WORKS CONTRACTTGVAT ACT

2005

Satish SarafChartered Accountant

+91 96 1818 4567casaraf@yahoo.co.in

Agenda

• Provisions relating to Works Contract – TGVAT Act, 2005

• T & AP HC Decision in the case of Omega Shelters (P) Limited

• Act No: 4 of 2015, Dt: 09-04-2015

What, Why, how

1. Nature of Contract – Predominance2. Incidental - Supply of Goods Vs. Service3. Accretion/ accession theory4. Emergence of commercial commodity5. Emergence of customized goods6. Transfer of ownership – before they are used7. Owner of the goods – supplied by the contractee8. Price charged for separately for goods & labour or for both as a job.9. goods used, are capable to remove in the same form in case of breach10. Trade marks / patents etc. involved in the contract and their ownership

Source: Works contracts by Dr. T. Ramesh Babu

Classification of Contracts

• The Contract may be for work to be done for remuneration and for supply of materials used in the execution of the works contract (Works Contract)

• The Contract may be a contract for work in which use of materials is accessory or incidental to the execution of the work (Labour Contract)

• The contract may be a contract for supply of goods where some work is required to be done incidental to the sale (Sale)

• Source: A Guide to Works Contract by M.G. Merchant

Classification & Types of Contracts

• Divisible Contracts• Indivisible Contracts

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• Apex Court Re. State of A P Vs. Larsen & Tourbro Ltd – 17 VST 1

• Divided Works Contract into two types• Works Contract for Construction• Works Contract in relation to movable property like repairs to vehicles,

printing & Etc.

Definition - Section 2(45)

Works Contact includes any agreement for carrying out

for cash or deferred payment or for any other valuable

consideration, the building construction, manufacture,

processing, fabrication, erection, installation, laying,

fitting out, improvement, modification, repair or

commissioning of any movable or immovable property.

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Works Contracts – TGVAT Act, 2005

Incidence & levy of Tax

Input Tax Credit

Tax Deduction at Source

Maintenance of Records

SCHEME OF TAXATION

Works Contract

V A T Dealer

Regular

Proper Books

No Proper Books

Composition

Other than Builders

Builders

T O T Dealer

Regular Proper Books of Accounts

•Value of goods incorporated at the time of execution.

•Value of Goods incorporated are taxed at Schedule rates.

• Input tax credit @ 75%•Eligible to issue “Tax Invoice”.•The value of sub contract is allowed as

deduction.

Regular Proper Books of Accounts

•Value of Goods incorporated includes the following (Addition Method):•Value of goods shall not be less than

purchase value•Seigniorage Charges, Blasting & Braking

Charges, crushing, loading, unloading, transport, stacking, distribution charges & expenditure incurred for hot mixing & its transportation.

Regular Proper Books of Accounts

•Value of Goods incorporated does not include the following (Subtraction Method):• Labour Charges & other related expenses• Planning, designing & Architect fee.• Plat & Machinery hire charges• Cost of consumables (which is not transferred)

like water, fuel & electricity etc• Cost of establishment• profit relating to supply of labour & services.

Regular Proper Books of Accounts

•While filing of returns the contractor may pay tax on the basis of addition method

•On completion of each contract or finalization of accounts the total value of goods incorporated should be arrived by subtracting method and the balance turnover and tax has to be declared and paid

•Ultimate effect is profit margin put to tax

Abatement – No proper books of a/c.

•Total consideration taxable @ 14.5% subject to abatement (Rule 17(1)(g))•Ex: Civil works @ 30% (effective rate 10.15%)

•Not eligible for Input Tax Credit on Purchases

•Not eligible to issue “Tax Invoice”•Sub – Contract value ???? [Rule 17(1)(g)]

Composition – Other than Builders

• Taxable @ 5% on total value of consideration / contract – Sec.4(7)(b)

• Not eligible for Input tax credit• Not eligible to issue Tax Invoice• Must be registered as VAT dealer• Application in form VAT-250 before commencement & for

each contract• Any part of work is sub-contracted, main contractor is

taxable, sub-contractor is exempted for payment of tax.

Composition - Builders

• Any dealer engaged in Construction and selling of residential Apartments, houses, buildings or commercial complexes.

• Must be a VAT Dealer• Application in Form VAT-250 for each contract before

commencement of work• Taxable @ 5% on 25% (effective rate 1.25%)• Any part of work is sub-contracted, such part of

contract value is exempted in the hands of sub-contractor.

Contractor – sub contractor• Section 4(7)(h)• No tax shall be payable by the main contractor• Amount paid to sub-contractor• The evidence of sub-contractor is registered under

the Act, and• The sub-contractor has paid tax on the amount

received from the main contractor.• State of AP Vs. L & T Ltd., (SC) 2008 AIR SCW 6358 or 17 VST

1

Tax on Purchases

•Any Works Contractor under composition is liable to pay tax on the purchases, if the purchases are Non-VAT Dealer & out side the State.• Value of such purchases are taxable at schedule

rates• Such Purchase value to be reduced from the value

of composition

•Omitted by Act No: 21 of 2011, wef 15-09-2011

TOT Works Contractor

• Turnover between 7.50 & 50.00 Lakhs• Taxable @ 1% on the value of goods incorporated• If the value of goods incorporated is unable to

determine, the entire proceeds are taxable @ 1% subject to deductions.

• Not eligible for input tax credit• Not eligible to issue tax invoice.

