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INPUT TAX CREDIT AND WORK CONTRACT TAX UNDER RVAT. An Overview By CA Shambhu Lal Gupta M.Com , FCA, DISA(ISA) Mob No. 9829092375 Email: guptasl@hotmail.com. INPUT TAX CREDIT(ITC) IN VAT. Under VAT net tax payable by a registered dealer for a tax period shall be calculated as:

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INPUT TAX CREDIT AND WORK CONTRACT TAX UNDER RVAT

An Overview

By

CA ShambhuLal Gupta

M.Com, FCA, DISA(ISA)

Mob No. 9829092375

Email: guptasl@hotmail.com

input tax credit itc in vat
INPUT TAX CREDIT(ITC) IN VAT
  • Under VAT net tax payable by a registered dealer for a tax period shall be calculated as:

T = (O+R+P)-I

Where – T is net Tax payable; O is amount of output tax; R is amount of reverse tax; P is the amount of tax payable under sub-section (2) of Section 4; and I is the amount of Input tax.

Hence for determining net tax liability of dealer, It is most important to ascertain amount of input tax credit allowable under the VAT provisions.

  • Section 2(17) define ‘Input tax ‘ means tax paid or payable by a registered dealer in course of business On purchases of any goods from a registered dealer.
allowability of input tax credit section 18
Allowability of input tax credit(Section 18)
  • In RVAT, Input tax credit shall be allowable
  • toregistered dealers other than dealers covered u/s 3(2) & 5
  • in respect of purchases of any taxable goods within the state from a Registered dealers
  • To the extent and in such manner as may be prescribed
  • For purpose specified
purposes specified for claiming itc u s 18 1 of rvat act
Purposes specified for claiming ITC u/s 18(1) of RVAT ACT
  • Sale within state of Rajasthan; or
  • Sale in the course of Inter-state trade and commerce; or
  • Sale in the course of export outside the territory of India; or
  • Being used as packing material of goods, other than exempted goods, for sale; or
  • Being used as Raw Material except those as may be notified by the State Government, in the manufacture of goods other than exempted goods, for sale within the state or in the course of Inter-state trade or commerce; or
  • Being used as packing material of goods or as raw material in the manufacture of goods for sale in the course of export outside the territory of India; or
  • Being used in the state as capital goods in manufacture of goods other than exempted goods .
itc is allowable on the tax deposited
ITC is allowable on the tax deposited
  • Sub section 2 of section 18 clearly state that the claim of ITC is allowable on the tax deposited .
  • Even where dealer made full payment through A/c Payee Cheque and shown the purchases in his quarterly return and claimed ITC but seller not paid the tax collected, ITC not allowed on such purchases even tax imposed and proceeding for collection of tax initiated by the department on seller.RTB- CTO Vs Sagar Industries
claim of itc on basis of vat invoice
Claim of ITC on basis of Vat Invoice
  • Credit is available on basis of original VAT invoice-the extent of credit available shall be equal to amount of tax paid as evident from such invoice.
  • Within three months from the date of issuance of invoice.
  • in case original VAT invoice has lost, it may be allowed on duplicate invoice issued in accordance with Rule 38(4).
  • Amount of tax must be displayed separately on the VAT invoice.
  • Claim of input tax on additional tax deposited may be allowed on basis of invoice which has been issued subsequently in compliance with decision of any court or authority showing the tax at higher rate.
condition to maintain record for availing itc rule 18 1
Condition to maintain record for availing ITC-Rule 18(1)
  • Maintain separate account of purchases against vat invoice in Vat 7
  • Submit summary of such purchases in vat 7A alongwith return in rule 19
  • Maintain separate account of sale in Vat 8
  • Submit summary of sale in Vat 8A alongwith return in rule 19
  • In Such Vat 7,7A,8,8A, the vat invoice shall be entered in the quarter in which the date of invoice fall even if receipt of goods is spread over to different quarter in year or years.
itc if sale of goods at subsidized price
ITC if sale of goods at subsidized price
  • Upto 09-3-2011 there was no provision of reversal of excess ITC due to goods sale at discounted price/ subsidized price.
  • RTB In the case ACTO Vs M/S GOPALIA CEMENT AGENCIES held that ITC can not be reversed on ex post facto discount or credit note given against purchases price by seller.
  • Sub section 3A to section 18 w.e.f 09-03-2011 inserted effecting where any goods purchased in the State are subsequently sold at subsidized price, the input tax allowable under this section in respect of such goods shall not exceed the output tax payable on such goods
situations under which itc not available
Situations under which ITC not available

