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Workshop on Taxability of Works Contracts by NIRC of ICAI 0n 12.01.2010. RAKESH GARG, FCA. History of Works Contract. Delhi VAT on Works Contract by Rakesh Garg, FCA. Indivisible Works Contract. Delhi VAT on Works Contract by Rakesh Garg, FCA. Sale vs. Works Contract.

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RAKESH GARG, FCA

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Workshop on

Taxability of

Works Contracts

by

NIRC of ICAI

0n 12.01.2010

RAKESH GARG, FCA


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History of Works Contract

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Indivisible Works Contract

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Sale vs. Works Contract

Delhi VAT on Works Contract by Rakesh Garg, FCA


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DVAT and Works Contract

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Maintenance Contracts

  • Maintenance Contracts including AMC

  • – Not Taxable under VAT if does not involve any material such as pest control, cleaning contracts, etc.

  • Taxable under VAT if involve material to be transferred from contractor to contractee – Exemptions available

  • Advisable to specify the sale and service separately in the contract / order to avoid double taxation.

Delhi VAT on Works Contract by Rakesh Garg, FCA


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S.C. in Imagic Creative

  • A distinction must be borne in mind between an indivisible contract and a composite contract

  • The court must also bear in mind that where the application of a Parliamentary and a legislative Act comes up for consideration; endeavours shall be made to see that provisions of both the Acts are made applicable

  • Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract.

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Computation of VAT Turnover

Computation of Taxable Turnover - STEPS

1. Whether the contract is divisible or indivisible

2. Whether it is taxable under local Act or CST Act

3. If divisible - Pay local / central tax on supply portion

4. If partly divisible, e.g., (1) supply and (2) installation (WCT) - Pay tax on supply portion and compute material involved in the installation portion

5. If indivisible - Reduce labour & services from contract value

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Computation of VAT Turnover

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Inter-State Works Contract

Delhi VAT on Works Contract by Rakesh Garg, FCA


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S.C. in A&G Projects dt. 11.12.2008 (Read with Kar. HC)

Transaction of SPECIFIC goods or Standard Goods with prior contract between B & C or Goods dispatched by A directly to C

A

(Manufactr.) (UP)

B (contractor) (supply + Installation) or (Supplier) (Delhi)

C (Contractee/End User) (Delhi)

Sale by A to B is 3(a) sale, without dispute

Sale by B to C is not 3(b) sale, Sec.6(2) not applicable

Sale by B is also 3(a) sale, taxable in U.P. (not in Delhi)

12

Delhi VAT on Works Contract by Rakesh Garg, FCA


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S.C. in A&G Projects – Contd…

Transaction of STANDARD goods – No prior contract between B & C; Goods sold in transit

A

(Manufactr.) (UP)

B (contractor in Delhi) (supply + Installation) or (Supplier in Delhi)

C (Contractee/ End User) (Delhi)

Sale by A to B is 3(a) sale, without dispute

B can issue Form ‘C’ to A

Sale/WC by B to C is taxable in Delhi as inter-State sale; However can be exempted thr. E-I

13

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Computation of VAT (WCT)

Computation of VAT

Depends upon State Provisions

1. Calculate Total Turnover

Aggregate of contract price

2. Reduce Deduction u/r 3

Cost of land+labour & Service

3. Compute Output Tax

Declared goods & printing- 4%

Otherwise - 12.5%

4. Reduce Input Tax Credit

Tax paid on local eligible pur-chases of goods+capital goods

5. Result is Net Tax Payable

Aggregate of B/F Tax, TDS and self assessment challan

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Taxable VAT Turnover

2. Reduce Labour & Services

(i)labour charges for execution of works; - means direct labour

(ii) charges for planning and architects fees;

(iii) Hire charges for mach./tools used for the works contract;

(iv) cost of consumables, e.g.,water,fuel, etc., which get consumed;

(v) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;

(vi) other similar expenses relatable to supply of labour & services;

(vii)profits earned by the contractor to the extent it is relatable to supply of labour and services

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Labour & Services - VAT

Methods of Computation of Labour & Services

Composition Basis

Percentage prescribed

Actual Basis

Where amount not ascertainable from books of accounts

Maintain records for satisfaction of A.A.

