Is Labour Cess Covered under GST?

Introduction

The government of India had enacted building and other construction workers cess act, 1996 (BOCW act), under which any establishment, belonging to, or under the control of, Government, anybody corporate or firm, an individual or association or other body of individuals which or who employing more than 10 building construction worker and other construction works, or had employed on any day preceding 12 months any 10 or more building workers in any building or other construction work, but does not includes an individual who employs such workers in any building or construction in relation to his residence the total cost of such construction not being more than Rs. 10 lakh, have to pay such amount as notified, not exceeding 2% (not less than 1%) of construction cost incurred by the employer. Currently the central government has notified the rate at 1% of construction cost incurred by the employer.

Building or other construction work has been defined in the act as, construction, alteration, repairs, maintenance or demolition, of or, in relation to, buildings, streets, roads, railways, tramways, airfields, irrigation, drainage, embankment and navigation works, flood control works (including storm water drainage works), generation, transmission and distribution of power, water works (including channels for distribution of water), oil and gas installations, electric lines, wireless, radio; television, telephone, telegraph and overseas communication dams, canals, reservoirs, watercourses, tunnels, bridges, viaducts, aqueducts, pipelines, towers, cooling towers, transmission towers and such other work as may be specified in this behalf by the appropriate Government, by notification but does not include any building or other construction work to which the provisions of the Factories Act, 1948 (63 of 1948), or the Mines Act, 1952 (35 of 1952), apply.

Employer has been defined under this act as, in relation to an establishment, means the owner thereof, and includes,-

(i) in relation to a building or other construction work carried on by or under the authority of any department of the Government, directly without any contractor, the authority specified in this behalf, or where no authority is specified, the head of the department;

(ii) in relation to a building or other construction work carried on by or on behalf of a local authority or other establishment, directly without any contractor, the chief executive officer of that authority or establishment;

(iii) in relation to a building or other construction work carried on by or though a contractor, or by the employment of building workers supplied by a contractor, the contractor

Liability to pay Cess

The definition of establishment includes building or any other construction work which has commenced or proposed to be commenced. It is relevant to understand that the definition of building and other construction works has a wide amplitude and will also include apart from original works, alterations to the buildings, demolitions, repairs, maintenance, infrastructure projects, etc. The definition of the employer also includes building and other constructions works carried through a sub-contractor.

Every employer is required to get its Establishment registered within 60 days from its commencement or from the date on which this Act becomes applicable to such Establishments. The act makes it mandatory for every employer to give notice of commencement of any building and other construction work atleast 30 days before the commencement of the work, with complete details including nature of work involved nature of the work involved, number of workers likely to be employed, approximate duration of the work and the arrangement for the storage of the explosives to be used in the building or other construction work.

As per section 3 of the act which is the charging section, does not clearly specify whether the cess is payable by the owner or the contractor in respect of such establishment. Such a query has been partially addressed by the Courts in Builders Association of India v. UOI [(139) 2007 DLT 578] and New India Construction Company v. State of Haryana by observing that under the scheme of the BOCW Act, the intention was not to confine the applicability of the Acts to the owner or the contractor but to cover both. The cess should be collected from either the owner or the contractor. The Court has also suggested that if the cess is not collected from the contractor then the same may be collected from the owner. In case of Delhi Metro Rail Corporation vs Simplex Infrastructures Limited, Delhi High Court, 2011, it was held that there is nothing wrong in deducting the amount of cess from the payments made to the contractors.

Brief about GST

There was a burden of “tax on tax” in the pre-existing Central excise duty of the Government of India and sales tax system of the State Governments. The introduction of Central VAT (CENVAT) has removed the cascading burden of “tax on tax” to a good extent by providing a mechanism of “set off” for tax paid on inputs and services upto the stage of production, and has been an improvement over the pre-existing Central excise duty. Similarly, the introduction of VAT in the States has removed the cascading effect by giving set-off for tax paid on inputs as well as tax paid on previous purchases and has again been an improvement over the previous sales tax regime.

