf
Works Contract under Gujarat VAT Act
Valuation options under
Works Contract
Actual Labour
deduction
Composition
Standard Labour
deduction
Calculation of Sale Price of Works Contract
Actual labour deduction – Following deductions are allowed in case
books of accounts are maintained
(a)
(b)
(c)
(d)
(e)
(f)
Labour charges & Service charges
Sub-contract charges
Planning, designing and architect's fees
Machinery on hire and tools used
Cost of consumables, the property in which is not transferred
Cost of establishment to the extent to it is relatable to the supply of
labour and services
(g) Other similar expenses relatable to the supply of labour and services
(h) Profit earned by the contractor to the extent it is relatable to the supply
of said labour and services
Intention of the government is to levy tax ONLY on
Material component
Calculation of Sale Price of Works Contract
Indivisible Contract – in case separate books of A/c’s are not maintained –
Lump sum deductions are allowed
Description of Works Contract
Percentage of
Deduction
Construction, improvement, repair of any building, road, bridge, dam,
canal or other immovable property
30%
Installation, fabrication, assembling, commissioning or repair of any
P&M
15%
Installation, fabrication, assembling, commissioning of Air conditioner,
air cooler
10%
Assembling, fitting, re-assembling, improving, producing, repairing,
furniture, fixtures (interior decoration)
20%
Construction, fabrication, assembling, commissioning, repairs of bodies
on chassis of motor vehicles
20%
Overhauling or repairing or dismantling of any motor vehicles, vessels
of every description meant for plying on water or any vessel propelled
by mechanical means, any air craft, etc
20%
* Amount to be deducted from the contract price (expressed as a percentage of contract
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Calculation of Sale Price of Works Contract
Indivisible Contract – in case separate books of A/c’s are not maintained –
Lump sum deductions are allowed
Description of Works Contract
Percentage of
Deduction
Fitting out, assembling, altering, ornamenting, re-assembling, blending,
finishing, furnishing, improving, processing, otherwise treating,
adapting or fabricating of any goods
15%
Erection, installation and commissioning of wind turbine generator
30%
Fixing of marble, slabs, polished granite stones and tiles other than
mosaic tiles
20%
Fixing of sanitary fittings and plumbing
15%
Painting and polishing
20%
Laying of pipes excluding plumbing
20%
Tyre retreading
30%
* Amount to be deducted from the contract price (expressed as a percentage of contract pri
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Calculation of Sale Price of Works Contract
Indivisible Contract – in case separate books of A/c’s are not maintained –
Lump sum deductions are allowed
Description of Works Contract
Percentage of
Deduction
Supply of goods in providing know-how, designs, labour, supervision,
inspection, training or other services with any of the operations
specified above
20%
Dyeing and printing of textiles
30%
Printing contracts
30%
Any other works contract
20%
To arrive at Taxable turnover above rates are applied after deducting
payment made to specialised contractor, sub contractor (discharging
liability separately)
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Calculation of Sale Price of Works Contract
Composition Scheme – For contractors who do not wish to pay tax based on
the specific formula or after considering the lump sum deductions
•Rate of tax is 0.6% or 2% of the total contract value as under:
0.6%- Construction contracts relating to roads, buildings,
bridges, pipeline laying, dams, etc.
2% - Other contracts including contracts for erection,
installations etc.
• Restrictions:
 ITC not available on purchases
Contractor not eligible to issue VAT Invoice and also can not charge
tax in the invoice - Therefore, no ITC is available to the employer
Cannot import goods on interstate basis or branch transfer basis
TDS Rate under GVAT
Person responsible for payment exceeding Rupees 1 crore for works contract
is responsible for deduction of tax at prescribed rates
TDS Rate : 0.6% in case of construction contract and 2% in case of others
Works Contractor is mandatorily required to obtain TAN No. from
Commercial Tax Department.
Pay the tax to the Government within statutory due date in Form-207 and
issue certificate in Form-703 to the contractor evidencing the deduction of tax
at source.
File a return within 30 days of end of quarter in Form-704 and also file a
annual statement within 30 days from end of financial year.
Gujarat VAT – Compliance at a Glance
TDS Rate
0.6% in case of construction contract and
2% in case of others
Remittance of tax deducted
To be deposited to within 22 days in Form
207 from the end of the respective month
TDS Certificate to be issued
Certificate to be issued in ‘Form 703’
Records to be maintained for TDS
by Contractee
In ‘Form 705’ on monthly basis
TDS Return to be submitted
In ‘Form 704’ within 30 days from the end
of the quarter
Monthly Return to be submitted
In ‘Form 201’ within 30 days including e
return for specified dealers
Annual Return to be submitted
In ‘Form 205’ within 9 months from the end
of the year including e return for specified
dealers
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Gujarat VAT – Input Tax Credit
• ITC available on all inputs used in works contract other than composition method
subject to fulfilment of conditions
• Broad Restrictions on ITC:
‒
‒
‒
‒
‒
‒
‒
‒
CST purchases
Capital goods used in works contract
Lease goods
Goods purchased from Lump sum dealer
Goods not connected with business
Vehicles, equipments, accessories or spare parts
Fuel used in motor vehicles
Goods used as fuel in generation of electrical energy
• ITC to be reversed by 4% in case of branch transfer
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Inter State Works Contract
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Inter-State Works Contract
•
Finance Act 2002, had made certain amendment in the Central Sales Tax
Act 1956, to include inter-state sales of goods involved in the execution of
works contract taxable from May 11, 2002

