Section 8 of PVAT Act 2005 which deals with the rates of tax has been amended w.e.f. 21/10/2010 to provide for sub section 2-A explaining the tax payable in works contracts which runs as under:
“(2-A) every person executing works contracts shall pay tax on the value of goods at the time of incorporation of such goods in the works executed at the rates applicable to the goods under this Act:
Provided that where accounts are not maintained to determine the correct value of goods at the time of incorporation, such person shall pay tax at the rate of twelve and half per cent on the total consideration received or receivable, subject to such deductions , as may be prescribed
From the wording of the above sub-section following points regarding tax payments in works contracts can be noted down:
1. Tax on the value of goods involved in works contracts to be paid at the time of incorporation of such goods: Every person executing works contract will be liable to pay tax on the value of the goods involved in such works contract at the time of incorporation of such goods in the work executed or in other words tax on the value of goods involved in works contract will be payable at the time when such goods are used in the execution of such works contract.
2.Rate at which tax is payable when books of accounts are maintained: If the person executing works contract has maintained proper books of accounts so as to determine the correct value of the goods at the time of incorporation of such goods, the rate of tax payable will be the same as provided in the various schedules of the PVAT Act and rules on such material. For example in case of works contract of construction of road, tax on the material used in the construction of road will be payable at the rate as applicable under the PVAT Act on such material used and at the time when such material is incorporated in the works executed.
3. Rate of Tax when no books of accounts are maintained: Proviso to section 8(2-A) provides that if no books of accounts have been maintained by the works contractor so as to determine the correct value of goods incorporated in the works executed, at the time of incorporation then tax @ 12.5% will be payable on the total consideration received subject to such deductions as may be prescribed.
Deductions to be made from works contract: Rule 15(4) of Punjab VAT Rules provides that the value of the goods, involved in the execution of a works contract, shall be determined by taking into account the value of the entire works contract by deducting there-from the components of payment, made towards labour and services, including ?
(a) labour charges for execution of the works;
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect’s fees;
(d) Charges for obtaining for hire, machinery and tools used for the execution of the works contract;
(e) Cost of consumables, such as, water, electricity and fuel, used in the execution of the works contract, the property, which is not transferred in the course of execution of a works contract;
(f) Cost of establishment of the contractor to the extent, it is relatable to the supply of labour and services;
(g) Other similar expenses relatable to supply of labour and services and;
(h) Profit earned by the contractor to the extent, it is relatable to the supply of labour and services.
Sub rule 5 of Rule 15 further provides that the amounts deductible under sub clauses (c) to (h) of sub rule (4), shall be determined in the light of the facts of a particular case on the basis of the material produced by the contractor.