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Presented By CA Swatantra Singh, B.Com , FCA, MBA Email ID: singh.swatantra@gmail.com New Delhi , 9811322785 , www.caindelhiindia.com, www.carajput.com. WORKS CONTRACT TAX.

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  1. Presented By CA Swatantra Singh,B.Com , FCA, MBA Email ID: singh.swatantra@gmail.com New Delhi , 9811322785, www.caindelhiindia.com, www.carajput.com

  2. WORKS CONTRACT TAX Rajput Jain & Associates

  3. Contents

  4. Background

  5. Constitutional Amendment 46th Amendment made to the Constitution from February 2, 1983 Outcome of the above: • Permitted the States to levy tax on the Sale of goods involved in execution of all work contract. • States have been given power to separate the contract between work and the labour and services • Identifying whether the goods retained their original identity after the work was executed or had been merged, integrated or becoming part and parcel of the works, buildings etc. All the States to power under this Constitution Amendment and made Amendments in their respective Sales Tax Law to levy tax on such sale either by making separate legislation or by amendment in existing sales tax law

  6. Basic Sale of Goods vis-à-vis Works Contract

  7. Types of contract • Supply of Materials and Labour • Works Contract (e.g. Construction of a building, roads, bridges, dams etc.) • Supply of labour and supply of materials is incidental to the contract • Not a Works contract (e.g. Painting, cleaning, overhauling, lubricating, greasing of an old machinery etc.) • Pure Labour Contract – may involve materials for executing contract • Not a Works contract (e.g. Semi-finished material supplied to Job-worker for further processing, tailor doing stitching work)

  8. WCT under VAT

  9. Works Contract under Gujarat VAT • Section 2(23) : • Definition of Sale includes transfer of property in goods, (whether as goods or in some other form) involved in the execution of a works contract • Government of Gujarat has notified list of works contract • Notified works contractList_of_Works_Contract.pdf

  10. Works Contract under Gujarat VAT Act Valuation options under Works Contract Actual Labour deduction Standard Labour deduction Composition

  11. Calculation of Sale Price of Works Contract Actual labour deduction – Following deductions are allowed in case books of accounts are maintained Labour charges & Service charges Sub-contract charges Planning, designing and architect's fees Machinery on hire and tools used Cost of consumables, the property in which is not transferred Cost of establishment to the extent to it is relatable to the supply of labour and services Other similar expenses relatable to the supply of labour and services Profit earned by the contractor to the extent it is relatable to the supply of said labour and services Intention of the government is to levy tax ONLY on Material component

  12. Calculation of Sale Price of Works Contract Indivisible Contract – in case separate books of A/c’s are not maintained – Lump sum deductions are allowed * Amount to be deducted from the contract price (expressed as a percentage of contract

  13. Calculation of Sale Price of Works Contract Indivisible Contract – in case separate books of A/c’s are not maintained – Lump sum deductions are allowed * Amount to be deducted from the contract price (expressed as a percentage of contract pri

  14. Calculation of Sale Price of Works Contract Indivisible Contract – in case separate books of A/c’s are not maintained – Lump sum deductions are allowed To arrive at Taxable turnover above rates are applied after deducting payment made to specialised contractor, sub contractor (discharging liability separately)

  15. Composition Scheme – For contractors who do not wish to pay tax based on the specific formula or after considering the lump sum deductions Calculation of Sale Price of Works Contract • Rate of tax is 0.6% or 2% of the total contract value as under: • 0.6%- Construction contracts relating to roads, buildings, • bridges, pipeline laying, dams, etc. • 2% - Other contracts including contracts for erection, • installations etc. • Restrictions: • ITC not available on purchases • Contractor not eligible to issue VAT Invoice and also can not charge tax in the invoice - Therefore, no ITC is available to the employer • Cannot import goods on interstate basis or branch transfer basis

  16. TDS Rate under GVAT Person responsible for payment exceeding Rupees 1 crore for works contract is responsible for deduction of tax at prescribed rates

  17. Gujarat VAT – Compliance at a Glance

  18. Gujarat VAT – Input Tax Credit • ITC available on all inputs used in works contract other than composition method subject to fulfilment of conditions • Broad Restrictions on ITC: • CST purchases • Capital goods used in works contract • Lease goods • Goods purchased from Lump sum dealer • Goods not connected with business • Vehicles, equipments, accessories or spare parts • Fuel used in motor vehicles • Goods used as fuel in generation of electrical energy • ITC to be reversed by 4% in case of branch transfer

  19. Inter State Works Contract

  20. Inter-State Works Contract • Finance Act 2002, had made certain amendment in the Central Sales Tax Act 1956, to include inter-state sales of goods involved in the execution of works contract taxable from May 11, 2002 • clause (ja) in Section 2 of the CST Act was inserted which define work contract as:- • 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. • Citus of taxation will come only when: • Contractor executes works in another states and • The property over the goods passes from him to his customer either by transfer of document of title over the goods when they are in transit from his state to another state or directly on their incorporation in the works.

