VAT on works contracts in Maharashtra

CA Vaibhav Deodhar

Introduction

So far as works contracts are concerned, it is always a matter involving a lot of complications and controversies. It’s always been a matter of headache not only for businessmen but also for practitioners. Let’s try to understand and summarize matters relating to works contract so far as they relate to provisions of Maharashtra Value Added Tax Act, 2002.

Meaning of Works Contract

In layman’s language, works contract is a composite contract which involves sale of goods together with sale of services. It is a mixture of service or labour and goods. For example, construction contract, painting contract, annual maintenance contracts etc.

Legal background for VAT on works contracts:

Applicability of VAT on works contracts evolves from the concept of “Deemed Sales” under sales tax laws. According to clause 29A of article 366 of the Constitution of India, tax on sale or purchase of goods includes “a tax on transfer of property in goods (whether as goods or in some other form) invoked in the execution of works contract.” It is clear from this clause that VAT is leviable on transfer of goods involved in execution of works contract.

It is worth noting that VAT is applicable on sale price of ‘goods’. The term ‘goods’ includes all kinds of ‘movable properties’. Therefore, immovable properties are not ‘goods’ and hence cannot be subjected to VAT. If one sells a piece of land or a building standing on the land, he is not liable for VAT however, stones, bricks, cement, steel rods etc. used by a builder for construction of a building are movable properties. Hence, construction of building involves transfer of ownership in such movable properties viz. cement, stones etc. and such transfer may be subjected to VAT being transfer of property in goods (whether as goods or in some other form) invoked in the execution of works contract.

So far as MVAT is concerned, the term “works contract” in nowhere clearly defined. However, according to explanation (b)(ii) to section 2(24) of MVAT Act, ‘sale’ includes the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract including, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. It is clear from the above provisions that MVAT is applicable only on transfer of ‘goods’ involved in the execution of works contract.

The real controversy lies here only. Most of the times, value of works contract is quoted for contract as a whole i.e. the value of goods and service is not separately determined. In this case, one needs to bifurcate between value of services and value of goods for the purpose of levying vat and service tax. If we carefully observe the legal provisions in this regard, they focus on this problem only. There are various mechanisms under VAT law which try to segregate the value of goods from the works contract for the purpose of levying VAT.

Following are the provisions in MVAT Act 2002 which deal with valuation of ‘goods’ portion in the execution of works contract:-

Basically there are two mechanisms discussed in under MVAT for valuation of transfer of property in goods involved in the execution of Works Contract:

1. Rule 58 of MVAT Rules and
2. Composition schemes

A. Rule 58 of MVAT Rules:

Rule 58 can be divided into two parts for the sake of convenience. First part provides for certain items which will be deducted from the value of works contract to arrive at the sale price of goods involved in the execution of works contract and second part provides for standard percentage deductions (just like abatements in service tax) from value of contract where one needs to pay VAT on balance portion after deducting the percentages provided therein.

a. Items to be deducted from Contract Price

This part is read as under: [Rule 58(1)]

The value of the goods at the time of the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract may be determined by effecting the following deductions from the value of the entire contract, in so for as the amounts relating to the deduction pertain to the said works contract: –

(i) Labour and service charges for the execution of the works contract;

(ii) Amounts paid by way of price for sub-contract, if any, to sub-contractors;

(iii) Charges for planning, designing and architect’s fees;

(iv) Charges for obtaining on hire or otherwise, machinery and tools for the execution of the works contract;

(v) Cost of consumables such as water, electricity, fuel used in the execution of works contract, the property in which is not transferred in the course of execution of the works contract;

(vi) Cost of establishment of the contractor to the extent to which it is relatable to supply of the said labour and services;

(vii) Other similar expenses relatable to the said supply of labour and services;

(viii) Profit earned by the contractor to the extent it is relatable to the supply of said labour and services:

It is worth noting that the aforesaid deductions provided in Rule 58 are in the nature of service and in the nature of material which does not gets transferred to the buyer. For example; water, fuel etc. which are goods but property in these goods never gets transferred to buyer. These goods are consumed by the contractor. As there is no transfer of such goods, they should not be subjected to VAT. Profit portion arising from labour portion is also to be deducted. So, after deducting all these items one can arrive at the value of only those goods which get transferred to the buyer.

If one wants to get benefits of above provisions, maintaining proper books of accounts with detailed information is must. In case of small contractors, it may become difficult to have proper books of accounts maintained which will enable them to pull out the necessary details as mentioned earlier. As a solution to this problem, standard percentage deductions are provided in the next part of Rule 58 which is read as under:

Provided that where the contractor has not maintained accounts which enable a proper evaluation of the different deductions as above or where the commissioner finds that the accounts maintained by the contractor are not sufficiently clear or intelligible, the contractor or, as the case may be, the Commissioner may in lieu of the deductions as above provide a lump sum deduction as provided in the Table below and determine accordingly the ‘sale price’ of the goods at the time of the said transfer of property

‘* The percentage is to be applied after first deducting from the total contract price the quantum of price on which tax is paid by the sub-contractor, if any, and quantum of tax separately charged by the contractor if the contract provides for separate charging of tax.

b. Deductions in case of Construction Contracts: [Rule 58(1A)]

According to Rule 58(1A), in case where there is a construction contract, where along with the immovable property, the land or as the case may be interest in land underlying the property is conveyed and the property in the goods (whether as goods or in any other form) involved in the execution of construction contract is also transferred to the purchaser, such transfer is liable to tax under this rule. The value of said goods at the time of the transfer shall be calculated after deduction of cost of land.

