CA Amit Mundhra
Works contract is a deemed sale which involves the transfer of property in goods (whether as goods or in any other form) involved in the execution of the works contract. The concept of taxation of goods transferred during the execution of works contract has been a matter of great litigation over the period.
I am trying to sum up the regularly followed methods and procedures while determining the taxation of works contracts in the hands of contractor.
As far as the Rajasthan VAT is concerned, there are 2 methods by which the Works Contractor can be assessed to tax. The first one is “Exemption Fees Method” and second one is “VAT Method”.
EXEMPTION FEES METHOD
In Works Contract taxation, the scheme of exemption fees is a mechanism provided for collection of works contract tax from the contractor in such a way that causes minimum inconvenience to the contractor assessees and also to the department collecting the tax in computing and assessing the taxable figures.
In Rajasthan VAT Act, the relevant notification of exemption fees is F.12(63)FD/Tax-2005/80 dated 11.08.2006. The link for this notification is here. Click Here. This notification has been amended from time to time and I am discussing the provisions contained in this notification as amended up to 01.04.2012.
What is the Exemption Fees Method
In nutshell, exemption fees method is the simplest method of tax collection and payment so far as the assessee and taxing authority is concerned. In this method, a list of specific kind of works contracts is specified and tax is charged as a percentage of total gross value of said works contract. The assessee is required to exercise this option by way of submitting an application along with the copy of the work order received and the department will issue exemption certificate on the basis of nature of works contract involved.
Major Features of Exemption Fees Scheme in Rajasthan VAT
- Assessee to apply and exercise option of exemption fees by making application in form WT-1 along with the copy of work order received by the contractor.
- Application in form WT-1 can be made within 60 days from the date of work order without attracting any late fees.
- Late fees of Rs. 1000/- is required to be paid if application is beyond 60 days from the date of work order but within 1 year from this date.
- Late fees of Rs. 5000/- is required to be paid if application is beyond 1 year from the date of work order but within 2 years from this date.
- No application will be entertained after expiry of 2 years from the date of work order.
- After receipt of application, the assessing authority shall issue exemption certificate in form WT-3 specifying the rate of exemption fees to be payable on each type of work order for which application has been received. Form WT-3 is issued work order wise.
- Such contractor is required to make payment of exemption fees as specified in exemption certificate.
- If the awarder is not deducting TDS from the contractor, then contractor is required to pay such exemption fees in equal monthly installments during the period of the contract from the date of filing of the application.
- The contractor shall not be entitled to claim input tax credit in respect of the goods used in execution of works contract for which the exemption certificate has been granted.
- The rates of exemption fees for various kinds of works contracts are given in my earlier article the link of which is here. click here
What will be the Status of Sub-Contractor
As per rule 22(2A) of Rajasthan VAT Rules, 2006, if the main contractor has opted for exemption fees under above notification, then the sub contractor who is performing the work of main contractor need not again opt for this scheme as the turnover of such contract will not be included in the taxable turnover of the contractor.
VAT METHOD
What is the VAT Method
If the contractor does not opt for the exemption fees option as stated above, he will have to go for the VAT method for determination of his tax liability.
The main drawback of the exemption fees scheme is that the contractor has to forego all the input tax credit available on goods purchased by him for execution of the works contract. If contractor does not want to forego the input tax credit, then he will need to get himself assessed under VAT regime.
In VAT method, the taxable turnover of the contractor is calculated by deducting the value of labour and services involved in execution of works contract and on the balance amount VAT is levied. From this VAT, the contractor can claim the input tax credit of goods purchased by him and pay the balance liability in cash.
How the Taxable Turnover is Calculated
The principles of calculation of value of taxable turnover of a works contract have been laid down by Supreme Court in Gannon Dunkerley and Company Vs State of Rajasthan and Larsen & Turbo Vs Union of India and Others (1993). The principles laid down by these verdicts are thoroughly followed while assessing the VAT on contractor if the contractor has not taken the Exemption Scheme route.
