Works Contract- VAT Obligations & VAT on Builders In Rajasthan

What is Works Contract?

Definition in accordance to Section 2(44) of TRVAT Act, 2003 –

‘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.

It can also be understood as that some contracts are for contracts for labour, work or service and not merely for sale of goods, though goods/materials are used in executing the contract for labour, work or service e.g. when a contractor constructs a building, the buyer pays for cost of building which includes cost of building material, labour and other services offered by the Contractor. Property in building is passed on to buyer and there is no contract for supply of building material as such. Basically when a contractor enters into a composite order which includes MATERIAL + LABOUR + OTHER EXPENSES, the order can be said to be a work order for the contract awarded to the contractor.

VAT on transfer of property in goods in the case of Works Contract

For taxability under TRVAT Act, 2003 for the Works Contractor, there can be three situations described as below:-

A. Books of Accounts are maintained by the Contractor

B. Books of Accounts are not maintained by the Contractor

C. Opt for the Exemption Scheme and pay the Exemption Fees

A. If Books of Accounts are maintained by the Contractor

Rule 22A in The Rajasthan Value Added Tax Rules, 2006 has been inserted with this budget namely “Determination of taxable turnover in case of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract” wherein certain amounts are to be deducted from the Gross Value of the contract for levy of VAT, which are as follows:-

a)      on which no tax is leviable under the Act ; (i.e. Exempted Goods used in contract)

b)      which has been exempted from tax; (i.e. Exempted Goods used in contract)

c)      labour and service charges for the execution of the works;

d)      charges for planning, designing and architect’s fees;

e)      charges for obtaining on hire or otherwise, machinery and tools for the execution of the works contract;

f)       cost of consumables such as water, electricity, fuel used in the execution of works contract, where the property is not transferred in the course of execution of the works contract;

g)      cost of establishment of the contractor to the extent to which it is relatable to the supply of the said labour and services;

h)      other similar expenses relatable to the said supply of labour and services, where the labour and services are subsequent to the said transfer of property; and

i)        profit earned by the contractor to the extent it is relatable to the supply of labour and services.

Ex: If a contract for say Rs.1000/- has been awarded, wherein the contractor is having its records of all the expenditures in lieu of the said contract and having its recorded books of accounts, further, as per accounts say Rs. 650/- has been expended for the materials and Rs. 250/- has been expended for any or all of the above mentioned expenses from (a) to (i) and Rs. 90/- is the profit in the overall contract. Further, let’s take that Rs.55/- is the profit on materials and Rs. 35/- is the profit on labour and services as mentioned in from (a) to (i) and Rs.10/- is the cost of transportation (i.e. freight). The VAT shall be levied on the amount of Rs. 715/- (650+55+10).

( On the concept of Landed Cost, as very well described in the case of GANNON DUNKERLEY & Co. V. STATE OF RAJASTHAN by the Hon`ble Supreme Court of India [88 STC 204]).

VAT Input

VAT Input on the local VAT purchases made from within the Rajasthan shall be allowed for set-off as against the VAT output liabilities.

B. If Books of Accounts are NOT maintained by the Contractor

In the cases where the contractor assessee is unable to maintain proper records of the expenditures as mentioned in para A or in case assessing officer is not satisfied with the amount of expenses so claimed by the contractor, the deductions shall be allowed in accordance to the limits as prescribed in the table, which is reproduced below:-

S.No	Type of contract	Labour charges as a percentage of gross value of contract
1	2	3
1	Fabrication and installation of plant and machinery.	25
2	Fabrication and erection of structural works of iron and steel including fabrication, supply and erection of iron trusses, purlins and the like.	15
3	Fabrication and installation of cranes and hoists.	15
4	Fabrication and installation of rolling shutters   and Collapsible gates.	15
5	Civil works like construction of buildings, bridges, roads, dams, barrages, canals and diversions.	30
6	Installation of doors, door frames, windows, frames and grills.	20
7	Supply and fixing of tiles, slabs, stones and sheets.	25
8	Supply and installation of air conditioners and air coolers.	15
9	Supply and installation of air conditioning equipments including deep freezers, cold storage plants, humidification plants and dehumidors.	15
10	Supply and fitting of electrical goods, supply and installation of electrical equipments including transformers.	15
11	Supply and fixing of furniture and fixtures, partitions including contracts for interior decorators and false ceiling.	20
12	Sanitary fitting for plumbing and drainage or sewerage.	20
13	Laying underground or surface pipelines, cables or conduits.	30
14	Supply and erection of weighing machines and weigh-bridges.	15
15	Painting, polishing and white washing.	25
16	All other contracts not specified from serial number 1 to 15 above.	25

 Ex.: For the sake of brevity taking the above example again, say if the contract has been awarded for supply and installation of air conditioners and air coolers, deduction shall be allowed for 15% i.e. Out of Rs. 1000/- , Rs. 150/- shall be allowed as deduction and VAT shall be levied on Rs.850/-.