Therefore, in case of construction contract along with sale of land, deductions under Rule 58(1) shall be made after first deducting the land cost from contract price.

Rule 58(1A) also provides the manner of calculation of land cost. It says, the cost of land shall be determined in accordance with the guidelines appended to the annual statement of rates prepared under the provisions of the Bombay Stamp Act (Determination of true market value of the property) Rules 1995 as applicable on the 1^st January of the year in which the agreement to sell the property is registered. Thus, the cost of land shall be the value of land for stamp duty purposes as applicable on the 1^st January of the year of registration of agreement to sale.

However, if the contractor feels that the actual cost of land is more than the value determined for stamp duty purposes, he can provide such facts before the Department of Town Planning and Valuation. One important point to be noted here is that before applying to Town Planning Department, contractor has to first pay the applicable tax determined on the basis of deduction of cost of land calculated in accordance with the Bombay Stamp Act (Determination of true market value of the property) Rules 1995. If he proves that actual cost is more than the stamp duty value, actual cost of land shall be deducted from the value of contract and excess vat previously by the dealer, if any, shall be refunded back to him.

c. Deductions in case of Construction Contracts involving construction of flats, dwellings, buildings or premises [Rule 58(1B)]:

As per the provisions of Rule 58(1B), where the dealer undertakes the construction of flats, dwellings, buildings or premises, and transfers them in pursuance of an agreement along with the land or interest underlying the land then, after deductions under sub-rules (1) and (1A) from the total contract price, the value of the goods involved in the execution of works contract shall be determined after applying the percentage provided in column (3) of the following table depending upon the state at which the purchaser entered into the contract:

One point needs attention that the above percentages are to be applied after deductions under sub-rule (1) and (1A). Further, for determining the completion of stages referred in the above table, dealer needs to furnish the certificate from the local authority certifying such completion of stage.

Thus, dealer can calculate the value of goods involved in the execution of works contract according to the provisions of Rule 58.

It needs to be appreciated that:

1. Dealer opting for Rule 58 can issue Tax Invoice and collect tax separately from the buyer.

2. He is also eligible to avail full input tax credit subject to the provisions of Rule 53 and Rule 54 of MVAT Rules.

3. The rate of VAT payable is determined on the basis of rate at which goods used in the
execution of works contract fall in Schedules A to E to the MVAT Act.

B. Composition Schemes:

The provisions relating to composition schemes are given in Section 42 of MVAT Act. Sub­section (3) of section 42 specifically provides for two types of composition schemes for works contractors. These two schemes are as follows:

1. Composition Scheme for Construction Contracts: (5% Composition Scheme)

Under this scheme, dealer has to pay VAT @5% on the total contract value. However, this option can be exercised only in case of construction contracts notified in Notification No. VAT.1506/CR-134/Taxation-1 dt. 30/11/2006. The notified construction contracts are as

follows for which 5% composition scheme can be opted:

(A) Contracts for construction of,-

i. Buildings,

ii. Roads,

iii. Runways,

iv. Bridges,

v. Railway overbridges,

vi. Dams,

vii. Tunnels,

viii. Canals,

ix. Barrages,

x. Diversions,

xi. Rail tracks,

xii. Causeways, Subways, Spillways,

xiii. Water supply schemes,

xiv. Sewerage works,

xv. Drainage,

xvi. Swimming pools,

xvii. Water Purification plants and

xviii. Jettys

(B) Any works contract incidental or ancillary to the contracts mentioned in paragraph (A) above, if such work contracts are awarded and executed before the completion of the said contracts.

If the dealer opts for 5% composition scheme, input credit in excess of 4% of purchase price can be availed i.e. there will 4% retention in setoff according to Rule 53(4)(b) of MVAT Rules

and balance setoff can be availed.

2. Composition for all types of Works Contracts: (8% Composition Scheme)

Here, dealer may choose to pay VAT @8% on total contract value less the amount paid towards works contract executed by a registered sub-contractor. In case dealer opts for 8%

composition scheme, 36% percent of total setoff amount is disallowed and balance 64% setoff can be availed as per Rule 53(4)(a) of MVAT Rules.

3. Composition scheme for Builders and Developers: (1% Composition Scheme)

Under this scheme, registered dealers undertaking construction of flats, dwellings or buildings or premises may choose to pay VAT @1% of the agreement amount specified in the agreement or agreement value adopted for stamp duty purposes whichever is higher. If he chooses to opt for this scheme, he cannot avail any input tax credit in respect of purchases effected by him. Further, he is not allowed to make any purchase against ‘C’ form. Also, he cannot issue tax invoice and also not eligible for to issue Form No. 409 to the sub­contractor.

Works Contract TDS:

As per provisions of Rule 40 of MVAT Rules, notified employers are required to deduct TDS, known as works contract TDS or WCT TDS from the amount payable to the contractor. The rate of TDS shall be 2% if the contractor is a registered dealer. If the contractor is unregistered, rate of tax deduction shall be 5%. The deductor needs to file WCT TDS return in form No. 424 before 30^th June every year.