J S BEDI Advocate
Introduction: It is an effort to compile all the provisions related to Works Contract under the Punjab Value Added Tax Act, 2005 beside this the provisions related to lumpsum scheme, taxability on Interstate purchases for goods used in the execution of works contract, tax deduction, Constitutional validity of provisions with its constitutional background, Importance of 46th amendment with its effects are also included in this article.
“works contract” includes any agreement for carrying out, for cash, deferred payment or other valuable consideration, building ,construction, manufacturing, processing, fabrication, erection, installation, fitting out, improvement, modification, repairs or commissioning of any movable or immovable property;
As per the scheme of Punjab Value Added Tax Act, 2005 every contractee except individual and HUF not registered under VAT is under an obligation to deduct 5% while making the payment to the contractor if the amount exceeds Rs. 5 Lacs in a single contract payable for transfer of property of goods in pursuance of works contract. Beside this contractee is under an obligation to furnish particulars of contract along with VAT 25 within 30 days of contract before the Designated Officer. Further contractee is under an obligation to make an application for Tax Deduction Number within 30 days of his liability to deduct tax in Form VAT 26 after obtaining the Tax Deduction Number contractee shall deposit such tax within 15 days from the close of each month Further Contractee is to furnish a monthly statement in Form VAT 27 within 15 days after deposit of tax. The contractee will issue certificate in Form 28 to the Contractor for the amount deducted and deposited in the Govt. Treasury. Here it is pertinent to point out if contractee failed to deduct or deposit tax then he is to pay penalty equal to the amount of such tax in addition to the simple interest @1.5% per month of such tax.
That Contractor who is awarded with the contract is under an obligation to obtain Registration in State of Punjab so that he may avail the benefit of Tax Deducted by the Contractee here it is pertinent to point out that there are different parameters for calculation of tax liability in case of works contract qua for the reason if contractor maintains the account books then he can avail ITC on the purchase of goods within the state of Punjab and liable to pay tax on the rates mentioned in different schedules after claiming the deduction prescribed under Rule 15(4) of Punjab Value Added Tax Rules, 2005 but if Contractor has not maintained account to determine the correct value of goods then he is liable to pay tax at the rate of 12.5% on the total consideration received or receivable subject to the deductions specified in table attached to Rule 15(6) of the Punjab Value Added Tax Rules, 2005. here it is worthwhile to mention that under these circumstances contractor is not eligible to claim ITC and shall not eligible to issue VAT Invoice
States are not competent to levy tax on transfer of goods in works contract in the course of Interstate trade.
That the law is well settled by now. Inter–State purchase of goods meant for use in the execution of works contract cannot be subjected to levy tax under the Punjab Value Added Tax Act, 2005. The Hon’ble Supreme Court of India in the case of Gannon Dunkerley & Co. vs. State of Rajasthan reported as (1993) 88 S.T.C. 204 at page 231 has held as under:–
“it is not permissible for the State Legislature to make a law imposing tax on such a deemed sale which constitutes a sale in the course of inter-State trade or commerce under Section 3 of the Central Sales Tax Act or an outside sale under Section 4 of the Central Sales Tax Act or sale in the course of import or export under Section 5 of the Central Sales Tax Act. So also it is not permissible for the State Legislature to impose a tax on goods declared to be of special importance in inter-State trade or commerce under Section 14 of the Central Sales Tax Act except in accordance with the restrictions and conditions contained in Section 15 of the Central Sales Tax Act.
The Hon’ble Supreme Court of India further held that:–
The location of the situs of the sale in sales tax legislation of the State, would, therefore, have no bearing or the chargeability of tax on sales in the course of inter-State trade or commerce since they fall outside the field of legislative competence of the State Legislatures and will have to be excluded while assessing the tax liability under the State legislation.”
