Presentation Transcript

1. VAT ON REAL ESTATE TRANSACTIONS CA KISHOR R. GHEEWALA (DT.17.08.2013)
2. TYPES OF DEALERS WORKS CONTRACTOR LABOUR CONTRACTOR READY PROPERTY DEALER BUILDER MODEL DEVELOPER MODEL
3. HISTORICAL BACKGROUND : - 1) Works Contract is NOT a ‘contact for sale’ of materials & hence , NOT exigible to Sales Tax. - The State of Madras vs. Gannon Dunkerly & Co. (Madras) Ltd. (1958) 9 STC 353 (SC). 2) 46th Amendment to the Constitution of India w.e.f.02-02-1983, inserting clause (29A) to Article 366 to include, inter alia, tax on sale or purchase of goods involved in execution of Works Contract
4. 3) Amendments in the Gujarat Sales Tax Act, 1969 w.e.f.05-08-1985, imposing tax on all such newly inserted Deemed Sale transactions including works contract. The Constitutional validity of the 46th Amendment Upheld by Supreme Court in Builders Association of India vs. UIO (1989) 73 STC 370 (SC) (5 Member Bench) In the C.S.T. Act.1956, consequential amendments were carried out by The Finance Act. 2002 only & hence, CST on inter state works contract became applicable w.e.f.11-05-2002.
5. “WORKS CONTRACT” DEFINITION: - 1) Definition under CST Act : – The Finance Act, 2005 inserted Clause 2(ja) in the Central Sales Tax Act, 1956 which reads as under: ‘(ja) “works contract” means 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”.
6. 2) Definition under GVAT Act : – The Gujarat Value Added Tax Act.2003 (The GVAT Act) contains the definition of the term “Works Contract”, by way of Explanation (ii), to Sec. 2(23), which defines the term ‘Sale’. It reads as under. “Sec. 2(23) “Sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration and includes, - ……… transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract,
7. to j) ………………………………………. Explanation – ………………………………………………. for the purpose of sub-clause (b), the expression “works Contract” means a contract for execution of works and includes such works contract as the State Government may, by notification in the Official Gazette, specify: (Emphasis Supplied)
8. 3) Notified Works Contracts : – Vide Government of Gujarat, Finance Department Notification No. (GHN-23) VAT -2006/ (S.2)(23)(1)/ TH dated 31/03/2006, following items have been notified as “Works Contracts” The construction, improvement or repair of any Building, Road, Bridge, Dam or other immovable property.
9. The installation, fabrication, assembling, commissioning, or repair of any plant or machinery whether or not affixed to any building, land or other immovable property. The installation, fabrication, assembling, commissioning of any Air conditioner plant, Air conditioner, Air cooler, whether or not affixed to any building or the immovable property. The assembling, fitting out, reassembling improving, producing repairing or otherwise treating of furniture fixtures, partitions including contracts of interior decoration.
10. Since omitted Vide Notification Dt.16/05/2008. Prior to its omission, it read as under. The installation, fabrication, assembling, commissioning or repairs of lifts, or elevators or escalators. The Construction, fabrication, assembling, commissioning or repairs of bodies on chassis of motor vehicles including three wheelers and fire fighters or of vessels of every description meant for plying on water.
11. The overhauling or repairing or dismantling of any motor vehicle, vessels of every description meant for plying on water or any other vessel propelled by mechanical means, any air craft, or any equipment or part of any of the aforesaid items The fitting out, assembling, altering, ornamenting, reassembling, blending, finishing, furnishing, improving, processing or otherwise treating or adapting or fabrication of any goods. Erection, installation and Commissioning of Wind Turbine Generator including power evacuation system and repairing thereof.
12. Fixing of Marble, slabs, polished granite stones, and tiles (other than mosaic tiles) Fixing of sanitary fittings for plumbing drainage and the like Painting and polishing Laying of pipes Tyre re-treading The supply of goods in providing know-how, designs, labour, supervision, inspection, training or other services in connection with any of the operations mentioned in serial numbers 1 to 14 above.
