CA Vinod Kaushik
Background: This article is basically written to give you understanding of evolution of works contract tax in India and its entire journey from beginning till date. Before I take you into the mid of ocean we have to first understand that why the need arises of introduction of works contact tax and its respective calculation methods. Now the answers of the above questions are nestling in the constitution and we have to go through the said holy book to get all the desired answers. The Constitution has well defined the taxation powers of Union and States in an unequivocal manner where the exclusive powers of Centre are given under schedule VII list I i.e. union list and list II describes the powers of states where they can legislate exclusively. I shall not list all the entries of the list I and list II but shall limit my discussion only to the relevant points which are essential to understand the topic under consideration. The entry 54 of state list has authorized States to levy and collect taxes on sale and purchase of goods other then news papers within a state jurisdiction and on the basis of this entry States are levying sales tax. The States were happily levying sales tax on sale of goods within a State. Amid all this a disputed point was taking birth and that was who is authorized to levy and collect tax on the materials supplied in a building contracts where the material is used to construct the building. The builder and customer have entered into an agreement for construction of Building and not for the sale of material. Now I ask you to seriously think on this question before further reading this article.
Understanding the bone of contention:
Have you applied your best thoughts to answer this murky question? Yes I am damn sure you too have some confusion to reply the above question but let me help you by giving some inputs. The answers to above question is BIG NO, States were not authorized to levy and collect the sales tax on said transaction but they were any how doing the same and there was sharp difference of opinion among various High Courts and with this point the dispute started between tax payer and taxman. The State Government were pretending that they can bifurcate the indivisible contract and levy sales tax on the material portion of it but taxpayers were arguing otherwise and there were also some disputed High Court judgments available for both the stakeholders to the issue.
Intervention by Apex Court:
After all the Apex Court (I personally pay highest regard for its wisdom and unbiased approach) had to intervene and pronounce a landmark judgment in the case of “State of Madras vs. Ganoon Dunkerley & Co. Ltd.” and laid the law that States cannot bifurcate the material and labour portion in an indivisible contract and levy sales tax on the material supplied. The apex court categorically defined the entry 48 of list II of seventh schedule to the Govt. of India Act, 1935 which was authorizing States to levy sales tax on the sale of goods in a State. The States were contending that as per above entry they can levy sales tax on the material supplied in a building contract and it is a right given to them by the constitution but the Apex Court disagreed with the contention of States and clarified that the definition of sale and purchase of goods given in constitution of India must be read with the definition given in “Sales of goods Act, 1930”. Now it is worthwhile to quote the essential conditions given in “Sales of goods Act” to give you more clarity on the definition of sales of goods as per above Act and it says that “There must be an agreement between seller and buyer for sale of goods in which property passes and the property must be movable. In a building contract the builder and customer has executed an agreement for construction of building and not for the sale of material and the builder shall receive consideration for construction of building. The property in building has not passed from builder to customer as movable and above building contract has failed to satisfy the prime conditions given under sales of goods act and therefore States cannot levy sales tax on a transaction which is not sales as per constitution of India. The Apex Court by the said judgment has laid a law for the States that before taxing any transaction as sales of goods it should hold goods as per Sales of Goods Act, 1930 and consequently the States were facing too many problems after said judgment
Severe Impact of Ganoon Dunkerley & Co. Case
Here I shall mention some more transaction where States were facing difficulty in taxing transaction of sales and they are discussed one by one. In hire purchase transaction the ownership of goods passes at the end hence as per law laid by Apex Court the transaction is taxable at the end when right of purchase is exercised by buyer, lease of films were not within ambit of sales tax law, sale by an unincorporated association of members to its members since the association and its members were not distinct from each other and finally the sale of foods and beverages by hotels to its guest was not taxable as the agreement between the hotel and guest is of services and not for sale of foods and beverages. Now you too must be brooding about what next will happen, what will be the way out and how the States were doing?
Way towards Solution:
After the landmark judgment by Apex court limiting the power of States, The Union Govt. was too anxious about this litigation prone transaction of sales of goods and material in a bundle and which is too indivisible. After all the events the law had to settle finally and a Law Commission was formed to examine the severe impact of judgment in Gannon Drunkenly case and the Commission suggested to amend the Constitution by inserting clause (29A) in article 366 and also article 286 to resolve the controversy. Now the article 366(29A) has been produced for your analysis and which states as under:
46th Amendment in the Constitution:
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) invoked in the execution of a works contract;
(c) A tax on the delivery of goods on hire purchase or any system of payment by installments;
(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;
(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;
By inserting clause (29A) the parliament has ensured to resolve the dispute arising out due to Gannon Drunkenly case and covered maximum transactions under deemed sales. Sub clause (b) of clause (29A) specifically deals with works contract tax and empowered States to make laws related to taxation of works contract in a State. Further the article 286 amended which states that the States law related to sub clause (b) (c) (d) must be subject to such restrictions and conditions as the Parliament may specify.
After all the developments the law was finally settled and State were levying and collecting sales tax on the value of material used in a works contract, hire purchase transactions, leasing transactions, sale by unincorporated clubs to its members and sale of foods and beverages by hotels to its customers. Later on after introduction of VAT in all states separate rules were made by each of the State to levy and collect works contract tax.
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