Further the Hon’ble Gauhati High Court in the case of Projects and Services Centre vs. State of Tripura reported as (1991) 82 S.T.C. 89 (Gau) has held as under:–
“In view of the aforesaid decisions of the Supreme Court it is clear that the sale in the instant case was an inter–State sale. The fact that the use of the materials was made in a works contract in the State of Tripura did not in any way affect the inter–State nature of the transaction. Evidently, the decisions of the Superintendent of Taxes holding the sale in the instant case as intra–State sale on the ground that the property therein passed to the buyer in the State of Tripura goes counter to the law laid down by the Supreme Court. As indicated above, the place of delivery or the place where the property in the goods passes is not material for determining whether the sale was an inter–State sale.”
Similar view has been taken by the Hon’ble Allahabad High Court in the case of Commissioner, Trade Tax vs. Indus Food Products and Equipments Limited reported as (2009) 34 PHT 25 (All.), wherein the following has been held:–
“Where the property and goods brought from outside the State can be ascertained and amount representing the sale value of goods covered by Section 3, 4 and 5 of Central Sales Tax Act, 1956 can be separated from the cost of fabrication and transfer of goods, the State does not have the authority to levy trade tax on such goods. Section 3F charges tax on the right to use any goods or goods involved in the execution of works contract in the State of UP. The goods brought from outside the State and covered by Section 3, 4 and 5 of the Central Sales Tax Act, 1956 would not be subject to tax, even if they are included in the execution of the works contract. The fact the nature of the works contract provided for transfer of the property and the goods after they were fabricated and the trial run was complete, would by itself not amount transfer of the fabricated goods, in the State of UP.”
In the above judgment earlier judgment of the Division bench of the Allahabad High Court in the case of Santosh and Co., New Delhi vs. CST reported as 1999 NTN (Vol. 15) 604 stands relied upon.
It may be added that the definition of the term “sale” under the Central Sales Tax Act, 1956 was also substituted vide Finance Act, 2002 w.e.f. 11.05.2002 by deeming fiction transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract is included in the definition of the term “sale”. This further supports the above view.
Constitutional Part in relation to Works Contract
Prior to the constitution of India the states were authorized to levy tax on the sale of goods by virtue of entry 48 of list 11 of the seventh Schedule of the Govt. of India Act, 1935. The said entry 48 read as under:-
“Tax on the sale of goods and Advertisement”
Now the States are authorized to levy tax on the sale or purchase of goods by virtue of entry 54 of list 11 of the Seventh Schedule of the Constitution of India as per article 246(3) of the constitution of India.
Entry 54 of list 11 of the seventh schedule of the constitution of India, which authorizes the States to levy tax on the sale or purchase of goods is read as under:-
“Tax on the sale or purchase of goods other than newspaper” subject to the provisions of entry 92(A) of list I.
Parliament is competent to levy tax in respect of entry 92-A of list I and Entry 92-B of list-I.
Entry 92-A list I: Taxes on the sale or purchase of goods other than newspaper where such sale or purchase takes place in the course of inter-State-trade or commerce.
Entry 92-B of list-I: Taxes on the consignment of goods (whether consignment is to the person making it or to any other person) where such consignment takes place in the course of inter-state-trade or commerce.
No Law has been enacted by the Parliament to levy tax on the purchase of goods taking place in the course of inter-state-trade or commerce. Similarly no law has been enacted by the parliament to levy tax on consignment of goods taking place in the course of inter-State-trade or commerce.
It means either sale or purchase of goods taking place within the State could be taxed by the State. Both the purchase and the sale of the goods could not be taxed within the State.
The expression “Sale of goods” occurring in entry 54 of list-11 of the seventh Schedule to the constitution of India can not be construed in the popular sense but only in terms of the meaning specified in Section 4 of the “Sale of Goods Act, 1930”
According to Section 4 of the Sale of Goods Act, 1930 to constitute a valid sale, there must be occurrence of the following ingredients:-
Essentials of sale:
Thus in a transaction of sale of goods which is liable to tax, there must be occurrence of the four elements viz. (1) Parties competent to contract (2) Mutual assent (3) A thing, the absolute or general property of which is transferred from the seller to the buyer and (4) a price in money paid or promised.
