09:45
Manish Singh Nirala
Works contract involving transfer of property in goods is an
indivisible contract. It is indivisible in the sense that value of goods to be
incorporated in any form in the works and value of labour & services to be
rendered in execution of the contract have not been subject matter of bargain
separately. Single amount has been
subject matter of bargain.
In India, tax
on sale of goods is levied under the Sales Tax Law (VAT Law) and tax on labour
& services is levied under the Service Tax Law. Service tax is levied by
the Central Government under the law enacted by the Parliament whereas sales
tax is levied by different States under the VAT law of respective State.
Clause 29-A
of Article 366 defines transfer of property in goods (whether as goods or in
some other form) involved in the execution of works contract as sale of such
goods by the person who makes such transger and a purchase of such goods by the
person to whom property in such goods is transferred.
The Central
Sales Tax Act, 1956 and VAT laws of various States define term ‘works contract’
in almost similar terms. VAT law of Uttar Pradesh defines the term ‘works
contract’ as under:
(au) "works
contract" includes any 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.
The Central
Sales Tax Act, 1956 defines the term ‘works contract’ as follows:
"works contract", means a contract for carrying
out any work which includes assembling, construction, building, altering,
manufacturing, processing, fabricating, erection, installation, fitting out,
improvement, repair or commissioning of any movable or immovable property;
In cases of
works contracts, difficulty in computing tax on sale of goods arises due to
following reasons:
(i) Values
(amounts receivable) of labour & services and of goods are not separately
known;
(ii) However, if we are able to segregate
value of labour & services and value of goods, then difficulty arises in
segregating values of various goods taxable at different rates of tax.
Amount
receivable for labour & services is not only the sum spent in rendering
services. It also includes profit earned on labour & services. For so many
reasons, value of labour & services and profit thereon cannot be found from
the books of accounts kept by a contractor. Looking into this difficulty,
several Sates have enacted a deeming provision for the purpose of determining
value of goods. They have prescribed percentage value of total amount receivable
for execution of the contract as percentage value of labour & services and
profit thereon. Remaining amount of contract is deemed as the value of goods in
which property in the execution of works contract passes from contractor to the
contractee. In Uttar Pradesh, in the Uttar Pradesh Value Added Tax Rules, 2008,
Rule 9 has been framed as under:
9.Determination of turnover of sale of goods involved in the
execution of a works contract.
(1) Subject to
other provisions of these rules, the tax on turnover of sale of goods where
such sale is affected by way of transfer of property in goods (whether as goods
or in some other form) involved in the execution of a work contract shall be
computed on the taxable turnover of sale of taxable goods. For the purposes of
determining the taxable turnover of sale of such goods, the amounts specified
below shall be deducted if included in the gross amount received or receivable
in respect of the works contract:-
(a) all amounts representing the value of
goods consumed in execution of the works contract; in which property in goods
is not transferred in the execution of the works contract;
(b) all amounts representing the value of exempt goods and
amount of profit thereon;
(c) all amounts representing the rent
paid or payable in respect of machinery and other equipments taken on hire for
use in the execution of such works contract;
(d) all amounts representing the value of service and labour
and profit thereon;
(e) all amounts representing the value of
goods in which property has been transferred in the execution of the works
contract as a result of sale in the course of inter-state trade or commerce;
(f) all amounts representing the value of
goods in which property has been transferred in the execution of the works
contract as a result of sale in the course of export of goods out of the
territory of India or sale in the course of import of goods into the territory
of India;
(g) all amounts representing the value of
goods in which property has been transferred as a result of a sale outside the
State;
(h) all amounts representing the value of
non-vat goods purchased from within the State in the circumstances in which the
dealer executing the works contact himself is liable to pay tax on turnover of
purchase of such goods;
(i) all amounts representing value of
non vat goods where such goods are purchased by he dealer from a registered
dealer.
(j) the amount representing the cost of
establishment and other similar expenses of the contractor to the extent it is
relatable to supply of labour and services, and profit thereon.
(k) amount paid to sub-contractor for the
execution of works contract on furnishing certificate obtained from the
assessing authority of subcontractor certifying that:-
(i) The subcontractor is registered
dealer under the Act;
(ii) The subcontractor has disclosed
turnover in the relevant return of tax period and has paid tax according to the
provisions of the Act.
(l) Proportionate amount of actual cost
of land required to be used in construction of building, by the builder
contractor where cost of such land is included in the amount received or
receivable from the purchaser.