  21. How to determine the taxable turnover? • Proviso to Section 2(h) of the CST Act provides the meaning of sale price as under:- ‘sale price’ in relation to transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to the sale price for the purpose of this clause. • However no deductions has been prescribed under the CST Act . • Section 8A of the CST Act does not prescribe any mechanism regarding how to determine the turnover in case of a works contract. • Section 13 (1)(aa) of the CST Act empowers the Central Government to make rules providing for “the manner of determination of the sale price and the deductions from the total consideration for a works contract under the proviso to Section 2(h)”. • However no rules has been framed by the Central Government in this regard. • Section 13 (3) the CST Act empowers the State Government to make Rules, not inconsistent with the provisions of this Act and the Rules made under sub-section (1), to carry out the purpose of this Act

  22. How to determine the taxable turnover? • However no specific rules have been made by the State Government in respect of an inter-state works contract. So, what are the remedies available in this matter - Recourse needs to be taken to the Supreme Court judgment in the case of “M/s. MahimPatram Private Limited v. Union of India (2007)”. • Brief facts of the case:- • Appellant was engaged in the printing of question papers for various universities and boards situated outside the State of Uttar Pradesh; • As the goods have moved from one State to another, it was an inter-state works contract; • The appellant had contended that in absence of the provisions for determining the ‘sale price’; taxable turnover cannot be computed under Section 8A and CST cannot be levied.

  23. How to determine the taxable turnover? • The learned Supreme Court decided as under: • Section 9(2) of the CST Act empowers the assessing officer to ‘assess, reassess, collect and enforce payment of tax, including any interest or penalty payable by a dealer under this Act as if the tax, interest or penalty payable by such dealer under this Act is a tax, interest or penalty payable under the general sales tax law of the State’. • Thus the powers conferred and the procedures laid down under the State sales tax laws would, therefore be applicable for the purpose of carrying out the assessment under the CST Act.

  24. How to determine the taxable turnover? • In view of the above ruling, provisions made in a particular State (from where the goods are moving) for determining the taxable turnover and the sale price in case of a works contract would be applicable accordingly in case of an inter-state works contract .

  25. Rate of Tax Applicable • After determining the ‘sale price’ and the ‘turnover’ as per the provisions of the State Act, rates of CST prescribed under Section 8 of the CST Act would be applicable. • Section 8 of the CST Act provides the following rates in case of an inter-state sale • If sale is made to a registered dealer against Form ‘C’ – 2% • If sale is made to a registered dealer without form ‘C’ – rate applicable in the respective State • If the sale is made to an un-registered dealer – rate applicable in the State from where the goods are moving in the course of inter-state trade or commerce.

  26. Works Contract under Service Tax

  27. Following are relevant taxable services involved in the Works Contract

  28. Works Contract service – Inserted from 1st June 2007 • Section 65(105)(zzzza) of the Finance Act defines taxable service as: • “any service provided or to be provided to any person by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airport ports, railways, transport terminals, bridges, tunnels and dams” • Explanation to this sub-clause defines ‘works contract’ : • Works contract means a contract wherein – Transfer of property in goods involved in the execution of such contract is leivable to tax as sale of goods and such contract is for the purpose of carrying out specified works.

  29. Works Contract service – Inserted from 1st June 2007 • Specified works are: • (a) Erection, commissioning or installation of plant ,machinery equipment or • structures, whether pre-fabricated or otherwise, installation of electrical and • electronic devices, plumbing, drain laying or other installations or transport of • fluids. heating ,ventilation on air-conditioning related pipe work, duct work and • sheet metal work, thermal insulation, sound insulation, fire proofing or water • proofing, lift and escalator ,fire escape staircases or elevators or • (b) Construction of a new building or a civil structure or a part thereof or of a pipeline or conduit ,primary for the purpose of commercial or industry or • (c) Construction of a new residential complex or a part thereof or • (d) Completion and finishing services, repairs, alteration, renovation or restoration of • or similar services in relation to (b) and (c) • (e) Turnkey projects including, engineering, procurement and construction or • commissioning (EPC) projects.

  30. Works Contract service – Inserted from 1st June 2007 • Two essential conditions for taxability under works contract service are – • There must be transfer of property in goods involved in the execution of specified works contracts • Such transfer is leviable to tax as sales of goods.