The States are not competent to extend the meaning of sale from that in the sale of goods Act while the parliament could do so.
When does Property Pass?
The Supreme Court in 16-STC-213 has held that property shall pass from the seller to the buyer when the Contract of sale is made except in conditional sale.
Element of sale in Divisible and Indivisible works contract:
Prior to the verdict given by the Hon’ble Supreme Court of India in 9-STC-353 in the case M/s Ganon Dunkerley Vs. State of Madras there was a difference of opinion among the various High Courts on the issue of levy of tax on works contract. The legal controversial over imposition of sales tax on works contract were settled in 9-STC-353, wherein it has been laid down that in case of one, entire and indivisible works contract there was no sale. However if there existed district and separate contracts, one for the transfer of material for money consideration and other for payment of remuneration for services and for work done, the position would be different and in that case the States will be competent to levy tax on the sale and supply of material which infact were supplied under different agreements altogether.
Need of Forty Sixth Constitutional Amendment:
The State Governments to whom revenue from sales tax has been assigned as to the large scale avoidance of central sales tax leviable on inter state sales of goods through the device of consignment of goods from one State to another and as to the leakage of local sales tax in works contract, hire purchase transactions lease of films etc. Though Parliament could levy tax on these transactions, as tax on sales has all along been treated as an item of revenue to be assigned to the States, in regard to these transactions, as tax on sales has all along been treated as an item of revenue to be assigned to the States, in regard to these transactions which resemble sales also, it was considered that the same policy should be adopted.
Date from which effective: The constitution (46th Amendment) Act, 1982 came into force on 03.02.1983
Amendments by 46th Constitutional Amendment Act:
(i) In Article 366 a new clause 29-A was inserted which is extracted below:-
(a) a tax on the transfer, otherwise than in pursuance of a contract, 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) involved in the execution of a works contract;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;
(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, 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 mabber 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.”
ii) Simultaneously, a new Entry 92-B was inserted in list-I of Seventh Schedule to the Constitution, which is extracted as under:
“92-B. Taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter state trade or commerce.”
iii) In clause (1) of Article 269, a sub-clause (h) was also added and clause (3) of Article 269 was also amended. The amended provisions of Article 269 is extracted as under:
“(h) taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place, in the course of inter-state trade or commerce…………..
(3) Parliament may by law formulate principles for determining when a sale or purchase of or consignment of, goods takes place in the course of inter state trade or commerce.”
iv) By Forty-sixth Amendment, Article 286 of the Constitution was also amended by substituting clause (3) by a new clause which reads as thus;
“(3) Any law of a State shall, insofar as it imposes, or authorizes the imposition of;
(a) a tax on the sale or purchase of goods declared by parliament by law to be of special importance in inter State trade or commerce;
(b) a tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause(c) or sub-clause (d) of clause (29-A) of Article 366
be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify”
Limitation & Restriction on the Powers of State under entry 54 of List II of Seventh Schedule to the constitution
The State is not empowered to levy tax on the sale or purchase in the following circumstances:-
Provisions relating to tax Deduction by the contractee
(1) 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.
(2) Any contractor responsible for making any payment or 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 two per cent of such payment or discharge, purporting to be a part of the tax, payable under this Act on such transfer, from the bills or invoices raised by the sub-contractor, as payable by the contractor.
(3) Every person liable to deduct tax at source under sub-section (1) or sub-section (2), as the case may be, shall make an application in the prescribed manner to the designated officer for allotment of Tax Deduction Number. The designated officer, after satisfying that the application is in order, shall allot Tax Deduction Number.
(4) The amount deducted under sub-section (1) or sub-section (2), as the case may be, shall be deposited into the Government Treasury by the person making such deduction in the prescribed manner and shall also file a return of tax deduction and payment thereof in such form and in such manner, as may be prescribed.