13. 4) Mere supply of labour not covered – Taxable event is transfer of property in goods. In case of contract for supply of labour, there is no transfer of property in goods and hence there is no tax liability – Ashok Kumar Garg vs. UOI (2002) 128 STC 442 (P&H HC DC)* Rajiv Gumber vs. Bharat Sanchar Nigam Ltd. (2002) 128 STC 494 (P&H HC DB.) Thus, simple job work will not be taxable, if there are no goods involved in the job work K V Nagarajan vs. DCTO (2007) 5 STR 325 = 208 ELT 165 (Mad. HC DB) – same view in K C Nagarajan vs. DCTO (2007) 7 VST 585 = 11 STT 411 (Mad. HC)
14. 5) TAXABLE VALUE : – In case of Builders Association of India Vs. Union of India 73 STC 370 (SC), the Supreme Court held that the entire contract price cannot be subjected to Sales Tax but only value of the goods in which the property would pass during execution of works contract can be taxed. The Supreme Court in the case of Gannon Dunkerly & Co. Vs. State of Rajasthan 88 STC 204 has observed as under:
15. “The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover : labour charges for execution of the works; amount paid to a sub-contractor for labour and services; charges for planning, designing and architect’s fees;
16. charges for obtaining on hire or otherwise machinery and tools used for 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 a works contract; and cost of establishment of the contractor, to the extent, it is relatable to supply of labour and services; other similar expenses relatable to supply of labour and services;
17. profit earned by the contractor to the extent it is relatable to supply of labour and services. The Court further held: “We may, however, make it clear that apart from the deductions referred to above, it will be necessary to exclude from the value of the works contract, the value of the goods which are not taxable in view of Sections 3, 4 and 5 of the Central Sales Tax Act and goods covered by Sections 14 and 15 of the Central Sales Tax Act as well as goods which are exempt from tax under the Sales Tax legislation of the State. The value of goods involved
18. in the execution of a works contract will have to be determined after making these deductions and exclusions from the value of the works contract”. “Sale price” under Section 2(24) of, the GVAT Act means, “the amount of valuable consideration received or receivable by a dealer for sale of any goods. In respect of works contract, under sub-clause (b), “sale price” means the amount arrived at by deducting from the amount of valuable consideration paid or payable to a person for the execution of such works contract, the amount representing labour charges for such execution.” (Emphasis Supplied)
19. Section 2(30) of the GVAT Act, 2003 defines “taxable turnover” in respect of works contracts as “turnover of all sales or purchases of a dealer during the prescribed period in any year, which remains after deducting therefrom, the charges towards labour, service and other like charges, and subject to such conditions as may be prescribed.” (Emphasis Supplied) Normally, the contractor will be in a position to furnish the necessary material to establish the expenses that were incurred under the aforesaid heads of deduction for labour and services. But there may be cases where the contractor has not
20. maintained proper accounts or the accounts maintained by him are not found to be worthy of credence by the assessing authority. In that event, a question would arise as to how the deduction towards the aforesaid heads may be made Rule 18AA of the GVAT Rules, 2006, inserted w.e.f. 11/10/2006 refers to the deductions and the conditions thereto, in respect of charges towards labour, service, etc. [as provided under Section 2(30)]. The provisions of this Rule are as follows : “(1) The value of the goods shall be determined by deducting the amounts paid by way of price for sub-contract made with a registered dealer, if any, pertaining to the said works contract.
21. (2) A registered dealer who claims any deduction for labour, services and other like charges shall- maintain true and correct records for such deductions; prove to the satisfaction of the Commissioner that he has actually paid the amount in the year in which he claims such deduction; and furnish true and correct evidences for claiming such deductions at the time of assessment or when asked to furnish in any proceedings:
22. Provided that where the amount of charges towards labour, service and other like charges are not ascertainable or the accounts maintained by the contractor are not sufficiently clear or intelligible, a lump sum deduction is admissible at prescribed percentages. (3) The percentage shown in the Table shall be applied after first deducting from the total contract price, the amount paid by way of price for the entire sub-contract made with sub-contractor, if any.”