Explanation:
(i) For the purpose of clauses (a) and
(e) to (h), the value of goods referred to in such clauses includes amount of
profit thereon.
(ii) Actual cost of land required to be
used in construction of building, by the buiolder contractor means the value of
land computed at rate notified by the Collector of the relevant district in
accordance with procedure laid down for determination of the value of land for
the purpose of payment of stamp duty under the Indian Stamp Act, 1899.
(2) Where any amount has been deducted by
the contractee from the amount of the contract on account of breach of any
condition of the contract, such amount shall be deemed part of amount payable
to the contractor in respect of such contract.
(3) Where accounts maintained by the
contractor do not show separately the value of labour and services and amount
of profit accrued on such labour and services, or accounts maintained by the
dealer are not worthy of credence or if the dealer has not maintained accounts,
for the purpose of determining turnover of goods in which transfer of property
in goods has taken place, in cases other than those mentioned in the table
below, an amount, representing twenty percent of gross amount received or
receivable, shall be deducted towards labour and services and amount of profit
accrued thereon and in the cases described or mentioned in column 2 of the
table given bellow, amount of deduction towards such labour and services and
amount of profit accrued thereon shall be computed at the rate percentages,
given in column 3 against the entry in column 2 of the table, of the amount
received or receivable.
Table
Sl. no.
|
Description of works contracts
|
Rate
|
1
|
2
|
3
|
1-
|
Fabrication and installation of plant and machinery
|
10%
|
2-
|
Fabrication and erection of structural works including
fabrication, supply and erection of iron trusses, purline.
|
10%
|
3-
|
Fabrication and installation of cranes and hoists
|
10%
|
4-
|
Fabrication and installation of elevator(lifts) and
escalators
|
10%
|
5-
|
Supply and installation of air conditioning equipment
including deep freezers, cold storage plants, humidification plants and
dehumidifier
|
10%
|
6-
|
Supply and installation of air conditioners and air
coolers
|
10%
|
7-
|
Supply and fitting of electrical goods, Supply and
installation of electrical equipment including transformers
|
10%
|
8-
|
Supply and fixing of furnitures and fixtures, partitions,
including contracts of interior decorations
|
10%
|
9-
|
Construction of railway coaches and wagons on under
carriages supplied by railways
|
10%
|
10-
|
Construction of bodies of motor vehicle and construction
of trailers
|
10%
|
11-
|
Fabrication and installation of rolling shutters and
collapsible gates
|
30%
|
12-
|
Civil works like construction of building, bridge, roads,
dams, barrages, spillways and diversions, sewages and drainage system
|
30%
|
13-
|
Installation of doors, doors frames, windows, window
frames and grills
|
30%
|
14-
|
Supply and fixing of tiles, slabs, stone and sheets
|
30%
|
15-
|
Sanitary fitting for plumbing, for drainage or sewerage
system
|
30%
|
16-
|
Whitewashing, painting, and polishing
|
40%
|
Explanation: For the purposes of this rule, where period of
execution of a works contract is spread over several tax periods or several
assessment years, the aggregate, of all amounts of deductions towards labour
and services; and amount of profit accrued thereon, shall not exceed the
percentage of the gross amount receivable in respect of execution of such works
contract.
Explanation: For the purposes of this rule,
(a) where period of execution of a works
contract is spread over several tax periods or several assessment years; or
(b) where part of a works contract awarded
to a sub-contractor relates to different category of works contract; or
(c) where whole or part of a works
contract is awarded to sub-contractors,
the amount towards labour and services and the amount of profit accrued thereon
claimed by contractor and subcontractor together, shall not exceed the
percentage of the gross amount received or receivable in respect of execution
of each category of such works contract.
(4) For removal of doubts it is hereby
made clear that, for the purposes of this rule, in arriving at the turnover of
sale of goods involved in the execution of a work contract, amounts of
following nature shall not be deducted from the gross amount receivable.
(a) any amount proposed to be deducted in
the name of any tax or fee or any other levy;
(b) any amount which has been deducted by
the contractee from the contractor as demurrage or penalty or a fine or in any
other name for breach of any conditions of the contract or otherwise;
(c) any amount which has been deducted by
the contractee from the contractor as compensation.
Before going to
next step of determining turnover of individual goods, I would also like to
clarify that amount, arrived at after deducting amount receivable towards
labour and services and profit thereon, is the gross turnover of goods in which
properly has been transferred in any form and does not include turnover of
goods which other wise have been used or consumed in the execution of the
contract. For example turnover of fuel used/consumed, lubricants; water,
electricity etc. is not included in the turnover arrived at. Value of such
goods is part of labour & services.