clause (ja) in Section 2 of the CST Act was inserted which define work
contract as: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.
•
Citus of taxation will come only when:
(a) Contractor executes works in another states and
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(b) The property over the goods passes from him to his customer either
by transfer of document of title over the goods when they are in
transit from his state to another state or directly on their
incorporation in the works.
How to determine the taxable turnover?

Proviso to Section 2(h) of the CST Act provides the meaning of sale price as under:‘sale price’ in relation to transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract, shall be determined in the
prescribed manner by making such deduction from the total consideration for the works
contract as may be prescribed and such price shall be deemed to the sale price for the
purpose of this clause.

However no deductions has been prescribed under the CST Act .

Section 8A of the CST Act does not prescribe any mechanism regarding how to
determine the turnover in case of a works contract.

Section 13 (1)(aa) of the CST Act empowers the Central Government to make rules
providing for “the manner of determination of the sale price and the deductions from
the total consideration for a works contract under the proviso to Section 2(h)”.

However no rules has been framed by the Central Government in this regard.

Section 13 (3) the CST Act empowers the State Government to make Rules, not
inconsistent with the provisions of this Act and the Rules made under sub-section (1),
to carry out the purpose of this Act
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How to determine the taxable turnover?

However no specific rules have been made by the State Government in
respect of an inter-state works contract.
So, what are the remedies available in this matter Recourse needs to be taken to the Supreme Court judgment in the case
of “M/s. Mahim Patram Private Limited v. Union of India (2007)”.

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Brief facts of the case:• Appellant was engaged in the printing of question papers for various
universities and boards situated outside the State of Uttar Pradesh;
•
As the goods have moved from one State to another, it was an interstate works contract;
•
The appellant had contended that in absence of the provisions for
determining the ‘sale price’; taxable turnover cannot be computed
under Section 8A and CST cannot be levied.
How to determine the taxable turnover?

The learned Supreme Court decided as under:
•
Section 9(2) of the CST Act empowers the assessing officer to ‘assess,
reassess, collect and enforce payment of tax, including any interest or
penalty payable by a dealer under this Act as if the tax, interest or
penalty payable by such dealer under this Act is a tax, interest or
penalty payable under the general sales tax law of the State’.
•
Thus the powers conferred and the procedures laid down under the
State sales tax laws would, therefore be applicable for the purpose of
carrying out the assessment under the CST Act.
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How to determine the taxable turnover?
•
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In view of the above ruling, provisions made in a particular State (from
where the goods are moving) for determining the taxable turnover and
the sale price in case of a works contract would be applicable accordingly
in case of an inter-state works contract .
Rate of Tax Applicable

After determining the ‘sale price’ and the ‘turnover’ as per the
provisions of the State Act, rates of CST prescribed under Section 8 of
the CST Act would be applicable.