No input tax credit shall be allowed on the purchases-

  • from a registered dealer who is liable to pay tax under sub-section(2) of section 3 or who has opted to pay tax under section 5 of this Act;
  • of goods made in the course of import from outside the State;
  • of goods taxable at first point in the series of sale
  • where the original VAT invoice or duplicate copy thereof is not available with the claimant,
  • When there is evidence that the invoice has not been issued by the selling registered dealer from whom the goods are purported to have been purchased ; or
  • of goods where invoice does not show the amount of tax separately; or
  • Where the purchasing dealer fails to prove the genuineness of the purchase transaction by producing the selling dealer or otherwise, on being asked to do so by an officer not below the rank of A.C.T.O. authorized by the Commissioner.
  • No input tax credit is allowed on exempted sales.
  • NoITC allowed on goods in stock to the dealer who opted to pay tax under sub-section (2) of section 3, exceeds the limit of the said sub-section i.e. 75 Lacs now.
  • ITC not allowed on raw material used for manufacturing of exempted goods.
processing material and consumable are also eligible for itc
Processing material and consumable are also eligible for ITC
  • As per section 18(1) (e&f) raw material is eligible for input tax credit.
  • section 2(29) define “raw material” means goods used as an ingredient in the manufacture of other goods and includes processing material, consumables, preservative, fuel and lubricant required for the process of manufacture”.
  • Therefore, it is clear that all processing material, consumables, fuel & lubricants etc. are eligible for input tax credit if these are purchased on VAT invoice after payment of tax.
  • In the case National Aluminium Co. Ltd. V/s Dy. Commissioner 2012 (56) VST-68 (Orissa) ‘Define Input Goods directly used in manufacturing means– without which manufacturing is not possible so Coal, Alum, Castic Soda and other consumables used in captive power plant for generation of Electricity to run Aluminum plant are treated ‘Inputs’ and eligible for ITC.
partial itc on goods consigned outside the state i e consignment sales u s 4 of cst act
Partial ITC on goods consigned outside the state i.e.Consignmentsales U/s 4 of CST Act.

In exercise of power u/s 18(4),The State Government, notified to allow a dealer to claim input tax credit in excess of 4% of the tax paid in the State on the purchase of goods:-

  • which are consigned outside the State by way of Stock/branch/depot transfer, or 
  • which are used as raw material in the manufacture of goods and such manufactured goods are consigned outside the State by way of stock/branch/depot transfer.

Notification No. F-12(63) FD/Tax/2005-174 Dt. 31/03/2006.

itc on capital goods used in manufacturing
ITC on “capital goods” used in manufacturing
  • Under Sec. 18(1)(g) “capital goods” are eligible for input tax credit.
  • The definition of capital goods is given in Sec. 2(7) as:-

“Capital goods” means plant and machinery including parts and accessories thereof meant for use in manufacture unless otherwise notified by the State Government from time to time in the official gazette.”

  • It is clear from the definition that only plant & machinery and their parts & accessories are eligible for input tax.
  • Equipments used in the office like A.C., Computer, furniture etc. are not eligible for input tax credit.
  • If equipments are used as plant & machinery like in laboratory then they will be eligible for input tax credit.
  • Input tax credit on capital goods shall be carried forward till the first sale of goods manufactured from that capital goods. (sub rule 2 amended w.e.f. 1-4-11)
itc in proportionate basis
ITC in proportionate basis
  • If the goods purchased are used partly for purpose of specified in this section and partly as otherwise, input tax credit shall be allowed proportionate to the extent they are used for the purposes specified in section 18(1).
  • Even when manufacturer purchased taxable raw material and manufactured the goods which are taxable under the RVAT Act but by product coming out is exempt under RVAT Act, ITC will be allowed on Pro-rata basis.
  • 2012(32)TUD-3 (Raj H.C.), CTO V/s Duageshwari Food Ltd. In this case Atta, Suji, Maida, manufactured out of taxable ‘wheat’ purchased and by product – wheat bran, chaff / Choker comes out which are exempted. So ITC will be allowed on pro-rata Basis.

RTB- CTO Alwar Vs M/S Lalit Hans protinePvt Ltd

In this case manufacturing of Taxable Oil and by product DOC out of taxable Mustered. However AO proportionate on volume of production basis against which court allowed to proportionate on value of product.

refund of itc in the case of export
Refund of ITC in the case of Export
  • With a view to make the export competitive in the international markets, refunds of the tax paid by the exporter is allowed. Export sales are not subjected to levy of any Vat and section 18(1)(f) of this Act allows input tax credit in respect of raw material or packing material used in the manufacture of goods for sale in the course of export outside the territory of India.
  • Section 53(2) specially provided to refund to exporters within 30 days from the date of claim.
  • For claiming refund in respect of Input Tax for export, application in Form VAT 21 together with a certificate from a chartered Accountants in Form VAT 26 and other enclosures as prescribed in Rule 28, is required to be submitted.
penalty in case itc availed wrongly u s 61 2 of rvat act
Penalty in case ITC availed wrongly U/s 61(2) of RVAT Act

