It is ussualy seen that works contractors registered under Punjab VAT Act, 2005 have always refund to claim from the Excise & Taxation department due to the fact that their final tax liability is much lower/Nil than the tax deductions made u/s 27 of Punjab VAT Act, 2005. It results in blocking of their working capital till the time they get refund from the Department.The solution to it is to resort to section 27(10) of Punjab VAT Act, 2005.
The relevant provisions of PVAT Act 2005 and certain relevant judgements have been discussed herebelow in this regard.
Tax Deductions from payments made to contractors:Section 27(1) of Punjab VAT Act, 2005 provides as under:
Notwithstanding anything contained in any of the provisions of this Act, every contractee responsible for making payment to any person (hereinafter in this section referred to as the contractor) for discharge of any liability on account of valuable consideration, exceeding rupees five lac in a single contract payable for the transfer of property in goods (whether as goods or in some other form) in pursuance of a works contract, shall, at the time of making such payment to the contractor either in cash or in any other manner, deduct an amount equal to two per cent of such sum towards the tax payable under this Act on account of such contract:
Provided that any individual or Hindu undivided family not registered under this Act, shall not be liable for deduction of such tax.
Thus if the value of the works contract exceeds Rs. 5 lakh, tax deduction @5% has to be made by the contractee at the time of making payment to the contractor. However it is to be noted that the settled law is that no deduction of tax at source is required where the payment is an advance and as a loan to the contractor.
Tax Deductions from payments made to sub-contractors:Similarly section 27(2) provides that any contractor responsible for making any payment for discharge of any liability to any sub-contractor or in pursuance of a contract with the sub-contractor, for the transfer of property in goods (whether as goods or in some other form) involved in the execution whether wholly or in part, of the work undertaken by the contractor, shall at the time of such payment or discharge, in cash or by cheque or draft or by any other mode, deduct an amount equal to 5% of such payment or discharge, purporting to be a part of tax, payable under this act on such transfer, from the bills, invoices raised by the sub-contractor as payable by the contractor.
Where the tax deduction u/s 27(1) is required only if the value of contract exceeds Rs. 5 lakh but there is no such limit in case of sub-contractors as section 27(2) doesn’t provide any condition of Rs. 5 lakh.
Twice tax deduction in a single works contract where there is sub-contracting: Where sub-contracting is done in a works contract, there will be twice tax deduction in a single works contract as not only the tax deduction @ 5% in a works contract is required to be made by the contractee from the payments made to the contractor but the contractor also is required to deduct tax @ 5% from the payments made to the sub-contractor.
The settled law is that there can be only one deemed sales in a single works contract as the deemed sales of goods in works contract takes place by the principle of accretion. However in view of the provisions of section 27 of Punjab VAT Act, 2005 in case of sub-contracting in a same works contract, the tax deduction @5% would be made twice as explained above.
No tax deduction should be there on labour/service element:There are always two parts in the works contract one is deemed sales of material incorporated in the contract and other is service/labour element. The tax under Punjab VAT Act, 2005 on works contract is applicable only on the deemed sales of the taxable goods incorporated in the contract within Punjab.
No tax can be levied on the labour/service element nor on the inter state sales or purchase or sale or purchase in the course of import or export of goods as both are outside the purview of power of State Government to levy tax as it was held by the Hon’ble Supreme Court in Gannon & Dunkerley Vs. State of Rajsthan (1993) 1 SCC 364
In CWP No. 19355 of 2010 -KRBL Limited v State of Punjab and others, decided on 14.1.2011, it was held by P&H HC that recovery can be effected only if it is within the competence of the State Legislature. It cannot be recovered initially providing the remedy of refund later on.
However the tax deduction @5% u/s 27 is made on the whole of the contract irrespective of the fact that final tax liability in a works contract under Punjab VAT Act will only be on the deemed sales of the goods incorporated and not on the labour/service element. Section 27 does not take care of excluding labour/service element for the purpose of tax deduction.
If there is no tax payable on labour/service element incorporated in a works contract under Punjab VAT Act then there should also not be any tax deduction on such element in view of the decision in KRBL case as mentioned above.