VAT Input

VAT Input on the local VAT purchases made from within the Rajasthan shall be allowed for set-off as against the VAT output liabilities.

C. Opt for the Exemption Scheme and pay the Exemption Fees (commonly known as WCT)

(Notification No.F.12(59)FD/Tax/2014-23 dated 14.07.2014

Herein, under the Exemption Scheme, if the contractor cannot maintain books of accounts and records of any expenditure in lieu of the works contract, he can opt for the Exemption Scheme in accordance to the notification, wherein the contractor shall be liable for the Exemption fees at the rate as specified in column no.3 of the table reproduced below. Under this scheme, the contractor may not be bound to produce the books of accounts to the assessing officer and shall be liable for the exemption fees.

Item No.	Category of works contract	Rate of exemption fee(% of the total valueof the contract)
1	2	3
1	Works contract where the cost of goods involved in execution of works contract does not exceed five percent of the total contract amount.	0.10
2	Works contract relating to EPC Turnkey power projects awarded by Rajasthan Rajya Vidyut Utpadan Nigam Limited.	1.00
3	Works contract relating to construction and repair of roads, runways, bridges, dams, drains excluding sewerage system, tunnels, canals, channels, barrages, railway tracks, causeways, sub ways, diversion, spill ways, boundary walls, buildings and water harvesting system.	0.75
4	Works contract related to setting up of new enterprise or expansion of existing enterprise manufacturing fertilizer within the State with minimum investment of Rs.2500 Crore.	1.00
5	Any other kind of works contract not covered by item no. 1 to 4 above.	2.00

 VAT Input

VAT Input on the local VAT purchases shall NOT be allowed for set-off.

Procedure to opt for Exemption Scheme

♠ With Digital Signatures

• Application in Form WT-1 shall be submitted on the portal of Commercial Taxes Department, within 60 days from the date of the work order, which shall be digitally signed by the dealer or his authorized person.
• Self-attested and scanned copy of the Work Order and G-schedule shall be scanned and attached with the application.
• If cost of material is less than or equal to 5% of the total value of contract, a self-attested certificate from the awarder shall also be scanned and attached with the application.

♠ Without Digital Signatures

• Application in Form WT-1 shall be submitted on-line and all the documents as stated above shall be submitted to the department within 10 days of filing the application along with duly signed acknowledgement generated from the website.

♠ Issuance of Exemption certificate

• The assessing officer has to issue the Exemption Certificate within 21 days from the date of application or submission of the documents.

♠ Delayed Submission

• After expiry of 60 days, application shall be filed alongwith the application for condonation of delay in Form WT-3 alongwith the late fees.
• Late fees of Rs.1000/- upto One year and Rs.5000/- upto 2 years. After 2 years application shall not be allowed.

♠  Conditions to be followed under Exemption Certificate

1. Dealer opting for the exemption certificate shall purchase the goods from Registered Dealer of the state
2. If such dealer purchases the goods from other than the Registered Dealer of the State, such dealer has to pay the VAT on such goods at the rate, assuming if the goods have been purchased from within the state.
   

⇒ VAT on SALE OF FLATS, DWELLINGS ,BUILDINGS or other PREMISES

Till 14^th July,2014, VAT was not applicable to the builders and developers, however by inserting Rule 22A in The Rajasthan Value Added Tax Rules,2006, this has been introduced and VAT shall be applicable on the sale of flats, dwelling, building or any other premises (herein after referred as `a unit`), if sold during construction. However, for all the receipts made before 31^st March,2014 VAT shall not be levied. Also, as the notifications are applicable from 14.07.2014, so, in our opinion, VAT on sale of flats, dwellings, buildings or other premises shall be applicable from 14.07.2014 onwards.

By adding, the entry no. 68 to the Schedule-II of the act read with sub-rule 4 of Rule 22 of TRVAT Rules, 2006, the method to determine the Sales Price for the purpose of VAT has been mentioned. The method has been defined in the rules in correlation with the stage where the agreement between the seller and the buyer has been entered into.

In our opinion, the Buyer has been considered as an Awarder and the Builder has been considered as Contractor for levy of tax under current notifications, wherein if during the construction the unit is sold by the builder, then after the unit is being sold, Builder is acting as a contractor for the buyer i.e. the awarder.