But both the CENVAT and the State VAT have certain incompleteness. The incompleteness in CENVAT is that it has yet not been extended to include chain of value addition in the distributive 30 trade below the stage of production. It has also not included several Central taxes, such as Additional Excise Duties, Additional Customs Duty, Surcharges etc. in the overall framework of CENVAT, and thus kept the benefits of comprehensive input tax and service tax set-off out of the reach of manufacturers/ dealers. The introduction of GST will not only include comprehensively more indirect Central taxes and integrate goods and services taxes for set-off relief, but also capture certain value addition in the distributive trade.

Similarly, in the present State-level VAT scheme, CENVAT load on the goods has not yet been removed and the cascading effect of that part of tax burden has remained unrelieved. Moreover, there are several taxes in the States, such as, Luxury Tax, Entertainment Tax, etc. which have still not been subsumed in the VAT. Further, there has also not been any integration of VAT on goods with tax on services at the State level with removal of cascading effect of service tax. In addition, although the burden of Central Sales Tax (CST) on inter-State movement of goods has been lessened with reduction of CST rate from 4% to 2%, this burden has also not been fully phased out. With the introduction of GST at the State level, the additional burden of CENVAT and services tax would be comprehensively removed, 31 and a continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level would be established which would eliminate the burden of all cascading effects, including the burden of CENVAT and service tax. This is the essence of GST. Also, major Central and State taxes will get subsumed into GST which will reduce the multiplicity of taxes, and thus bring down the compliance cost. With GST, the burden of CST will also be phased out.

Acts under the ambit of GST

As per FAQ issued by empowered committee of state finance ministers, various taxes or levies were identified to be subsumed under GST, for that purpose the following principles were kept in mind:

1. Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either on the supply of goods or on the supply of services.
2. Taxes or levies to be subsumed should be part of the transaction chain which commences with import/ manufacture/ production of goods or provision of services at one end and the consumption of goods and services at the other.
3. The subsumption should result in free flow of tax credit in intra and inter-State levels.
4. The taxes, levies and fees that are not specifically related to supply of goods & services should not be subsumed under GST.
5. Revenue fairness for both the Union and the States individually would need to be attempted.

On the basis of above principles the, the empowered committee of state finance ministers had recommended the following taxes or levies to be subsumed under GST

I. Central Taxes to be subsumed:

1. 1. Central Excise Duty
   2. Additional Excise Duties
   3. The Excise Duty levied under the Medicinal and Toiletries Preparation Act
   4. Service Tax
   5. Additional Customs Duty, commonly known as Countervailing Duty (CVD)
   6. Special Additional Duty of Customs – 4% (SAD)
   7. Surcharges, and
   8. Cesses.

II. State Taxes to be subsumed:

1. 1. VAT / Sales tax
   2. Entertainment tax (unless it is levied by the local bodies).
   3. Luxury tax
   4. Taxes on lottery, betting and gambling.
   5. State Cesses and Surcharges in so far as they relate to supply of goods and services.
   6. Entry tax not in lieu of Octroi.

Conclusion

The principles laid down by the empowered committee of state finance minister clearly state that the taxes subsumed should be in the nature of indirect taxes, either on supply of goods and services. In the case of Delhi Metro Rail Corporation vs Simplex Infrastructures Limited, Delhi High Court, 2011, where, the high court held that, the subject matter of the Cess Act is the activity of building and construction, the object is to augment the Welfare Fund under the BOCW Act and the essential purpose is to benefit the building and construction worker. The ‘ultimate or incidental results or consequences’ might be that contractors have to part with 1% of the bill amount towards the cess. However, that does not detract from either the ‘primary object’ of the Cess Act or its ‘essential purpose.’ Applying the Hingir Rampur tests, it has to be held that the Cess Act cannot be construed to be a tax at all.

On the combined reading of the judgment given by the Delhi High Court and principles laid downed by the empowered committee of state finance ministers it can be concluded that cess levied under the building and other construction workers cess act, 1996, is not an indirect tax, hence it is out of the ambit of goods and services tax act.

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Disclaimer: This is only a knowledge sharing initiative and author does not intend to solicit any business or profession. I assume no responsibility for the consequences of use of such information. In no event shall be liable for any direct, indirect, special or incidental damage resulting from arising out of or in connection with the use of the information. It is not a professional advice so please do consult your professional adviser for your queries.

(The above article has been compiled from FAQ issued by empowered committee of state finance minister, summary of acts by Government of NCT of delhi on The Building And Other Construction Workers Welfare Cess Act, 1996)