In a works
contract, tax is leviable on transfer of property in goods (whether as goods or
in some other form) involved in the execution of the works contract. Transfer
of property in goods takes place at the time when goods are incorporated in the
works.
In this
article, for convenience, goods, those may involved in the execution of a works
contract and in which transfer of property might take place, are being referred
to as the goods to be incorporated in the works. Meanings of other similar
expressions are to be construed accordingly.
Now for
computing tax on turnover of goods, we see if total turnover of goods is
taxable at the same rate of tax then there is no difficulty in computing tax.
We can find out amount of tax by using the formula –
Tax amount =Turnover of sale of goods × rate percent of tax
/100
But where total
turnover of goods consists of goods taxable at different tax rates then we have
to find out turnover of goods for each tax rate slab separately. For example, a
contract of building construction may involve bricks, cement, sand, marble,
iron steel, badarpur, wood, colour, paint and hardware. In Uttar Pradesh, sale
of iron-steel is taxable @4%, sale of bricks, hardware and sand is taxable @5%,
sale of paints, colours, marble and timber (wood) is taxable @13.5% and sale of
cement is taxable @15.5%.
Therefore, for
the purpose of computing tax on all goods, we will need separate values
(turnover) of goods taxable at same rate of tax, i.e.
(i)
Turnover of goods taxable @4%;
(ii) Turnover of goods taxable @5%;
(iii) Turnover of goods taxable @13.5%;
(iv) Turnover of goods taxable @15.5%;
We see that no
provision has been made for the purpose of determining such turnover of goods
for each tax rate slab. (I do not know, if some State has provided such
mechanism). In such circumstances, we are left with only remedy that we should
segregate the total turnover in the ratio of their purchase prices assuming
that purchase values of same goods earn equal percent of profit or loss. For
this purpose we should know the purchase values of goods in which property has
been transferred and the rate of tax applicable to sale of such goods.
We must not
forget that we have to find out purchase values of those goods in which
property is transferred during the relevant tax period. Goods incorporated in
the works during a particular period may be the goods purchased during the same
tax period as well as goods purchased in some earlier tax period. Purchase
values of only those goods are to be considered which have been incorporated in
the works for which payment has become due irrespective of date of purchase of
such goods.
Now for goods
of each tax rate, we will compute ratio of gross turnover to their purchase
value. For this purpose we will add purchase values of all goods taxable at
different tax rate slabs separately and work out value addition factor as
under:-
Value addition factor = Gross turnover of sale of all goods
/ Gross purchase value of all goods
Now for each
tax rate slab, we will compute WCT as under:-
(1) WCT for goods atracting tax rate slab
of 4% =(purchase value of such goods ×
value addition factor) × 4 / 100
(2) WCT for goods atracting tax rate slab
of 5% =(purchase value of such goods ×
value addition factor) × 5 / 100
(3) WCT for goods atracting tax rate slab
of 13.5% =(purchase value of such goods ×
value addition factor) × 13.5 / 100
(4) WCT for goods atracting tax rate slab
of 15.5% =(purchase value of such goods ×
value addition factor) × 15.5 / 100
Total WCT
will be aggregate of amounts as computed above.
For a
particular tax period, amount receivable, in respect of the contract executed,
is the amount for which normally running bill is raised. Where more than one
bills have been raised for the works contract executed during a tax period then
sum of amounts will be taken as amount receivable.
The moment at
which transfer of property takes place, the Hon’ble Supreme Court has held that
in a works contract transfer of property in goods takes place at the time of
incorporation of goods in the works. We know that as soon as sale gets
completed the payment becomes due.
Where sale is
subject to approval, the sale will be complete only after the purchaser gives
its approval. On completed sale, the selling dealer is required to pay tax,
irrespective of payment mode or date.