In Larsen & Toubro Limited vs. State of Haryana and others CWP No. 14797 of 2010 it has also been held by Punjab & Haryana High Court as under:
“Argument on behalf of the petitioner is that in the case of State of Haryana, clarification does not take care of excluding service component of the turnover and mere clarification is not sufficient unless appropriate amendment is made in absence of which this Court may either declare the impugned provisions ultravires or may declare the rights of the petitioner in consonance with the judgment of the Hon’ble Supreme Court in Steel Authoritiy & BSNL based on constitutional scheme of taxing power of the State Legislature under Entry 54 of List II read with Articles 286 and 366 (29A) of the Constitution. For that purpose, it may be held that tax at source will be limited to taxable turnover i.e. after excluding service component in the contract and turnover of inter state sales or sales outside the State or sales in the course of import. For this purpose, the State may lay down a mechanism and till such a mechanism was laid down, the deduction may be limited to the declaration of taxable turnover by the petitioner to the contractor with a copy to the concerned Assessing Authority subject to statutory provisions including those dealing with the assessment, interest, penalty and recovery. In respect of cases from the State of Punjab, it was submitted that pending working out of appropriate mechanism by the State, either the provisions may be declared unconstitutional or similar arrangement as suggested in the case of the State of Haryana may be directed to be adopted.
After due consideration of the rival stands, we find that the proposal made on behalf of the petitioners as an alternative to striking down statutory provisions being in consonance with the judgments of the Hon’ble Supreme Court has to be accepted. This is so as the States propose to do their duty of providing an appropriate mechanism to give effect to the law laid down by the Hon’ble Supreme Court. Accordingly, we hold that impugned provisions for deduction of tax at source will apply only to the taxable turnover i.e. after deducting service component and turnover relating to sales outside State, in the course of inter-State sales or in the course of import. The petitioner will give declaration in respect of such payments to the persons making the payment with a copy to the concerned assessing authority. This will be without prejudice to the provisions of assessment, levy of interest, penalty, recovery and all other statutory provisions. This arrangement will continue till any other appropriate arrangement is worked out by the States of Punjab and Haryana. as explained above the said dealer will not be making any deemed sales of goods incorporated in the works contract awarded to it by PWD, hence there will be no tax liability on the part of the said dealer.”
Thus as per the decision of P&H HC in the above noted case Tax Deduction u/s 27 of PVAT Act, 2005 has to be only on the taxable turnover involved in a works contract
Moreover no loss is also being caused to the revenue if the tax deduction is made only on the taxable turnover as the final tax liability of the works contractor under Punjab VAT Act, 2005 would also be only on the taxable turnover.
Certificate of NIL/Lower rate of tax deduction:Ussualy the tax deduction u/s 27 turns out to be more than the final tax liability of the works contractor, which results in blocking the working capital of the business till the time works contractor gets the refund of the excess tax deducted.
To avoid such excess deduction of tax due to sub-contracting or due to non-exclusion of labour/service element from the value of contract for the purpose of tax deduction, the contractor/subcontractor should seek NIL/Lower rate of tax deduction certificate u/s 27(10) of Punjab VAT Act, 2005.
Section 27(10) of Punjab VAT Act runs as under:
“Where on an application being made by any contractor or sub-contractor the Commissioner or Designated Officer is satisfied that no deduction of tax or deduction of tax at a lower rate is justified, he shall grant him such certificate permitting no deduction of tax or deduction of tax at a lower rate, as the case may be. On furnishing of such certificate, the person responsible for deduction of tax, shall comply with such certificate.”
If the final tax liability of the contractor or sub-contractor is less or nil as the case may be than the tax deduction made u/s 27, then such contractor or sub-contractor must move an application u/s 27(10) to seek Nil or lower rate of tax deduction certificate and in such case granting of NIL/Lower rate of tax deduction certificate will be justified.
Even if no sub-contracting is being done, the works contractor should seek the certificate of tax deduction only on the taxable turnover part of the works contract i.e after excluding labour/service element from works contract and the inter state deemed sales, on the basis of the above said judgements.