Where any dealer has availed input tax credit wrongly, the assessing authority shall reverse such credit of input tax and shall impose on such dealer :-

(i) in case such credit is availed on the basis of false or forged VAT invoices, a penalty equal to four times of the amount of such wrong credit; and 

(ii) in other cases, a penalty equal to double the amount of such credit.

provisions relating to work contract
PROVISIONS RELATING TO WORK CONTRACT
  • The definition of work contract given in section 2(44) as : ‘ Work contract means a contract for carrying out any work which includes assembling , construction, building, altering, manufacturing, processing, fabricating, installation, fitting out, improvement, repair or commissioning of any movable or immovable property.’
  • U/s 2(35) in the Definition of sale includes a transfer of property in goods(whether as goods or in some other form) involve in execution of work contract.
  • U/S 2(15) In the Definition of Goods includes materials, article and commodities used in any form in the execution of work contract.
  • Thus Works contract is a deemed sale which involves the transfer of property in goods and vat liability arise on execution of work contract to that extent.
  • The concept of taxation of goods transferred during the execution of works contract has been a matter of great litigation over the period. 
obligation on awarder
Obligation on awarder:

In Rajasthan VAT ACT, in addition to liability of vat on contractor, certain obligation also to fulfill by awarder in VAT rule 40. 

  • Submit particular of contract in Vat-40 within one month to Assessing authority of such awarder and also a copy to A.O. of contractor – in case work contract exceeding Rs 5 Lacs.
  • If awarder is Government Department, a corporation, a public undertaking, a co- operative society, a local body, a statutory body, an autonomous body, a trust or a private or public limited company - to deduct tax as specified .
  • Deposit such tax deducted within 15 day of close of month.
  • Issue certificate in Vat-41 for deduction of tax and deposit it.
  • Furnish monthly statement in vat- 42 for details of tax deducted and deposited for each contractor along with duplicate copy of Vat-41.
tds by awarder section 20 2 and notification no 2005 81dt 11 08 2006
TDS BY AWARDERsection 20(2) and notification no 2005-81dt 11-08-2006
  • TDS to be at the time of credit of any sum to the account of contractor or at the time of making payment such payment for carrying out any work.
  • The notified rate of TDS is 3% of such sum
  • If Contractor having exemption certificate vide notification u/s 8(3), an amount equal to rate of Exemption fees in E.C.
  • No threshold limit
  • No TDS if contractor exempted from payment of tax vide notification 05/36 dt 24-08-2007.
  • No TDS for contract related to Jaipur Metro Project and construction of house under Affordable Housing Policy-2009
  • In respect of Turnkey contract by State electricity companies-if supply goods against vat invoice and contractor submit proof of deposit of tax – the awarder shall reduce such tax paid in TDS.
  • In respect of other turnkey works contract having separate contract of supply of goods and sale by contractor from outside state- On application, the A.O. after satisfaction shall pass order not to deduct tax .
penalty on awarder
PENALTY ON AWARDER
  • Where any awarder of a works contract fails to deductthe amount in lieu of tax or after having deducted does not deposit the same in the prescribed manner and time he shall be liable to pay as penalty(Section 63)
    • -In case of Non-deduction - upto rupees 1,000
    • -In case of deduction but Non-deposition - 2 Percent per month of amount deducted but not deposited for the period during which default continues.
  • Where the awarder fails to submit monthly statements of tax deducted the penalty not exceeding Rs. 2000/- for each violation and for continuous violation Rs. 25/- per day is payable.(Other violation section 64)
determining the taxation of works contracts in the hands of contractor
Determining the taxation of works contracts in the hands of contractor
  • As per various provisions in Rajasthan VAT , there are 2 methods by which the Works Contractor can be assessed to tax.