(5) Any deduction made in accordance with the provisions of this section and credited into the Government Treasury, shall be treated as payment towards the tax payable on behalf of the person from whose bills and invoices, the deduction has been made and credit shall be given to him for the amount so deducted on the production of the certificate, in the prescribed form in this regard.
(6) If any contractee or the contractor, as is referred to in sub-section (1) or sub-section (2), as the case may be, fails to make the deduction or after deducting such amount fails to deposit the amount so deducted, the designated officer may, after giving an opportunity of being heard, by order in writing, direct that the contractee or the contractor shall pay, by way of penalty, a sum, equal to the amount deductible under this section, but not so deducted, and if deducted, not so deposited into the Government Treasury.
(7) Without prejudice to the provision of sub-section (6), if any contractee or the contractor, as the case may be, fails to make the deduction or after deducting, fails to deposit the amount so deducted, he shall be liable to pay simple interest at the rate of one and half per cent per month on the amount deductible under this section, but not so deducted and, if deducted, but not so deposited, from the date on which such amount was deductible to the date, on which such amount is actually deposited.
(8) Where the amount has not been deposited after deduction, such amount together with interest referred to in sub-section (7), shall be a charge upon all the assets of the person concerned.
(9) Payment by way of deduction in accordance with sub-section (1) or sub-section (2), shall be without prejudice to any other mode of recovery of tax, due under this Act from the contractor or the sub-contractor, as the case may be.
(10) 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.
Important Rules under the Punjab Value Added Tax Rules, 2005 in relation to Works Contract
|Rule 15. Determination of taxable turnover by a person.–(1) To determine the taxable turnover of sales, a person, shall deduct from his gross turnover of sales, the following :-||
sections 15,16,17 and 19.
|(a) turnover of sales of goods, declared tax free under section 16 of the Act;(b) turnover of sales of goods, made outside the State or in the course of inter-state trade or commerce or in the course of import of goods into or export of goods out of the territory of India under section 84 of the Act;(c) turnover of goods, sent on consignment basis or branch transfers;
(d) amount, charged separately as interest in the case of a hire-purchase transaction or any system of payment by installments;
(e) amount, allowed as cash discount and trade discount, provided such discount is in accordance with the regular trade practice;
(f) sale price of taxable goods where such sale was cancelled:
Provided that the deduction shall be claimed only, if the person is in possession of all copies of VAT invoice or Retail invoice.
(g) sale price, in respect of any goods , returned within a period of six months:
Provided that a taxable person shall claim the deduction only on the basis of debit note, issued by the purchaser for the goods returned; and
(h) a sum, to be calculated by applying a tax fraction in case, gross turnover includes retail sales.
(2) The deduction referred to in clauses (e), (f) and (g) of sub-rule (1), shall be claimed in the tax period in which the event occurs:
Provided that if the turnover of the period is less than the claim, then the balance of such deduction, shall be claimed in the immediate subsequent period.
(3) The provisions of clauses (a) to (g) of sub-rule (1), shall also apply for determination of taxable turnover of purchases for levy of purchase tax under sections 19 and 20 of the Act.
|(4) 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.
(5) 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.