DVAT-15% to 30%; General-20%; Civil-25%

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Computation of VAT Turnover

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Output Tax

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Output Tax

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Output Tax

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Input Tax Credit

  • Works contractors can claim ITC on following purchases:

    • Raw Material

    • Consumables which do not get destroyed

    • Packing Material

    • Capital Goods other than those specified in Sch.VII

  • VAT paid on hire charges and consumable which get destroyed can not be claimed as ITC since these are allowable deductions as labour and services and are exempted sales.

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Input Tax Credit

TRANSFER TO OTHER STATES

  • The amount of the tax credit shall be reduced by 2% (w.e.f. 1.6.2008) of the purchase price if the goods or goods manufactured out of such goods are to be exported from Delhi by way of transfer to a 

    (i)non-resident consignment agent; or

    (ii) non-resident branch of the dealer;

  • ITC will be reduced only in relation to those goods where it is claimed or is claimable, i.e., no reduction shall be made in respect of those goods which are purchased from local unregistered dealers or in the course of inter-State trade.

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Input Tax Credit

STOCK TRANSFER TO OTHER STATES

  • In addition, the transferor shall obtain Form F from the transferee to claim exemption from central sales tax.

  • Where the goods so transferred are received back in Delhi either in the original form or in some other form, tax credit already reduced can be reclaimed in the tax period when goods are so received.

Delhi VAT on Works Contract by Rakesh Garg, FCA


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HELD by SC

Judgment applicable to civil contracts

Even if there is no privity of contract between the contractee and the sub-contractor, that would not do away the principle of transfer of property by the sub-contractor by employing the same on the property belonging to the contractee.

This reasoning is based on the principle of accretion of property in goods.

S.C. in L & T – Sub-Contracts

Delhi VAT on Works Contract by Rakesh Garg, FCA


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HELD by SC

Thus, in our view, in such a case the work, executed by a sub-contractor, results in a single transaction and not as multiple transactions.   ………...

If the argument of the Department is to be accepted, it would result in plurality of deemed sales which would be contrary to Article 366(29A)(b) of the Constitution.

It may be noted that, in this case, the apex court has commented upon the taxable event and not the measure of tax.

S.C. in L & T – Sub-Contracts

Delhi VAT on Works Contract by Rakesh Garg, FCA


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However, the Commissioner, DVAT Act in the case of Doshian recently (23.12.2009) held

Judgment of SC is distinguishable in Delhi

Where, as per the facts of the case, property in the goods is transferred at the time other than incorporation, L&T case is not applicable

Where the sub-contractor has opted for the composition scheme, L&T case is not applicable.

S.C. in L & T – Sub-Contracts

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Reconciliation with P&L

  • Prepare the project wise (or at least State wise) P&L Account

  • Project receipts in Delhi should match with Delhi VAT GTO

  • Complete account of exemptions claims particularly inter-State purchases and sale in the course of import.

  • If labour and services are claimed on actual basis, it must be reconciled with the P&L

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Precautions

  • Special care must be taken when reconciling the provisions of service tax and VAT.

  • Income Tax TDS or VAT TDS is deducted without making actual payment of the bill – Service tax is payable on the amount of TDS deducted by the contractee.

  • If adhoc mobilization advance is received for a works contract at the time of entering into the contract – VAT is not payable since work has not been executed. Service tax is payable; but on which value – is it “total receipt” or “value relatable to services”

  • Retention money deducted by the contractee – Cenvat credit cannot be claimed on such amount

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Precautions

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Precautions

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Precautions

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Need for Tax Planning

Delhi VAT on Works Contract by Rakesh Garg, FCA


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Need for Tax Planning

Delhi VAT on Works Contract by Rakesh Garg, FCA


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THANK YOU

RAKESH GARG, FCA

Author

  • Introduction to G.S.T.

  • Delhi VAT Ready-Reckoner

  • Concepts of Central Sales Tax

  • Goods under Sales Tax Laws

  • Works Contract, Right to Use and Delhi VAT

  • Service Tax Ready Reckoner

  • Service Tax, CST & VAT on Composite & Works Contract

  • Directory with Ready Reckoner to Service Tax Classification

    phones : 011- 6596 0912-13; 6528 8584

    mail: [email protected]; [email protected]


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