Method specified by Gannon Dunkerley & Company and L & T’s case by SC
In this method, the following deductions are made from the gross value of the works contracts performed by the contractor.
i) Labour Charges for execution of Works
ii) Amount paid to sub contractor for labour and services.
iii) Charges paid for obtaining on hire the equipment or machinery used for execution of works contract.
iv) Charges for planning and designing and architect’s fees.
v) Cost of consumables used in execution of works contract.
vi) Cost of establishment of the contractor to the extent it is relatable to supply of labour and services.
vii) Other similar expenses relating to supply of labour and services.
viii) Profits earned by contractor to the extent it relates to supply of labour and services.
Thus after deducting the above items, the remaining figure will be the taxable turnover of the contractor.
At What rate the Tax will be levied on the Taxable Turnover
Now the question arises, on the taxable turnover as arrived above, what tax rate will be applicable. Instead of discussing the methodology in words, I prefer to use following example by which the computation of tax liability can be easily understood.
Draft Works Account of a Contractor
Particulars |
|
Amount |
|
Particulars |
Amount |
To Opening WIP |
125000 |
By Gross Contract Receipts |
2500000 |
||
By Closing WIP |
150000 |
||||
To Purchase of Materials |
1375000 |
||||
Taxable at 5% |
675000 |
||||
Taxable at 14% |
625000 |
||||
Exempted Materials |
75000 |
||||
To Wages & Labour |
575000 |
||||
To Equipment Rent |
60000 |
||||
To Sub Contract Labour |
50000 |
||||
To Designing & Planning Charges |
11000 |
||||
To Consumables |
25000 |
||||
To Gross Profit |
|
429000 |
|||
|
|
|
2650000 |
|
|
2650000 |
Calculation of Taxable Turnover
| Particulars | Amount | |
| Gross Turnover of Contractor |
2500000 |
|
| Less: Admissible Deductions | ||
| Wages & Labour |
575000 |
|
| Equipment Rent |
60000 |
|
| Sub Contract Labour |
50000 |
|
| Designing & Planning Charges |
11000 |
|
| Consumables |
25000 |
721000 |
|
1779000 |
||
| Less: Profit on labour and services | ||
| (17.16% of 721000/- applying the GP rate) |
123724 |
|
| Taxable Turnover |
1655276 |
Now the Taxable Turnover will be bifurcated into turnover of different tax rates based on the following calculation.
|
Purchase of Materials |
Amount |
As % of Total |
Taxable Turnover |
Amount (Applying the same percentage) |
| Taxable at 5% |
675000 |
49.10% |
Taxable at 5% |
812590 |
| Taxable at 14% |
625000 |
45.45% |
Taxable at 14% |
752398 |
| Exempted |
75000 |
5.45% |
Exempted |
90288 |
| Total |
1375000 |
100.00% |
Total |
1655276 |
Thus the tax on turnover will be calculated at the rates specified as above and from the output tax the assessee can claim input tax on the goods purchased by him. The difference if any will be payable by the contractor as VAT.
This above example is just for simple understanding of the concept; however the computation of tax liability will vary depending upon the facts and circumstances of each case.
Cases Where Proper Books of Accounts are not kept by Contractor
In the above calculation, it is presumed that the contractor performing the works contract is maintaining proper books of accounts and other relevant records and he can prove the genuineness of the deductions claimed from the gross turnover before the assessing authority.
But however, to deal with the cases where the contractor does not maintain proper books of accounts or the books of accounts produced by him cannot be said to be reliable, then the legislature can prescribe some arithmetic formula by which a certain percentage is specified which is to be deducted from the value of gross contracts for determining the taxable turnover of the contractor.
In Rajasthan VAT Rules, Explanation to Rule 22(2) deals with such situation. It reads as under.