Section 8 of the CST Act provides the following rates in case of an interstate sale
•
If sale is made to a registered dealer against Form ‘C’ – 2%
•
If sale is made to a registered dealer without form ‘C’ – rate applicable
in the respective State
•
If the sale is made to an un-registered dealer – rate applicable in the
State from where the goods are moving in the course of inter-state trade
or commerce.
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Works Contract under Service Tax
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Following are relevant taxable services involved in
the Works Contract
Description of Service
Taxable w. e. f
Commercial or Industrial Construction services
10/9/2004
Erection, Commissioning or Installation Services
1/7/2003
Construction of Complex Residential services
18/4/2005
Works contract services
1/6/2007
Works Contract service – Inserted from 1st June 2007

Section 65(105)(zzzza) of the Finance Act defines taxable service as:
“any service provided or to be provided to any person by any other person
in relation to the execution of a works contract, excluding works contract in
respect of roads, airport ports, railways, transport terminals, bridges,
tunnels and dams”
 Explanation to this sub-clause defines ‘works contract’ :
Works contract means a contract wherein – Transfer of property in goods
involved in the execution of such contract is leivable to tax as sale of goods
and such contract is for the purpose of carrying out specified works.
Works Contract service – Inserted from 1st June 2007
 Specified works are:
(a) Erection, commissioning or installation of plant ,machinery equipment or
structures, whether pre-fabricated or otherwise, installation of electrical and
electronic devices, plumbing, drain laying or other installations or transport of
fluids. heating ,ventilation on air-conditioning related pipe work, duct work and
sheet metal work, thermal insulation, sound insulation, fire proofing or water
proofing, lift and escalator ,fire escape staircases or elevators or
(b) Construction of a new building or a civil structure or a part thereof or of a
pipeline or conduit ,primary for the purpose of commercial or industry or
(c) Construction of a new residential complex or a part thereof or
(d) Completion and finishing services, repairs, alteration, renovation or restoration of
or similar services in relation to (b) and (c)
(e) Turnkey projects including, engineering, procurement and construction or
commissioning (EPC) projects.
Works Contract service – Inserted from 1st June 2007
Two essential conditions for taxability under works contract service are –
 There must be transfer of property in goods involved in the execution of
specified works contracts
 Such transfer is leviable to tax as sales of goods.
Appropriate Classification under Service Tax Legislation
If the specified work contract involves transfer of property and on which
VAT/Sales tax is payable the service will be taxable under Works contract
Service

If the Contract is a simple service contract i.e. no material is involved or
even if some material is involved, VAT/Sales tax is not payable the service
would be classified under respective category of Construction or Erection and
Commissioning Service
Works Contract Service
Valuation options
Computation
as per
Valuation Rules
Composition
Valuation of works contract service
Computation as per Valuation Rules
Value of works contract shall be equivalent to gross amount charged for the works
contract less value of transfer of property in goods involved in execution of the said
works contract. Along with value of Material VAT/CST paid to be deducted.
Following to be included :
(a) Labour charges & Service charges
(b) Sub-contract charges
(c) Planning, designing and architect's fees
(d) Machinery on hire and tools used
(e) Cost of consumables, the property in which is not transferred
(f) Cost of establishment to the extent to it is relatable to the supply of labour and
services
(g) Other similar expenses relatable to the supply of labour and services
(h) Profit earned by the contractor to the extent it is relatable to the supply of said
labour and services
(i) Other similar expenses relatable to supply of labour and services
(j) Profit earned by the service provider relatable to supply of labour and services.
Valuation of works contract service
Computation as per Valuation Rules - Tax rate and CENVAT
-Service Tax @ 10.3% to be paid on taxable value arrived
-CENVAT credit on Input services and Capital goods can be availed
Valuation of works contract service
Computation as per Composition scheme

