ST & VAT-WC & Cont. Contracts-PS-27.06.15

Analysis of “Service Tax & VAT” inWorks Contract, Construction and EPC

Contract

Presented by:Ca. Payal (Prerana) Shah

Organised by:Women Members Empowerment Committee jointly with IDT

Committee of ICAI

Training Programme on Service Tax

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Discussion Bullets

• Meaning of Works Contract & History

• Basics under Service tax and Maharashtra VAT

• Inter-state Works Contract

• Valuation

• WCT TDS under MVAT

• Reverse Charge under Service tax

• Service tax Exemptions6/27/2015

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MEANING OF WORKS CONTRACT & HISTORY

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What is Works Contract?

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Commercial activities

Sale of Goods

Provision of services

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• Contract of Work– Basically a Labour Contract

– Popularly considered as a contract of material as well as services

– Most Works Contract invariably involve goods element• Eg.: Construction; stitching etc.

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Gannon Dunkerly’s case (SC) 1958 (9 STC 353)

• “Sale” in Entry 54 is Sales as per Sale of Goods Act, 1930– Taxes on the sale or purchase of goods other than newspapers, subject

to the provisions of entry 92A of List I

• Sec 4(1) of SOGA– Seller Transfers or Agrees to Transfer– Property in Goods– To the Buyer– For a Price

• Interpretation of Court– Agreement required– For sale of very goods– In which eventually– The property passes

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Gannon Dunkerly’s case (SC) 1958 (9 STC 353)

• In Construction Contracts– There is an agreement– Contractor should construct the building– Receive payment– Neither a contract to sell the materials, nor does the property pass

therein as moveable

• In Present Case– Building Contract is

• One, entire and indivisible– There is no Sales of goods– State Legislature not competent to levy sales tax– To levy tax on indivisible works contracts

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Law Commission

• Centre has the power to tax under Entry 97

• 3 Alternatives Suggested– Amend Entry 54 in the State List

– Adding a fresh entry in the State List

– Insert in article 366 a wide meaning of “Sale”

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46TH Constitutional Amendment

• Nullified Gannon Dunkerley’s case

• Indivisible contract can be divisible into two– Sale of goods– Supply of labour and services

• 46th Constitutional Amendment – 366(29A) : Deemed Sales

• 2nd February, 1983

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• Article 366 in The Constitution Of India 1949• Definitions.—In this Constitution, unless the context otherwise requires, the

following expressions have the meanings hereby respectively assigned to them

• …• (12) “goods” includes all materials, commodities, and articles…• (29A) tax on the sale or purchase of goods includes• (a) a tax on the transfer, otherwise than in pursuance of a contact, of property

in any goods for cash, deferred payment or other valuable consideration;• (b) a tax on the transfer of property in goods (whether as goods or in some

other form) involved in the execution of a works contract;• (c) a tax on the delivery of goods on hire purchase or any system of payment

by instalments;• (d) a tax on the transfer of the right to use any goods for any purpose

(whether or not for a specified period) for cash, deferred payment or other valuable consideration;

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http://indiankanoon.org/doc/1594041/






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• Article 366 in The Constitution Of India 1949• Definitions.—In this Constitution, unless the context otherwise requires, the

following expressions have the meanings hereby respectively assigned to them

• …• (e) a tax on the supply of goods by any unincorporated association or body of

persons to a member thereof for cash, deferred payment or other valuable consideration;

• (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,

• and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;

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• Basic tenets

– Only in case of indivisible contract

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Concepts Meaning Examples

Accretion Movables getting embedded to immovable goods

Tiling of floor, walls

Accession Movable goods getting attached to movable goods

Stitching of clothes

Blending Movable goods getting mixed with goods of Contractee

Dyeing or printing

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L & T decision (SC) dated 26th September, 2013

• For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract– there must be a works contract– the goods should have been involved in the execution of a works

contract– the property in those goods must be transferred to a third party

either as goods or in some other form

• Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract.

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• The term “works contract” in Article 366 (29- A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone

• Building contracts are species of the works contract.• The dominant nature test has no application and the

traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A).

