If you want to choose lump sum scheme for payment of tax in works contracts without maintaining any books of accounts under Punjab VAT Act, 2005, you should think twice before choosing it.
Proviso to section 8(2-A) of Punjab VAT Act and Rule 15(6) of Punjab VAT Rules deals with the lump sum payment of tax under Punjab VAT in works contracts.
As per proviso to section 8(2-A) where the accounts are not maintained to determine the correct value of goods at the time of incorporation in the works contract then tax at the rate of twelve and half per cent on the total consideration received or receivable is payable subject to such deductions as may be prescribed.
Thus tax @ 12.5% will be payable on the total consideration received or receivable under works contract after making deductions prescribed under Rule 15(6) of Punjab VAT Rules relating to labour and service charges involved in the works contract.
Rule 15(6) runs as under:
Where the contractor has not maintained the accounts to determine the correct value of the goods at the time of incorporation or deductions being claimed under sub-rule 4 are considered to be unreasonably high in view of the nature of contract, he shall pay tax at the rate of twelve and a half percent on the total consideration received or receivable, subject to the deductions specified in the table below. In such cases the contractor shall not be eligible to claim input tax credit and shall not be eligible to issue VAT Invoice:-
|Serial. No.||Type of contract||Percentage of the total value eligible for deduction|
|1||(a) Electrical Contracts:-|
|(i) H.T Transmission lines;||Twenty percent|
|(ii) Sub-station equipment;||Fifteen percent|
|(iii) Power house equipment and extensions;||Fifteen percent|
|(iv) 11 and 22 KV and L.T distribution lines 12+5; and||Seventeen percent|
|(v) All other electrical contracts.||Twenty five percent|
|(b) All structural contracts||Thirty five percent|
|2||Installation of plant and machinery.||Fifteen percent|
|3||Fixing of marble stabs, polished granite stones and tiles (other than mosaic tiles.)||Twenty five percent|
|4||Civil works like construction of buildings, bridges, roads etc.||Thirty percent|
|5||Fixing of sanitary fittings for plumbing, drainage and the like.||Fifteen percent|
|6||Fabrication and erection of structural works of iron and steel including fabrication, supply and erection of Iron trusses, purfins and the like.||Fifteen percent|
|7||Fabrication and installation of cranes and hoists.||Fifteen percent|
|8||Fabrication and installation of elevators (lifts) and escalators||Fifteen percent|
|9||Fabrication and installation of rolling shutters and collapsible gates||Fifteen percent|
|10||Installation of doors, door frames, window frames and grills.||Twenty percent|
|11||Supply and installation of air conditioners and air coolers||Fifteen percent|
|12||Supply and installation of air conditioning equipments including deep freezers, cold storage plants, humidification plants and dehumidres.||Fifteen percent|
|13||Supply and fixing of furniture and fixtures, partitions including contracts for interior decorators and false ceiling.||Twenty percent|
|14||Construction of Railway coaches and wagons on under carriages supplied by Railways.||Thirty percent|
|15||Construction of mounting of bodies of motor vehicles and construction of trailers.||Twenty percent|
|16||Supply and erection of weighing machines and weigh bridges.||Fifteen percent|
|17||Painting, Polishing and White Washing.||Twenty five percent|
|18||Laying of pipes.||Twenty percent|
|19||Tyre retreading||Forty percent|
|20||Dyeing and printing of textiles||Forty percent|
|21||Printing of reading material, cards, pamphlets, posters and office stationery.||Forty percent|
|22||All other contracts.||Thirty percent”|
Thus as per rule 15(6) if the books of accounts are not maintained to determine the correct value of the goods at the time of incorporation or deductions claimed under rule 15(4) are unreasonable high then lump sum tax @ 12.5% on total consideration received or receivable in works contract, will be payable after making deductions as prescribed in the above table. In such case no ITC of tax paid on purchases shall be allowed to the works contractor and no VAT invoice will be issued by such contractor.
Rule 15(4) : It is to be noted here that Rule 15(4) prescribes the deduction for labour and services included in the works contract to determine the value of goods involved in the execution of works contract. Deductions under Rule 15(4) are available to the persons maintaining books of accounts.
Effects of choosing to pay tax under rule 15(6): If a person goes for lump sum scheme without maintaining books of accounts to determine the correct value of goods involved in works contract under Rule 15(6) then he will not only be paying output tax @ 12.5% on total consideration after making prescribed deductions but also no input tax credit will be available to such person. As we know entry tax is also applicable in Punjab, thus if no ITC is available under Rule 15(6) then no ITC of entry tax will also not be available.
Thus choosing lump sum scheme in works contract under PVAT Act is not a wise thing to do. In my view the lump sum scheme under Rule 15(6) leads to double taxation as the contractor not only pays output tax at higher rate of 12.5% but also he has to forego his ITC of tax paid on purchases as well as of entry tax paid.
Rule 15(6) is applicable not only to works contractor who has not maintained books of accounts but also to other works contractor who although has maintained books of accounts but deductions claimed by him under Rule 15(4) as per books are considered to be unreasonably high.
Now the question is what will be the criteria to determine whether deductions claimed by a works contractor as per rule 15(4) are unreasonably high or not. This word unreasonably high is a vague word. No criteria whatsoever has been prescribed to determine what type of deductions or what amount of deductions can be treated as unreasonably high.
In my view where the contractor has claimed deductions for labour and service charges under rule 15(4) based upon books of accounts duly maintained supported with vouchers and sufficient proofs then deductions claimed should not be treated as unreasonably high.
Conclusion: It is advisable that works contractors in Punjab should think twice before choosing to pay tax under Rule 15(6) as it may lead to scrapping of their refund arising out of tax deduction u/s 27 of PVAT Act as he will have to pay output tax @12.5% without adjusting any ITC of tax paid on purchases and of entry tax paid. Book keeping of labour and other service charges deductible under Rule 15(4) should be done accurately to avoid circumstances leading to consideration of such deductions as unreasonably high by the designated officer.