23. Only one taxable event even when work is done by sub-contractor In Larsen & Toubro Ltd. vs. State of Andhra Pradesh (2006) 148 STC 616 (AP C DB), it was held that “Sub-contractor acts only as agent of Contractor. Hence, there is only one taxable event. Property in goods directly passes on to the contractee. Hence, there is only one ‘sale’. Thus, sales tax can be collected either from contractor or sub-contractor and not both.
24. This view was confirmed in State of Andhra Pradesh vs. Larsen and Toubro (2008) 9 SCC 191= 16 STT 501 = 17 VST 1 (SC), where it was held that main contractor is not liable to VAT on turnover of subcontractor. There is only one deemed sale and not two, even if subcontractor had no privity of contract with the contractee. The property in goods passes to owner/contractee on its incorporation in the works contract.”
25. 8) Taxation of Work Contract : – Two methods are available under the GVAT Act for determining the tax liability for a works contract. As per Normal Provisions : – In this method, tax calculations are generally made as under. First of all, labour exps., Consumables etc. are deducted from Gross Receipts of works contract to arrive at sale value of goods. The sale value, thus derived is to be further bifurcated according to applicable tax rates say 5% or 15% etc.
26. The aforesaid bifurcation of sale value according to tax rates is generally done on the basis of purchases of goods, by segregating the same rate wise. In such segregated rate wise purchase costs, freight exps. if any, are added. In cost of goods so arrived, Gross Profit is added to arrive at value of goods sold. From value of goods sold, so derived, rate-wise separately, actual tax liability is worked out. This is known as “Output Tax”.
27. From the aforesaid “Output Tax” liability, Input Tax Credit (ITC) admissible to the dealer on his purchases of goods is deducted. The Difference between Output Tax & Input Tax Credit is the actual tax payable by a Dealer. If such difference is negative, meaning thereby that, Input Tax Credit is more than Output Tax, the excess is to be carried forward to next tax period to be adjusted against future liability.
28. COMPOSITION SCHEME: – The GVAT Act, 2003 also provides an optional scheme for payment of lump sum tax by way of composition in respect of works contracts under Section 14A read with Rule 28. Composition qua contract : The contractor may opt for composition qua each contract separately. Accordingly, a contractor may opt for Composition scheme for same contracts & may not opt for the same for other contracts. The contractor is required to apply for composition within 30 days from
29. the beginning of the contract to the jurisdictional officer in Form 214. The permission for composition shall be granted in Form 215 within fifteen working days, which will be effective from the date of the beginning of the contract and till its conclusion. Composition qua year in case of “ongoing works contracts”: As per the amendments carried out w.e.f. 11/10/2006, the contractor can also apply for composition for all contracts executed during a financial year. Application for permission is
30. required to be made to the jurisdictional officer in Form 214A within thirty days before the commencement of the year. In case of new dealers registered after 01/04/2006, the application will have to be made within 90 days (30 days upto 21/05/2007) of the date of Registration. Permission will be granted by the officer in Form 215A within fifteen working days form the date of receipt of the application and shall be effective from the beginning of the year. W.e.f 01/04/2008, the dealer under this category need not file fresh application every year. The permission earlier granted will continue to be valid.
31. The composition amount is payable by the dealer on full amount received in respect of those contracts for which permission for composition has been granted after deducting the amount paid by way of price for entire sub-contract, if any, made with the sub-contractor. So excepting the payments to sub contractors, no other deductions whatsoever including for labour etc. will be admissible for determining liability for composition amount which is payable on Gross receipts only, after making deduction for price payable to sub contractor.
32. A contractor who is permitted to pay lump sum tax shall not, Claim tax credit in respect of tax paid by him on his purchases, Charge any tax in his sales bill or sales invoice in respect of the works contract and Issue tax invoice to the contractee in respect of the works contract. A contractor who is permitted to pay lump sum tax is also liable in addition to composite amount to pay purchase tax on purchases from unregistered dealers under provisions of Sec. 9(1) and (3).