For the purpose of calculation of sales price, deductions in respect of expenses as mentioned in Para A of this article on first page and deductions in lieu of cost of land shall be allowed from the Total Agreement Value and then the sales price shall be calculated as per the table mentioned below. Calculation of sales price is linked with the stage at which the agreement has been made between the builder and the buyer for sale of flat.

S. No.	Stage at which the developer enters into a contract with the purchaser	Amount to be determined as value of agreement
1	2	3
1	Up to completion of plinth level	95%
2	From plinth level to completion of 100% RCC framework.	85%
3	From completion   of RCC framework   to Occupancy Certificate	55%
4	From   Occupancy     certificate   till   the completion of construction.	Nil

Ex. with hypothetical figures:-Say a Flat of which Total Agreement Value is Rs.10,00,000/-, is sold on the completion of the plinth level by the builder to a buyer. So in such case the sales price in accordance to the Rule22A of TRVAT Rules, 2006 shall be:

			(Rs.)
	Total Agreement Value	(A)	10,00,000/-
Less:	Cost of Land as per rule 58 of Rajasthan Stamp Rules,2004	(B)	1,00,000/-
Less:	Deductions in respect of Rule 22A (1), i.e. as mentioned in Para A of this article on first page	(C)	2,50,000/-
	Value to be applied to table above	(A)-(B)-(C)	6,50,000/-
	Sales Price as per table mentioned above i.e. 95%		6,17,500/-

 Further, say if the books of accounts are maintained by the dealer and if the material wise figures (inclusive of profit) are available i.e. say:

(Rs.)

Cost of Cement		Rs. 2,45,000/-
Cost of Steel		Rs. 1,63,000/-
Cost of furniture etc.		Rs. 1,40,000/-
Cost of other items, i.e. bricks etc.		Rs.   69,500/-
Total		Rs.6,17,500/-

 Calculation of VAT, under Deemed sales concept:-

 (Rs.)

Items	VAT Rates	Sales Price as above	VAT Output	VAT Input*	Net VAT Payable
Cement	14%	2,45,000/-	34,300/-	31,760/-	2,540/-
Steel	5%	1,63,000/-	8,150/-	7,550/-	600/-
Furniture etc.	14%	1,40,000/-	19,600/-	18,150/-	1,450/-
Bricks, etc.	0	69,500/-	0	0	0
Total		6,17,500/-	62,050/-	57,460/-	4,590/-

*Assuming the sales price is inclusive of GP @ 8%, so grossing up the figures to derive the purchase figures and then the applying the respective VAT rates.

So VAT on all the above items shall be taken assuming it as the deemed sales to the buyer at the respective VAT rates applicable on the items.

VAT Input

VAT Input shall be allowed in considering the VAT liabilities in the above mentioned method.

⇒ Lumpsum amount in lieu of Tax for SALE OF FLATS, DWELLINGS ,BUILDINGS or other PREMISES

Government has also inserted the Rule 17A i.e. “Option to pay lumpsum in lieu of tax“, wherein the builders can opt to avoid all the above stated calculations and opt to pay the tax in lumpsum in accordance to the point no.6 of the notification no. F.12(59)/FD/Tax/2014-18 dated 14.07.2014, which states to pay the tax of Rs. 1,300/- for every Rs. 2 Lacs or part thereof, of the consideration received during the year.

Conditions

1. The dealer shall purchase the goods ONLY from the registered dealer within the state.
2. The dealer shall not be entitled to claim VAT Input on such goods purchased.
3. The dealer shall not charge or collect such lumpsum tax from the purchaser of the goods.
4. If the dealer purchases such goods from outside the state, then he should pay such VAT to the Government assuming, had such goods being purchased from with in the state.
5. Any contractor working for such builders, wherein the builders has opted for lumpsum amount in lieu of tax, then to contractor shall not be liable for the VAT. Provided the contractor shall also comply with condition no. 1 & 4 above.
   

Procedures to opt for payment of lump sum amount in lieu of tax

1. Submit the application in Form VAT-69 through website of Commercial Taxes Department, within 30 days of issuance of registration certificate of within 30 days of issuance of the notification i.e. from 14.07.2014.

2. Within 7 days of the application, the permission for the payment of tax in lumpsum shall be allowed in Form VAT-70.

3. To opt out of the lumpsum payment, Form VAT -71 shall be filed on the website.

Disclaimer: The entire above stated article is squarely based on our opinion, derived from the interpretation of the respective amendments in rules and other notifications. The observations are the personal view and the authors do not take responsibility of the same and this cannot be quoted before any authority.

(Author ‘Hemant Kumar Gupta, ACA,LL.B.‘ is a Chartered Accountant based at Jaipur)