Now we take an
example of construction of buildings. Let us assume that during a particular
month, the contractor is entitled to receive Rs. 1,50,00,000.00 in respect of
works contract executed during such month. Purchase values of goods in which
property has been transferred are as follows:-
Sl. No.
|
Name of
goods
|
Purchase
value of goods
|
Tax rate
percent
|
1.
|
Bricks
|
50,00,000.00
|
5
|
2.
|
Cement
|
15,00,000.00
|
15.5
|
3.
|
Timber (wood)
|
3,00,000.00
|
13.5
|
4.
|
Marble
|
5,00,000.00
|
13.5
|
5.
|
Sand
|
1,00,000.00
|
5
|
6.
|
Iron-steel
|
15,00,000.00
|
4
|
7.
|
Badarpur
|
1,00,000.00
|
13.5
|
Total purchase value of goods incorporated in the
works= 90,00,000.00
Now, if perecentage value of labour & services and
profit on them is 30 percent of amount receivable (say);
Then percentage of value of goods and profit thereon=100- 30
i.e. 70 percent of amount receivable (let us call it goods value percent)
Therefore, total amount receivable for goods incorporated in
the works= amount receivable xgoods value percent / 100
Which gives total receivable value of goods = 1,05,00,000.00
Now for each tax rate
slab, we will compute value of all goods as under:
(1) Purchase value
of goods for tax rate slab of 4%
= 15,00,000.00
(2) Purchase value
of goods for tax rate slab of 5%
= 51,00,000.00
(3) Purchase value
of goods for tax rate slab of 13.5% =
9,00,000.00
(4) Purchase value
of goods for tax rate slab of 15.5% =
15,00,000.00
Total purchase value of goods incorporated in the works
= 90,00,000.00
Value addition factor =total receivable value of goods/
total purchase value of all goods incorporated
Which gives us, Value addition factor=1,05,00,000 /90,00,000
Or Value addition factor=7/6
Now turnover of sale of goods for –
(i) all goods taxable @4% = (purchase
value of all goods taxable @4%) x value addition factor
=15,00,000
x 7/6 =17,50,000.00
(ii) all goods taxable @5% = (purchase value of all goods taxable @5%) x
value addition factor
=51,00,000
x 7/6 =59,50,000.00
(ii)
all goods
taxable @13.5% = (purchase
value of all goods taxable @13.5%) x value addition factor
=9,00,000
x 7 / 6 =10,50,000.00
(iii)
all goods
taxable @15.5% = (purchase
value of all goods taxable @15.5%) x value addition factor
=15,00,000
x 7 / 6 =17,50,000.00
Now we can compute tax using formula: amount of tax
=turnover of sale x rate of tax /100
(i) Tax for goods taxtable @4% =17,50,000 x 4/100 =70,000.00
(ii) Tax for goods taxtable @5% =59,50,000 x 5/100 =2,97,500.00
(iii) Tax for goods taxtable
@13.5% =10,50,000 x 13.5 /
100 =1,41,750.00
(iv) Tax for goods taxtable
@15.5% =17,50,000 x 15.5 /
100 =2,71,250.00
Total Tax or WCT
=70,000.00 + 2,97,500.00 +
1,41,750.00 + 2,71,250.00
=7,80,500.00
Where benefit of inter-state sales, sales outside the State
or sales in the course of import of goods into the territory of India is to be
claimed
Where WCT
payable under the State VAT Law is to be computed, exemption on sales falling
under sections 3, 4 & 5 of the Central Sales Tax Act, 1956 is available.
These are sales which take place-
in the course of inter-state trade or commerce;
outside the State; and
in the course of import of the goods into the territory of
India.
In such a case, for the purpose of computing value addition
factor, we will include purchase values of such goods including all expenses in
tax rate slab wise gross purchases. But for the purpose of computing taxable
turnover of sale of goods, we will not include purchase values of goods falling
under section 3, 4 and 5 of the Central Sales Tax Act, 1956.
Thus we see that for computing WCT, we need –
(1) Total amount
receivable for the works executed during the tax period;
(2) Percentage of
labour & service and profit thereon.
(3) Tax rate
slab-wise purchase values of all goods in which transfer of property has taken
place during the tax period.
(4) Tax rate
slab-wise purchase values of goods in which property has been transferred as a
result of inter-state sale, sale outside the State and sale in the course of
the import of goods (section 3 & section 5 of the CST Act) where exemption
on such sales is to be claimed.
Computation of
purchase values of goods
For all
computations, purchase value should include freight and other expenses incurred
including taxes and levies paid or payable in bringing goods to work site.
Where purchase value is not available, fair purchase price in the local market
may be taken.
WCT COMPUTATION
FACILITY:
This web site
www.taxtalkindia.com provides facility for computing sale turnover of goods
taxable at different rates and amount of tax payable. On home page, link
COMPUTE WCT (VAT) may be used for the purpose. Guidelines for use of various
links have also been provided under the link GUIDELINES.
Posted in: Taxes
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