33. The contractor is not permitted w.e.f. 11/10/2006, to use the goods in the execution of works contracts covered under the permission to pay lump sum tax, if such goods are Purchased in the course of inter-state trade or commerce or imported from outside the territory of India, or Received from his branch situated outside the State or from his consigning agent outside the State;
34. Contractor opting for yearly composition for “ongoing works contracts” is not permitted to dispatch goods to his branch situated outside the State or to his consigning agent outside the State. All taxable goods used in the execution of works contract covered under the permission to pay lump sum tax, ought to have borne the tax payable under the GVAT Act, 2003; The option exercised under this rule shall be final and is irrevocable. Misc. Sales like Sales of gunny bags, scrap etc. will be chargeable at normal rate & not at the rate of composition, even in case of having opted for composition.
35. SPECIFIC PURCHASES ON WHICH ITC NOT AVAILABLE As specifically provided in Section 11(5), ITC will not be allowed on the following purchases, – Of vehicles, equipments, accessories or spare-parts thereof (except when they are meant for sales),–Sec.11(5)(j) Of goods which are used as fuel in generation of electrical energy for captive use or otherwise–Sec.11(5)(l) Of Petrol, HSD, crude oil and lignite (unless such purchase in intended for re-sale)–Sec.11(5)(ll) Of goods used as fuel in motor vehicles–Sec.11(5)(m)
36. Of capital goods used in transfer of property in goods involved in execution of works contract–Sec.11(5)(mm) Where original tax invoice does not contain details of tax charged separately, –Sec.11(5)(o) Where original tax invoice is not available or its duly authenticated duplicate is not available – Sec.11(5)(p)
37. TAX DEDUCTION AT SOURCE u/s. 59A and 59B and Rule 65 Any Person responsible for paying specified sale amount exceeding Rs.1 Crore to the contractor or sub-contractor is liable to deduct Tax at Source at the rates of composition. “specified sale price” means the amount of valuable consideration paid or payable for the works contract after deducting the amount of labour charges for execution of such works contract and the value of the goods purchased in the course of inter State trade or commerce or in the course of import of goods into territory of India for use in such works contract.
38. “Specified works contract” means the work contract, the specified sale price of which exceeds Rs. One Crore. In case where the contractor has awarded specified works contract to sub-contractors and the contractor has deducted the tax from the payments of specified sale price to the sub-contractors and paid such amount in to the Government Treasury within the prescribed time, then in that case, the person shall not be liable for deduction of equal amount of tax from the payment of specified sale price to the contractor.
39. Where a contractor or Sub-contractor is not liable to pay tax under the provisions of the Act, such contractor or sub-contractor may apply to the Commissioner to issue “No-TDS” certificate. If the Commissioner is satisfied that no tax is payable by the contactor or sub contractor, he may issue such certificate and on the basis of such certificate, the deduction will not be required to be made. The TDS deducted is to be paid into Government treasury in challan in Form 207 within 22 days. The deductor is required to obtain a treasury receipt therefor and furnish a copy of such receipt to the contractor or the sub-contractor within 30 days of the receipt of such treasury receipt.
40. Where the amount of TDS has not been deducted, the tax shall be payable by the contractor or the sub-contractor directly. Failure to deduct TDS or to deposit of the TDS deducted attracts penalty upto 25% of the amount required to be deducted. Delay in depositing the TDS deducted attracts simple interest at the rate of 18% per annum on the amount of tax not paid into Government Treasury.
41. The deductor has to issue certificate of TDS in Form 703 with tax paid challan in original to contractee. Out of the gross payment, the amount liable for deduction is to be arrived at by deducting labour charges, price of interstate/import purchases as per declaration given by the contractor/sub-contractor in Form 702. W.e.f. 01-08-2009, every person liable to make TDS should apply for Tax Deduction Account Number (TDN) within prescribed time in prescribed form. TDN should be quoted on all prescribed documents etc.
42. Salient features of rules for T.D.S., notified vide Notification Dated 24/12/2009 are as under, A person liable for T.D.S. shall have to apply in Form 706, online on Department’s Website, within 30 days, for Tax Deduction Account Number. A copy of such application shall be submitted within 7 days of the application, alongwith the particulars to be prescribed by the Commissioner by public circular for registered dealers or officer of central/ state govt./ local authority & alongwith the particulars prescribed in rules for other persons. The number will be issued in Form 707.