CST Works Contract

• Telangana – VAT dealer executing works out side the state with in the meaning of Section 3 of CST Act, 1956

• Goods transferred in the same form or in other form• Such transfer from Contractor to contractee are

exempted from tax under TGVAT Act 2005.• The contractor is liable to tax under CST Act (as per

CST AP Rules)

INPUT TAX CREDIT

• Dealer executing works contract with proper books of accounts

• Is eligible for ITC @ 75% on purchases made by him - Section 13 & Rule 20

• Only this dealer is also eligible for issue of tax invoice, such that the contractee will get Input Tax Credit.

Contractor & Sub Contractor

• Regular - with proper books of A/c’s:

• Contractor eligible for deduction.

• Tax Invoice issued by sub-contractor

• Sub-contractor must be a VAT Dealer

• Sub-Contractor is taxable at par with the contractor

• The proportionate TDS has to be transferred by the

contractor to sub – contractor by issue of Form 501B

(not Applicable in case of composition)

Contractor & Sub Contractor

• Composition Contracts• Sub Contractor Turnover is exempted in all kinds of

composition contracts• Other than Builders• Builders

• Contractor not eligible for deduction• Sub Contractor shall opt for composition and shall

prove that the main contractor also opted for composition with Form 250 of the Main Contractor

Contractor & Sub ContractorCONTRACTOR SUB – CONTRACTOR DEDUCTION / EXEMPTION

Regular Regular Deduction

Regular Abatement Deduction

Regular Composition Deduction

Abatement Regular Deduction

Abatement Abatement Deduction

Abatement Composition Deduction

Composition Regular -

Composition Abatement -

Composition Composition Exemption

TDS under TGVAT Act• Every contractee irrespective of their status shall

deduct TDS on payments made to contractors @ 70% of 5%, or 70% of 2%, (as applicable) or

• Shall make an application to the concerned AC(CT) or CTO, to determine the quantum of TDS.

• Procedure for obtaining T D S Certificate.• With in fifteen (15) days TDS to be deposited with the

jurisdictional assessing authority of the contractor.

Records to be maintained

• Dealer executing Works Contract:• Keep separate Accounts for each contract along with

details of each contractee.

• Opting for Composition:• Payments Received from contractee.• Record of From 200• Records of TDS & TCS

Records to be maintained

• Not Opting for Composition:• Particulars of goods procured for execution.• Particulars of goods used in the execution.• Details of payments received for each contract.• Details of Labour Charges for works executed.• Details of payments to Sub-Contractors.• Details of charges of Planning, designing & architect’s fee.• Details of charges paid for hiring machinery & tools• Details of Cost paid towards consumables.

Records to be maintained

• Details of cost of establishment & apportionment towards each contract.

• Details of profit to the extent relatable to supply of labour & services.

• Details of goods exempted under Schedule –I used in the execution of contracts.

• Details of turnovers under Sec. 3 of CST Act used for the execution of Works.

• the above records are not maintained to the satisfaction of the assessing authority, he can reject the records and make assessment at the rate of 14.5% with abatement.

T & AP HC - Omega Shelters (P) Ltd• Writ Petition No: 1528 of 2013, Dt: 24-04-2015.

• If dealers engaged in the construction and sale of residential apartments, houses, buildings or commercial complexes exercise the option, and comply with the conditions stipulated in Section 4(7)(d) and Rule 17(4), they cannot be denied the benefit of composition thereunder for the construction made by them, for the very same person, after execution of a registered deed for the sale of a semi-finished structure. Denial of the benefits of the composition scheme under Section 4(7)(d) to such dealers, for the post-sale construction made in terms of the initial agreement, is illegal and is contrary to the provisions of the AP VAT Act and the Rules made thereunder.

Act No: 4 of 2015, Dt: 09-04-2015

• Bill No: 5 of 2015. Dt: 23-03-2015• Accent of Governor of Telangana obtained on 07-04-2015.

• Amendment of Section 13 (1) of TGVAT Act, 2005• Insertion of Section 13(1A) to TGVAT Act, 2005• Amendment of Section 20(1) of TGVAT Act, 2005• Amendment of Section 22 of TGVAT Act, 2005.

Amendment of Section 13(1)• Input Tax Credit is allowed to the buying VAT Dealer provided

• The selling VAT dealer has paid the tax on the goods sold• The purchase is with in the state of Telangana• From a VAT Registered dealer.

• The goods purchased are being used for the purpose of • Resale with in the State.• Use as input in the manufacturing or processing of goods in the State.• Use as packing materials• Use as Capital goods in the manufacturing of taxable goods

• Sale in the course of inter state sale or commerce falling under sub section (1) of the CST Act, 1956.

• No ITC on Schedule – Vi Goods, if already ITC is allowed to re reversed

Section 13(1A) inserted

• Over rides the all sub-sections of Section 13.

• No Input Tax will be allowed• Any Registered Dealer has sold goods• The value of sales is lesser than the value of purchase• ITC will be restricted to the extent of OTC

Amendment of Section 20

•Section 20(1) is amended

•The Returns to be submitted along with annexures as may be prescribed

Amendment of Section 22• Insertion of Sub Section 3-C and 3-D in Section 22• Sub Section 3-C

• TCS by FCI and Civil Supplies Corporation on purchase of Rice from Rice Millers at the rate prescribed under the relevant schedule.

• The TCS amount to be deposited on the next working day in the manner prescribed.

• Sub Section 3-D• TCS by the Distilleries & Breweries on purchase of empty

bottles from the dealers at the rate prescribed under the relevant schedule.

• The TCS amount to be deposited on the next working day in the manner prescribed.

Q & A