Optional Composition scheme
 Service Tax (including Ed. Cess and SHE Cess) is 4.12 % of the total
value of the works contract.
 Intimation to the department for availment of this option prior to
execution of Works Contract.
 Once opted, can not change the option till completion of the contract.
 Value of free issue items also to be included in Gross Value
- CENVAT credit on Input services and Capital goods can be availed
Goods & Services Tax(GST)
• Indicated roll-out date is April 1, 2011
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The Gist of Proposed GST: Taxes to be
subsumed
Central Levies
• Excise duty
• Additional excise duties
• Excise duty under Medicinal and
Toiletries Preparation Act
State Levies
• Value added tax
• Entertainment tax
• Luxury tax
• Tax on lottery, betting & gambling
• Service tax
• Entry tax
• Additional and special additional
• Surcharges and cesses
customs duties
• Surcharges and cesses
Central GST
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State GST
What prompted the GST?
• Several indirect taxes at Central and State level
• Tax on tax in current Central Excise and State VAT mechanism
• No harmony in rates of VAT on similar commodities from one State to another
• CENVAT credit & VAT input tax set-off not comprehensive due to restrictive
provisions
• Break in credit chain in inter-State transactions
• Multiple taxes leading to complexity in compliance
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The Gist of GST: Uniformity in structure
•
1st Discussion paper on GST released by the Empowered
Committee on 10th Nov’2009
• As far as practicable there will be uniform procedures across
various statutes concerning:
- Chargeability
- Taxable event
- Taxable person
- Valuation
- Classification
• Rules for taking and utilisation of credit for CGST and SGST would
be aligned, but no cross utilisation of credit between these two taxes
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The Gist of GST: Scope and coverage
• CGST and SGST would be applicable on all transactions of
goods and except:
- Exempted goods and services
-Transactions which are below the prescribed threshold Goods outside the purview of GST:
Goods
Treatment under GST
Products containing
alcohol
Outside the purview of GST, State Government to
levy taxes as at present
Tobacco Products
Central Government to levy excise duty on tobacco
products over and above GST
Outside the purview of GST, will be subject to sales
Petroleum Products tax / value added tax Levied by State Governemnt
and to cess, excise duty by Central Government
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The Gist of GST: Rates and thresholds
• Two-tier rate structure for both CGST and SGST
- Standard rate for most goods and services
- Lower rate for essential commodities and precious metals
• Threshold limits:
Threshold limits for :
Tax
CGST
SGST
Goods
Rs. 150 Lakh
Rs. 10 Lakh
Services
Yet to be decided
Rs. 10 Lakh
• Composition scheme with floor rate of 0.5% to be
available for taxpayers having annual turnover below
Rs. 50 Lakh
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The Gist of GST: Input tax credit Mechanism
• Input Tax Credits (ITC)
CGST
CGST
against
IGST
SGST
SGST
against
IGST
IGST
IGST
against
CGST
SGST
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The Gist of GST: Inter-State transactions
• Inter-State sale of goods and services will be taxed under
the innovative Integrated GST (IGST) model
• IGST model would work as follows:
- The Central Government would levy IGST at the rate of CGST
+ SGST on all inter-State sale transactions
- To pay this IGST, the inter-State seller may use credit of CGST,
SGST and IGST on his inputs
- The inter-State purchaser may use the credit of the IGST paid on
his purchases to discharge the output tax liability on his taxable
supply of goods or services
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The Gist of GST: Exports and imports
• Exports would be zero-rated
• Exports to processing zones of SEZ will also be zero rated
- No benefit would be allowed for the sales from SEZ to
Domestic Tariff Area
• Imports of goods and services would be subject to CGST
and SGST based on destination principle:
- SGST revenue will accrue to the State where the imported goods
and services are consumed
- Both CGST and SGST paid on import of goods and
services will be available as credit
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Impact on businesses: Decision matrices
• Product Pricing needs to reflect GST efficiency
• Stock level to be maintained as on transition date
• Timing of acquisition of assets
• Review impact on existing contracts
• Focus on core activities vs. backward / forward
integration
• Ascertain change in documentation and processes
• Identify changes to ERP system to be GST compliant
• Assess need to re-engineer tax management function
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New dual GST: Transition matters
• Treatment of unutilised tax credit balance as on transition
date
• Tax credit on capital goods where only partial tax credit taken in
pre-GST regime
• Treatment of tax already paid on goods lying in stock as on the
transition date
• Sales return of goods sold in pre-GST period
• Taxation of contracts and services spread over pre-GST &
post-GST period
• ‘Change-in-law’ provisions in existing and new contracts
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Presented By
CA Swatantra Singh, B.Com , FCA, MBA
Email ID: singh.swatantra@gmail.com
New Delhi , 9811322785,
www.caindelhiindia.com,
www.carajput.com
47