43. A person deducting tax shall file quarterly return for T.D.S., in Form 704, within 30 days, on Department’s Website. A person claiming credit of T.D.S. shall have to file Form 216A, within 30 days of the tax period, alongwith regular return. T.D.S. Certificate in Form 703, shall be serially, mechanically numbered in duplicate. Original should be given to the Contractor/ Sub Contractor. A person liable for T.D.S. shall have to maintain the prescribed particulars in Form 705. On cessation of liability for T.D.S., an application in Form 708 shall have to be submitted on Department’s Website for cancellation of Tax Deduction Account Number.
44. VAT NOTIFICATION U/S. 5(2)(a) Above rates are inclusive of Additional Tax @ 1% W.e.f 01/04/2008.
45. A. Ready Properties:- Immovable Properties & hence, NOT “Goods” & hence, no liability under VAT Laws. B. To be Constructed Properties:- 1. Builder Model:- - Land owned by Builder, - De Facto & De Jure owner - Builder to execute ultimately sale document including rights in land to customer. - No liability on Sale Side - Liability for Purchase tax on Unregistered Dealer Purchases - Builder is a “Dealer” & hence, liable to be registered even if, Not liable to pay tax - OGS/Import Purchases Permissible.
46. 2. Developer Model:- - Land owned by ‘A’, Development Rights with ‘B’ & Customer ‘C’ - Development Rights only with the Developer. - Customer pays to landlord for land value & to Developer for construction.- Land Owner to execute sale deed for rights in land to Customer & Developer to issue Bills for Construction to Customer – Amounts to ‘Works Contract’ & liable to tax as such. - Developer to receive all moneys from Customer & join with land owner for execution of sale deed of whole property – Grey Area
47. In K Raheja Development Corporation v. State of Karnataka AIR 2005 SC 2350=(2005) 5 SCC 162= 2 STT 178 =141 STC 298 = 3 STR 337 (SC), it was held that definition of ‘works contract’ in Karnataka Sales Tax Act is wide. It is not restricted to ‘works contract’ as commonly understood. It was held that the developer would be liable to pay tax on the works contract. However, if the agreement is entered into after the flat or unit is already constructed, there would be no works contract.
48. COMMENT- The case is being interpreted to mean that all builders are liable under works contract. This is not so. In case of K Raheja, the agreement was for construction as developer on behalf of the allottee (prospective purchaser). Property in the goods passed by accession during construction. Hence, it was held as ‘works contract’ and not ‘contract for sale’. If property passes after construction, it would be ‘contract for sale’.
49. Decision in K Raheja’s case doubted by subsequent bench of SC – Decision of SC in case of Raheja Development Corporation has been doubted in Larsen and Toubro vs. State of Karnataka(2008) 16 STT 286=17 VST 460 (SC). It was observed that if ratio of K Raheja Development Corporation is accepted, there would be no difference between works contract and a contract for sale of chattel as a chattel. With these observations, the matter has been referred to a Larger Bench.
50. In Assotech Realty v. State of UP (2007) 10 STT 36=8 VST 738=7STR 129 (All. HC DB) and ATS Infrastructure v. State of UP [ WP decided on 6-12-2006 – see 9 STT 68 (Mag.)(All. HC DB)], it has been held that builders booking apartments before completion of construction of the apartments and receiving advance or part payment are not liable to pay Vat/ Sales tax under Works Contract, if right, title and interest in the construction remains with the builder ( and is passed to buyer only after construction is over).
51. It was observed that in case of K Raheja, the developer (K Raheja) was constructing the unit for and on behalf of person who had agreed to purchase the flats. While in present case (of Assotech Realty) he was not constructing flats on behalf of allottees. Activity undertaken by a person for himself is not ‘works contract’. In Magus Construction P Ltd. V. UOI (2008) 15 VST 17 (Gau HC), it was held that when builder sales a flat, the construction is not on behalf of prospective buyers. Hence , service tax is not applicable [ as natural corollary , works contract tax will also not apply ].
52. Renting of Properties:- Liable to Service tax & No liability under VAT laws Transfer of Right to use Goods:- Amounts to “Sale” – Liable to VAT – No ITC for Vat paid on goods let out.