1.Exemption Fees Method

2. VAT Method

exemption fees method
EXEMPTION FEES METHOD
  • In Works Contract taxation, the scheme of exemption fees is a mechanism provided for collection of works contract tax from the contractor in such a way that causes minimum inconvenience to the contractor assessees and also to the department collecting the tax in computing and assessing the taxable figures.
  • In RVAT Act, the relevant notification of exemption fees is F.12(63)FD/Tax-2005/80 dated 11.08.2006 . This notification has been amended from time to time
provision relating to exemption fees scheme
Provision relating to Exemption Fees scheme
  • Apply for exercising option in WT-I alongwith copy of work order received by contractor.
  • Application can be within 60 days from the date of work order.
  • In case of delay – AO may condone the delay after recording reason for doing so, on payment of late fee - First year Rs. 1,000/- - Second year Rs. 5,000/-
  • No application will be entertained after expiry of 2 years from the date of work order.
  • AO Shall issue EC in WT–3 on being satisfied as to the correctness of facts mentioned therein
  • Where excess payment made to contractor by the awarder for any additional work or value of contract is enhanced in relation to work contract for which EC has already been issued, the EC shall be revised.
  • The contractor is required to make payment of exemption fees as specified in exemption certificate.
  • If the awarder is not deducting TDS from the contractor, then contractor is required to pay such exemption fees in equal monthly installments during the period of the contract from the date of filing of the application
  • The contractor shall not be entitled to claim input tax credit in respect of the goods used in execution of works contract for which the exemption certificate has been granted
status of sub contractor in exemption certificate
Status of Sub-Contractor in exemption certificate

As per rule 22(2A) of Rajasthan VAT Rules, 2006, if the main contractor has opted for exemption fees under notification issued u/s 8(3), then the sub contractor who is performing the work of main contractor need not again opt for this scheme as the turnover of such contract will not be included in the taxable turnover of the sub contractor.

vat method
VAT METHOD
  • If the contractor does not opt for the exemption fees option as stated above, he will have to go for the VAT method for determination of his tax liability.
  • The main drawback of the exemption fees scheme is that the contractor has to forego all the input tax credit available on goods purchased by him for execution of the works contract. If contractor does not want to forego the input tax credit, then he will need to get himself assessed under VAT regime.
  • In VAT method, the taxable turnover of the contractor is calculated by deducting the value of labour and services involved in execution of works contract as provided in section 22(2) and on the balance amount VAT is levied.
  • From this VAT liability , the contractor can claim the input tax credit of goods purchased by him and pay the balance liability in cash.
method specified by gannon dunkerley company s case by sc
Method specified by Gannon Dunkerley & Company ‘s case by SC
  • The principles of calculation of value of taxable turnover of a works contract have been laid down by Supreme Court in Gannon Dunkerley and Company Vs State of Rajasthan (1993) 88STC204.
  • In this method, the following deductions are made from the gross value of the works contracts performed by the contractor:

i)  Labour Charges for execution of Works

ii)  Amount paid to sub contractor for labour and services.

iii)  Charges paid for obtaining on hire the equipment or machinery used for execution of works contract.

Iv) Charges for planning and designing and architect’s fees.

v)  Cost of consumables used in execution of works contract.

vi)  Cost of establishment of the contractor to the extent it is relatable to supply of labour and services.

vii)  Other similar expenses relating to supply of labour and services.

viii)  Profits earned by contractor to the extent it relates to supply of labour and services.

  • Thus after deducting the above items, the remaining figure will be the taxable turnover of the contractor
cases where proper books of accounts are not kept by contractor
Cases Where Proper Books of Accounts are not kept by Contractor

In the cases where the contractor does not maintain proper books of accounts or the books of accounts produced by him cannot be said to be reliable In Rajasthan VAT Rules, Explanation to Rule 22(2) deals with such situation the deduction towards labour charges shall be allowed by the assessing authority according to the various limits laid down in the table appended thereto.

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Limit of labour charges

explanation to Rule 22(2)

returns to be submitted by contractor
Returns to be submitted by Contractor
  • Contractors who have taken exemption certificates for all the contracts performed by them during the year are required to submit only Annual Return to the department in form VAT-11.
  • Contractors who have not taken exemption certificates or taken exemption certificates for some work orders then they are required to submit quarterly VAT Returns in form VAT-10 and Annual VAT return in form VAT-10A.
extract from various judgments on work contract
Extract from various Judgments on work contract
  • Work related to NREGA where labour paid separately under scheme does not fall under work contract. No EC issued.RTB- Laxmilal Sharma Vs CTO(2013)
  • Fabrication of ‘Automobile Bus Bodies’ – As per the terms and conditions of agreement – Held – Is Contract of Sale – And not Works Contract. No EC allowed.

RTB- M/s Mahindra Coach Factory Pvt. Ltd., Vs. Commercial Taxes Officer, Special Circle – III, Jaipur

  • There was two separate contract with RRVPNL for erection and supply of equipments on same date, Hon Court held it consolidated one for work contract value. The supply of goods are treated integral part of erection and commissioning.

Raj High Court-ThIndurePvt Ltd Vs State of Rajasthan.Raj High Court -CTO Vs Brij Construction and Engineers-supply of bitumin from Gujarat in WC under EC.

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Thanks

CA ShambhuLal Gupta

M.Com, FCA, DISA(ISA)

Mob No. 9829092375

Email: guptasl@hotmail.com