• It is open to the States to levy sales tax on the materials used in such contract

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• Deemed sale has all the incidents of the sale of goods involved in the execution of a works contract

• Single and indivisible contract has been brought on par with a contract containing two separate agreements

• Article 366(29-A)(b) serves to bring transactions where essential ingredients of ‘sale’ defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax

• Tax is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property

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• The activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser

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Kone Elevators (SC) dated 6th May, 2014

• Manufacturing, supply and installation of lift– Sales or Works Contract

• Majority View– Dominant nature test not applicable– Composite Contract (labour and service element is obvious)

• Purchase• Installation

– Requires considerable Skills

– Place Order• Lifts• Preparatory Work

– How the lift is working

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• Nature of Contract– Supply of goods– Installation

• Labour and service is involved

• Transfer– Either in goods or some other form

• If there are two contracts– Purchase of components of lift

• Sale– Installation

• Labour and service

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• If composite contract– Works Contract

• Supply and installation– Not sale of goods

• Chattel not sold as chattel• Chattel is being attached to another chattel

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• Minority View• Unless a contract is

– proved to be a ‘Works contract’ – by virtue of the terms agreed as between the parties, – invocation of Article 366(29A)(b) of the Constitution, cannot be made

• If terms of contract– Disclose or lead to– Definite conclusion– That it is not a works contract– But one of outright sale– The same would be declared as ‘Sales’

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• Bleaching process done on clothes – Is it a Works Contract?– Matushree Textiles 2003 132 STC 539 (Bom.)

• We hold that the property of the materials such as chemicals, colours and dyes used in the process of dyeing and printing are passed on to the fabrics of the customer and, such passing of property of the materials is a deemed sale and tax is leviable on such materials under the Works Contracts Act

• Maharashtra Mudran Parishad 2005 139 STC 193 (Bom.)– It goes without saying that in each case the nature of the contract and

transaction has to be seen. This is possible only when the intention of the parties that too dominant intention is found out. The fact that in the execution of the contract for work some materials are used, and the property/goods so used, passes to the other party, the contractor undertaking to do the work will not necessarily be deemed, on that account, to sell the materials. Whether or not and which part of the job-work relates to that depends as mentioned hereinbefore, on the nature of the transaction and what is the dominant intention has to be found in each case in the light of its own facts.

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• Doctor giving medicine to patient – Is it a Works Contract?– Dr. Batra’s Positive Health Clinic Pvt. Ltd. 2013 TIOL 01 (Tri.-Bang.)

• Karnataka VAT – Dispensing of medicines by doctors not sale; no tax: the transactions effected by the appellant so far as dispensation of medicine is not a transaction of sale: As held in BSNL case, the dominant nature being rendering of medical services, the transaction cannot be split into service and goods components. The transactions in question does not fit under any of the subclauses of Article 366 (29A). By applying the dominant nature test as well as the transaction nature it is decided that the dispensing of medicine by the doctors during the course of integrated package treatment cannot be considered as sale for the purpose of the Act

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Works contract

• Divisible and non-divisible works contract:

– Features

– implications

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DEFINITIONS

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Definitions - MVAT

• Explanation to Section 2 (24) – “Sale”• (b)(ii) –

– the transfer of property in goods– (whether as goods or in some other form) – involved in the execution of a works contract – including,

• an agreement for carrying out for cash, • deferred payment or • other valuable consideration, • the building, construction, manufacture, processing, fabrication, erection,

installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property

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Analysis of the definition - MVAT

• Transfer in property in goods• 2(24) of the MVAT ACT, 2002

• "goods" means every kind of movable property – not being

• newspapers, • actionable claims, • money, stocks, • shares, • securities or • lotteries and

– includes growing crop, grass and tree and plants including the produce thereof

– including property in such goods attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale

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Analysis of the definition - MVAT

• Transfer of property in Goods• Involved in a execution of a works contract• Including

– An agreement for carrying out for consideration– Building erection– Construction installation– Manufacture fitting out– Processing improvement– Fabrication Commissioning – repair modificationOf any movable or immovable property

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Service tax

• K. Raheja’s case- implications

• VAT and Service tax

• Provisions of Service tax law– 2 options


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Definitions - Service tax before 1.7.2012

• Commercial or industrial construction services – Section 65 (105) (zzq)

• Construction of residential complexes – Section 65 (105) (zzzh)

• Works Contract – Section 65 (105) (zzzza)

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Definitions – Service Tax post 1.7.2012

• Section 65B (44):– “Service” means

• any activity • carried out by a person • for another• for consideration

And includes:– A declared serviceBut shall not include:– Transfer of title in goods/immovable property– Deemed sales within the meaning of Article 366 (29A) of the

Constitution– Transaction in money/actionable claim– Employment– Court/ tribunal


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Definitions – Service Tax post 1.7.2012

• 66E (h) – “service portion in execution of works contract”

• 65B(54)• “works contract” means

– a contract wherein transfer of property in goods involved – in the execution of such contract is leviable to tax as sale of goods and – such contract is for the purpose of carrying out

• construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

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Declared Service

Section 66E(b):• construction of a complex, building, civil structure or a part

thereof• including a complex or building intended for sale to a buyer,

wholly or partly• except where the entire consideration is received after

issuance of completion-certificate by the competent authority

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Definitions – Service tax

“competent authority" means • the Government or any authority authorised to issue completion

certificate under any law for the time being in force • and in case of non requirement of such certificate from such

authority, from any of the following, namely:––– architect registered with the Council of Architecture constituted under

the Architects Act, 1972 or– chartered engineer registered with the Institution of Engineers (India); or– licensed surveyor of the respective local body of the city or town or

village or development or planning authority;

• "construction" includes additions, alterations, replacements or remodelling of any existing civil structure

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Interstate Works Contract

• CST Act amended w.e.f. 11.05.2002• Inter state CST came into effect• CST- elevance of movement of goods• No notional abatement• No composition• Tax on material value• Examples of Inter State Works Contract

– Civil contractor of Mumbai supplies goods to site in Surat for building construction

– Textile manufacturer of Dadra sends goods to Vapi for dyeing and gets it back

– C form possible

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VALUATION

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Valuation - MVAT

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Payment of MVAT

Actual deduction Method

Notional deduction Method

Composition Method

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Actual Deduction Method

Rule 58 (1)• Entire Value of Works Contract

Less:- • Labour & Service charges for the execution of works• Amounts paid by way of price for sub-contract, if any to sub- contractors;• Charges for planning, designing, & architect`s fees• Charges for obtaining on hire or otherwise, machinery & tools for the execution of the

works contract• Cost of consumables such as water, electricity, fuel used in the execution of the contract,

the property in which is not transferred in the course of execution of the works contract• Cost of establishment of the contractor to the extent to which it is relatable to supply of

the said labour & services• other similar expenses relatable to the said supply of labour & services, where the

labour and services are subsequent to the said transfer of property• Profit earned by the contractor to the extent it is relatable to the supply of labour &

services.

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Actual Deduction Method

• If Contractor has not maintained accounts– Cannot enable proper deduction

Or• Commissioner

– Accounts maintained by contractor– Are not sufficiently clear or intelligible

• Provide Lump Sum Deduction

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Notional Deduction Method….Sr. No. Types of works contract Abatement allowed %

1 Installation of plant and machinery 15%

2 Installation of air conditioners and air coolers 10%

3 Installation of elevators/escalators 15%

4 Fixing of marble slabs/granite/tiles 25%

5 Construction of building, bridges, roads, etc. 30%

6 Construction of railway coaches 30%

7 Ship and boat building 20%

8 Fixing of sanitary fittings 15%

9 Painting and polishing 20%

10 Construction of bodies of motor vehicles 20%

11 Laying of pipes 20%

12 Tyre retreading 40%

13 Dyeing and Printing of Textiles 40%

14 AMC 40%

15 Any other Works Contract 25%

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Notional Deduction Method

• Note:• Percentage to be applied

– After Deducting from the Total Contract Price• Cost of Land as determined u/r 58(1A)• Quantum of price on which tax is paid by the sub-contractor• Quantum of tax separately charged by the contractor

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Rule 58(1A)

• Construction Contracts– Along with immovable property– Interest in Land– Property in goods also transferred

• Value of goods at the time of transfer• Shall be calculated• After deduction of cost of land• From the total agreement value

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Rule 58(1A)

• Cost of Land– Bombay Stamp Rules (Determination of True Market Value of

Property), 1995– As applicable on 1st January– In which agreement to sell the property is registered

• After payment of tax as determined– Open to the dealer to prove before Dept. of Town Planning and

Valuation– Cost of land is higher as determined– Excess tax paid

• Refunded

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Rule 58(1B)

• Construction Contracts– Along with immovable property– Interest in Land– Property in goods also transferred

• After deduction under– Sub-rule (1)– Sub-rule (1A)

• From Total Contract Price• Value of goods involved in the works contract• Determined after applying the percentage

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Rule 58(1B)

Sr. No. Stage during which the developer enters into a contract with the purchaser

Amount to be determined as value of goods involved in Works Contract

(a) Before issuance of Commencement Certificate 100%

(b) From the Commencement Certificate to the completion of plinth level

95%

(c) After the completion of plinth level to the completion of 100% of RCC framework

85%

(d) After completion of 100% RCC framework to the Occupancy Certificate

55%

(e) After the Occupancy Certificate NIL

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Rule 58(1B)

• For determining value of goods as per Table• Necessary for dealer to furnish• Certificate

– Local or Planning Authority– Certifying date of completion of stages

• If such authority does not have such procedure– Certificate from registered RCC Consultant

• If dealer fails to establish– Entire value of goods after deduction under sub-rule (1) and (1A) – Taxable

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Composition Method

• Section 42 (3)– 5% - construction contract– 8% - other works contract– Reduction in set off – Rule 53

• After deduction of value sub contracted

• 1% in case of – Construction of flats, dwellings, buildings, premises– Transferred in persuasion of an agreement– Along with the land or interest underlying the land