“Where the amount of labour is not determinable from the accounts of the contractor, or is considered to be unreasonably high in view of the nature of the contract, the deduction towards labour charges shall be allowed by the assessing authority according to the limits laid down in Column 3 for the type of contract specified in Colomn 2 of the table appended hereto;”
|
S.n. |
Type of Contract |
Labour Charges as percentage of gross value of the contract |
|
1 |
2 |
3 |
|
1 |
Fabrication and installation of Plant & Machinery |
25 |
|
2 |
Fabrication and erection of structural works of iron and steel including fabrication, supply and erection of iron trusses, purlins and the like. |
15 |
|
3 |
Fabrication and installation of cranes and hoists |
15 |
|
4 |
Fabrication and installation of elevators (lifts) and escalators |
15 |
|
5 |
Fabrication and installation of rolling shutter and collapsible gets |
15 |
|
6 |
Civil Works like construction of building, bridges, roads, dams, barrages, canals and diversion |
30 |
|
7 |
Installation of doors, door frames, windows, frames and grills |
20 |
|
8 |
Supply and fixing of tiles, slabs, stones and sheets |
25 |
|
9 |
Supply and installation of air conditioners and coolers |
15 |
|
10 |
Supply and installation of air conditioning equipments including deep freezers, cold storage plants, humidification and plants and dehumidors |
15 |
|
11 |
Supply and fitting of electrical goods, supply and installation of electrical equipments including transformers |
15 |
|
12 |
Supply and fixing of furniture and fixtures, partitions including contracts for interior decorators and false ceiling |
20 |
|
13 |
Construction of railway coaches and wagons on undercarriage supplied by railway |
30 |
|
14 |
Construction or mounting of bodies of motor vehicles and construction of trailers |
20 |
|
15 |
Sanitary fitting for plumbing and drainage or sewerage |
20 |
|
16 |
Laying underground or surface pipelines, cables or conduits |
30 |
|
17 |
Dying and printing of textiles |
30 |
|
18 |
Supply and erection of weighing machines and weighing bridges |
15 |
|
19 |
Painting, polishing and white washing |
25 |
|
20 |
All other contracts not specified from s.n. 1 to 19 above |
25 |
Returns to be submitted by Contractor
Contractors who have taken exemption certificates for all the contracts performed by them during the year are required to submit only Annual Return to the department in form VAT-11.
Contractors who have not taken exemption certificates or taken exemption certificates for some work orders then they are required to submit quarterly VAT Returns in form VAT-10 and Annual VAT return in form VAT-10A.
Now let’s discuss the second method for payment of tax under Work Contract in Rajasthan. The second method is “VAT Method”
Which method to choose “Exemption Fees” or “VAT Method”
This is a tricky issue and a lot of tax planning is involved here whether to go for exemption fees option or VAT option. A contractor can go for exemption fees option for one contract and VAT option for another contract. The exercise of each option should be done after estimating the requirements of goods required to be purchased for each type of contract and after doing a Cost and Benefit Analysis of both type of methods.
I hope that this article clarifies most of the issues pertaining to taxability of contractors in the Works Contract Regime. However, suggestions for any further inclusions to be made in this article are gladly invited.
(CA Amit Mundhra- Author is a member of ICAI and he can be reached at amit.mundhra@gmail.com)
sir
kisi contractor ne 14/07/2014 ke before ki ec(1.5) hai. aur contractor ne out of state se bitumin purchase kiya h to uss par entry tax liablie h ya nai.
send the notification of ec 14/7/2014 before and after 14/7/2014..
We have received a construction Contract from Cement Co. in Rajasthan. We are registered in Sale Tax Deptt. at Punjab and vat No. is with us.Kindly intimate how we submit the Bill to Company for Service Tax.
Dear Sir,
Please tell me that If the total purchase amount is more then gross turnover. Then please tell me the same process to be follow or not?
thank so much for providing us a detail knowledge about Works Contracts but i have some queries which are mentioned as below
1. Whether calculation of GP is to be made for every quarter??
2. in case Awarder deducts TDS @ 3%, while EC taken for 1.5% , how to claim refund in VAT-11, there is no such column,?
3.U have mentioned if TDS not deducted then contractor himself deposit, what in case Invoice made on 31st March and TDs deduct In June-July month , Whether still Contractor require to deposit EC Fees?? –
4.if the contractor did not go for EC and pays regular vat. Then what would be the treatment of TDS deducted by contractee @3 Percent.
5.n Rajasthan Sales Tax Exemption Certificate Application form Should be Accompained with Schedule-G, But Format of Schedule-G is not Provided anywhere. Can you help me Understanding what is the Mean by Schedule-G, and also Provide me Format of Schedule-G if possible.