|Lump sum Scheme for Works Contract under The Punjab Value Added Tax Act, 2005 (6) Where the contractor has not maintained the accounts to determine the correct value of the goods at the time of incorporation or deductions being claimed under sub-rule 4 are considered to be unreasonably high in view of the nature of contract, he shall pay tax at the rate of twelve and a half percent on the total consideration received or receivable, subject to the deductions specified in the table below. In such cases the contractor shall not be eligible to claim input tax credit and shall not be eligible to issue VAT Invoice|
Type of contract
Percentage of the total value eligible for deduction
|1||(a) Electrical Contracts:-|
|(i) H.T Transmission lines;||Twenty percent|
|(ii) Sub-station equipment;||Fifteen percent|
|(iii) Power house equipment and extensions;||Fifteen percent|
|(iv) 11 and 22 KV and L.T distribution lines 12+5; and||Seventeen percent|
|(v) All other electrical contracts.||Twenty five percent|
|(b) All structural contracts||Thirty five percent|
|2||Installation of plant and machinery.||Fifteen percent|
|3||Fixing of marble stabs, polished granite stones and tiles (other than mosaic tiles.)||Twenty five percent|
|4||Civil works like construction of buildings, bridges, roads etc.||Thirty percent|
|5||Fixing of sanitary fittings for plumbing, drainage and the like.||Fifteen percent|
|6||Fabrication and erection of structural works of iron and steel including fabrication, supply and erection of Iron trusses, purfins and the like.||Fifteen percent|
|7||Fabrication and installation of cranes and hoists.||Fifteen percent|
|8||Fabrication and installation of elevators (lifts) and escalators||Fifteen percent|
|9||Fabrication and installation of rolling shutters and collapsible gates||Fifteen percent|
|10||Installation of doors, door frames, window frames and grills.||Twenty percent|
|11||Supply and installation of air conditioners and air coolers||Fifteen percent|
|12||Supply and installation of air conditioning equipments including deep freezers, cold storage plants, humidification plants and dehumidres.||Fifteen percent|
|13||Supply and fixing of furniture and fixtures, partitions including contracts for interior decorators and false ceiling.||Twenty percent|
|14||Construction of Railway coaches and wagons on under carriages supplied by Railways.||Thirty percent|
|15||Construction of mounting of bodies of motor vehicles and construction of trailers.||Twenty percent|
|16||Supply and erection of weighing machines and weigh bridges.||Fifteen percent|
|17||Painting, Polishing and White Washing.||Twenty five percent|
|18||Laying of pipes.||Twenty percent|
|19||Tyre retreading||Forty percent|
|20||Dyeing and printing of textiles||Forty percent|
|21||Printing of reading material, cards, pamphlets, posters and office stationery.||Forty percent|
|22||All other contracts.||Thirty percent”|
Important Rule related to Works Contract under the Punjab Value Added Tax Rules, 2005
|Rule 46. Liability of persons in case of works contract.–(1) A person entering into a contract with a contractor or a contractor entering into a contract with a sub-contractor for transfer of property in goods in execution of a works contract, shall furnish to the commissioner or the designated officer, particulars of such contract in Form VAT-25 within a period of thirty days from the date of entering into such contract.|
|(2) A person entering into a contract with a contractor or a contractor entering into a contract with a sub-contractor for transfer of property in goods for execution of a works contract, who is also liable for deduction of tax, shall within a period of thirty days of accruing his liability to deduct the tax, make an application, complete in all respects to the designated officer in Form VAT-26, for allotment of tax deduction number. The designated officer shall allot tax deduction number to the person concerned within a period of seven days from the receipt of the application.|
|(3) The tax deducted under the Act, shall be deposited by the person deducting the tax through a challan in Form “VAT-2” in the appropriate Government Treasury within a period of fifteen days from the close of each month.|
A monthly statement of the deposits made under sub-rule (3), shall be furnished by the persons concerned in Form “VAT-27” alongwith the proof of payment within a period of fifteen days after the date of deposit.(5) The person deducting the tax, shall issue a certificate of such tax deduction at source in Form VAT – 28, which shall entitle the contractor to claim credit for such amount in the return.
In nutshell it can be safely concluded that lumpsum scheme is not preferable under the Punjab Value Added Tax Act, 2005 beside this here it is pertinent to point out that states are not empowered to tax transfer of goods in works contract in the course of Inter state trade as in exercise of his legislative power to impose tax on sale or purchase of goods under entry 54 of the state list read with article 366 (29-A)(b) the state legislature imposing a tax on transfer of property in goods involved in execution of works contract is not competent to impose a tax on deemed sale which constitutes a sale in the course of interstate trade or commerce or a sale outside the state or a sale in the course of import or export.
(J S BEDI Advocate, Email: [email protected], Mobile: 98140-66336)