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Selection of the best option

Relevant factors

• Component mix– Labour vs. Material– 5% vs 12.5%

• Composition rate

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Valuation – Service Tax

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Payment of Service Tax

WC-Actual deduction Method

WC-Notional deduction Method

Construction - Abatement

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Rule 2A of Service Tax (Determination of Value) Rules, 2006Valuation of Works Contract

OPTION-I• Service Portion = GAC (-) Value of property in goods transferred• Gross Amount Charged does not include – Sales Tax paid or payable• Include

– 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– charges for obtaining on hire or otherwise, machinery and tools used for the

execution of the works contract– cost of consumables such as water, electricity, fuel used in the execution of

the works contract– cost of establishment of the contractor relatable to supply of labour and

services– other similar expenses relatable to supply of labour and services– profit earned by the service provider relatable to supply of labour and services

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• Where Sales tax is paid or payable– On value of property in goods transferred

• Such value adopted for purposes for payment of Sales Tax• Shall be taken a value of property in goods transferred

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• OPTION-II– Standard Percentage– No Cenvat on Inputs

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Types of Works Contact % of the total amount charged

Original works 40%Other Works Contract including Maintenance or repair or reconditioning or restoration or servicing of any goods or maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property

70%

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Explanation 1. - For the purposes of this rule,- (a) “original works” means- (i) all new constructions; (ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable; (iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise; (b) “total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting- (i) the amount charged for such goods or services, if any; and (ii) the value added tax or sales tax, if any, levied thereon :Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles

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2 different methods under 2 statues

VAT Service TaxActual Deduction Method • Actual Deduction Method only

• Other method not permissible Notional Deduction Method • Notional Deduction Method only

• Other method not permissible Composition Scheme • Actual Deduction Method or

Notional Deduction Method

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Abatements

Sl. No. Description of taxable service Percent- age

Conditions

12. Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,-(a) for a residential unit satisfying both the following conditions, namely:–(i) the carpet area of the unit is less than 2000 square feet; and(ii) the amount charged for the unit is less than rupees one crore;(b) for other than the (a) above

25

30

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004;(ii) The value of land is included in the amount charged from the service Receiver

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WCT TDS

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TDS

Income tax192, 194, 194C, etc.

Works contractSection 31,

Rule 40

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WCT TDS

• Person responsible for payment exceeding Rupees 5 lakhs (per contractor) for works contract is responsible for deduction of tax at prescribed rates

• TDS Rate : 2% in case of registered contractor and 5% in case of un registered contractors

• No TDS on service tax and sales tax separately charged by the contractor• TDS should not exceed tax payable by such contractor• No WCT TDS on interstate transactions• In relation to advance payments, the TDS will apply when the advance

payment is adjusted towards the actual amount payable to the contractor• TDS payment-challan 210,with in 21 days from the end of the month in

which TDS is deducted, Annual TDS return in form no. 405,TDS certificate to be issued in form no.402

• Record in form no. 404

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Reverse Charge- Service tax

Nature of Service Provider Recipient Comments

Works contract 50% 50% Method of valuation can be chosen by the Service recipient

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EXEMPTION UNDER SERVICE TAX

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Service tax Exemptions

Exemptions (25/12)Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of -

– A civil structure meant predominantly for a non-industrial or non-commercial use; – historical monument, archaeological site, etc– a structure meant predominantly for use as

• an educational• a clinical• an art or cultural establishment

– Canal, dam or other irrigation works– Pipeline, conduit or plant for

• drinking water supply • water treatment • sewerage treatment or disposal;

– a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Finance Act; (members of Parliament etc.)

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…Exemptions…• Services provided by way of construction, erection,

commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:– road, bridge, tunnel, or terminal for road transportation

• for use by general public– building owned by an entity registered under section 12 AA

• and meant predominantly for religious use by general public; – pollution control or effluent treatment plant

• except located as a part of a factory – electric crematorium

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…Exemptions• Services by way of construction, erection, commissioning, or

installation of original works pertaining to,-– airport, port or railways, including monorail or metro– single residential unit otherwise as a part of a residential complex; – low- cost houses up to a carpet area of 60 square metres per– post- harvest storage infrastructure for agricultural produce including

a cold storages for such purposes; or – mechanised food grain handling system, machinery or equipment for

units processing agricultural produce as food stuff excluding alcoholic beverages

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Ca. Payal ShahAssociate at

2/22 Nityanand Nagar, Sahar Road, Andheri (East),Mumbai-400 069.

[email protected]

Right advice at right time…


mailto:[email protected]

ST & VAT-WC & Cont. Contracts-PS-27.06.15

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Transcript of ST & VAT-WC & Cont. Contracts-PS-27.06.15