Dear Sir,
are there any cases where the contractor is not required to show that the sub-contractor has duly included the amount in the return of turnover filed by him…..will it be sufficient if contrator shows that the sub-contrator is registered and his regd no.?????????????/
what is WCT Rajasthan liabilities of Builder if we take 0.70% composition Scheme.and in this case what is WCT Rajasthan Liabilities of Contractor? vinod Sharma
M-9313808854
Dear Sir,
As per Rule 22 (2A) of Rajasthan VAT Rules 2006, if the main COntractor has opted for exemption fee, then the sub contractor who is performing the work of main contractor need not again opt for this scheme.
How to Subcontractor file the return.
Inderveer
9891213590
Dear Amit Ji,
Thanks for Your Valuable Article on Exemption Certificate under Sales Tax.
In Rajasthan Sales Tax Exemption Certificate Application form Should be Accompained with Schedule-G, But Format of Schedule-G is not Provided anywhere. Can you help me Understanding what is the Mean by Schedule-G, and also Provide me Format of Schedule-G if possible.
Thanking You,
Jaikumar Singh,
Thanks for the Artical . My Question is either the bank Intrest charged By banker & Depriciaion of Machinery is come under deduction ?
Salab of Dates for Payment of rajasthan sales tax
Dear Sir,
What will be the penalty on late deposit of Exemption certificate ( WT-1), and what is the procedure of late depositing of EC?
Dear sir,
please clear my doubts:
1. Company in haryana received two separate order from a customer (company)in rajasthan, one for supply of material and another is service order for erection, installation and commissioning of plant.
2. in service order company will use material supplied under separate order of supply.
3. Material have been supplied by raising sales tax invoices ( VAT or CST).
4. Service inovice for erection , Instt and commissioing will be raised later on.
5.will both the order will be treated as one work contract because supply and erection is done by same company and TDS on WCT will be deducted by the awarder.
6. Cant supply order be treated as separate order for sale of goods vat will be charged and in service order service tax will be charged. Work contract will not be applicable.
7. if both will fall under Work contract and contract opt for VAT method than still TDS on WCT will be applicable.
what should be the minimum amount in which wct leived against a contract in Rajsthan
Dear Amit Mundhra ji,
The sec.20(2) of RVAT Act2003 with a non-obstante clause
makes it obligatory for all Awarders( irrespective of its being co/individual or firm) to deduct amount at prescribed rate in lieu of tax from payment to contractor. The relevant Notification dt.11/08/2006 also does not mention any differentiation of awarder. But the Rule 40 which deals with such deduction does not mention individual/ firm to compulsorily deduct wct.On account of this apparent inconsistency between Section and Rule which should be followed.Should a firm as an awarder deduct wct or not?
Pl. share your valuable opinion.
S.M.Periwal, Advocate
Dear Manish Aggarwal,
The amount deducted by contractee is adjustable against
VAT liability of the contractor.
S.M.Periwal,Advocate
Dear amit sir,
i want to know if the contractor did not go for EC and pays regular vat. Then what would be the treatment of TDS deducted by contractee @3 Percent.
really a very helpful article Good Bless you Thank you very much
sir
thanks
k s goyal
in rajasthan elevaor come under work contract or not
if main contractor is taken exemption certificate & sub let the total work than which is required return to be submitted by the sub contractor.
R P Agarwalji,
If awarder is not deducting TDS and one has taken the exemption fees option, then the contractor is required to deposit the exemption fees. If awarder is company, and it has not deducted TDS, this does not release the liability of contractor of tax payment. Contractor is still liable to pay the exemption fees.
hi Amit ..need one clarification.. you have mentioned that “If the awarder is not deducting TDS from the contractor, then contractor is required to pay such exemption fees…”
Does it not make any differance whether awarder is a company or individual?
Dear Amitji Thanks for write up , can u please clarify
A Whether calculation of GP is to be made for every quarter??
B in case Awarder deducts TDS @ 3%, while EC taken for 1.5% , how to claim refund in VAT-11, there is no such column,?
C U have mentioned if TDS not deducted then contractor himself deposit, what in case Invoice made on 31st March and TDs deduct In June-July month , Whether still Contractor require to deposit EC Fees??
D Declaration Forms Original to be deposited when to department
E What about in case EC Obtained before amended at reduced rate??