  31. Appropriate Classification under Service Tax Legislation • If the specified work contract involves transfer of property and on which VAT/Sales tax is payable the service will be taxable under Works contract Service • If the Contract is a simple service contract i.e. no material is involved or even if some material is involved, VAT/Sales tax is not payable the service would be classified under respective category of Construction or Erection and Commissioning Service

  32. Works Contract Service Valuation options Computation as per Valuation Rules Composition

  33. Valuation of works contract service Computation as per Valuation Rules Value of works contract shall be equivalent to gross amount charged for the works contract less value of transfer of property in goods involved in execution of the said works contract. Along with value of Material VAT/CST paid to be deducted. Following to be included : Labour charges & Service charges Sub-contract charges Planning, designing and architect's fees Machinery on hire and tools used Cost of consumables, the property in which is not transferred Cost of establishment to the extent to it is relatable to the supply of labour and services Other similar expenses relatable to the supply of labour and services Profit earned by the contractor to the extent it is relatable to the supply of said labour and services Other similar expenses relatable to supply of labour and services Profit earned by the service provider relatable to supply of labour and services.

  34. Valuation of works contract service Computation as per Valuation Rules - Tax rate and CENVAT • Service Tax @ 10.3% to be paid on taxable value arrived • CENVAT credit on Input services and Capital goods can be availed

  35. Valuation of works contract service Computation as per Composition scheme • Optional Composition scheme • Service Tax (including Ed. Cess and SHE Cess) is 4.12 % of the total value of the works contract. • Intimation to the department for availment of this option prior to execution of Works Contract. • Once opted, can not change the option till completion of the contract. • Value of free issue items also to be included in Gross Value • CENVAT credit on Input services and Capital goods can be availed

  36. Goods & Services Tax(GST) • Indicated roll-out date is April 1, 2011

  37. The Gist of Proposed GST: Taxes to be subsumed Central Levies State Levies • Value added tax • Excise duty • Entertainment tax • Additional excise duties • Luxury tax • Excise duty under Medicinal and • Tax on lottery, betting & gambling Toiletries Preparation Act • Entry tax • Service tax • Additional and special additional • Surcharges and cesses customs duties • Surcharges and cesses Central GST State GST

  38. What prompted the GST? •Several indirect taxes at Central and State level • Tax on tax in current Central Excise and State VAT mechanism •No harmony in rates of VAT on similar commodities from one State to another •CENVAT credit & VAT input tax set-off not comprehensive due to restrictive provisions • Break in credit chain in inter-State transactions • Multiple taxes leading to complexity in compliance

  39. The Gist of GST: Uniformity in structure • • 1st Discussion paper on GST released by the Empowered Committee on 10th Nov’2009 • As far as practicable there will be uniform procedures across various statutes concerning: - Chargeability • Taxable event • Taxable person • Valuation - Classification • Rules for taking and utilisation of credit for CGST and SGST would be aligned, but no cross utilisation of credit between these two taxes

  40. The Gist of GST: Scope and coverage • CGST and SGST would be applicable on all transactions of goods and except: - Exempted goods and services -Transactions which are below the prescribed threshold - Goods outside the purview of GST: Goods Treatment under GST Products containing Outside the purview of GST, State Government to alcohol levy taxes as at present Central Government to levy excise duty on tobacco Tobacco Products products over and above GST Outside the purview of GST, will be subject to sales Petroleum Products tax / value added tax Levied by State Governemnt and to cess, excise duty by Central Government

  41. The Gist of GST: Rates and thresholds • Two-tier rate structure for both CGST and SGST - Standard rate for most goods and services - Lower rate for essential commodities and precious metals • Threshold limits: Threshold limits for : Tax Goods Services CGST Rs. 150 Lakh Yet to be decided SGST Rs. 10 Lakh Rs. 10 Lakh • Composition scheme with floor rate of 0.5% to be available for taxpayers having annual turnover below Rs. 50 Lakh

  42. CGST SGST CGST SGST IGST IGST IGST CGST IGST SGST The Gist of GST: Input tax credit Mechanism • Input Tax Credits (ITC) against against against

  43. The Gist of GST: Inter-State transactions • Inter-State sale of goods and services will be taxed under the innovative Integrated GST (IGST) model • IGST model would work as follows: - The Central Government would levy IGST at the rate of CGST + SGST on all inter-State sale transactions - To pay this IGST, the inter-State seller may use credit of CGST, SGST and IGST on his inputs - The inter-State purchaser may use the credit of the IGST paid on his purchases to discharge the output tax liability on his taxable supply of goods or services

  44. The Gist of GST: Exports and imports • Exports would be zero-rated • Exports to processing zones of SEZ will also be zero rated - No benefit would be allowed for the sales from SEZ to Domestic Tariff Area • Imports of goods and services would be subject to CGST and SGST based on destination principle: - SGST revenue will accrue to the State where the imported goods and services are consumed - Both CGST and SGST paid on import of goods and services will be available as credit

  45. Impact on businesses: Decision matrices • Product Pricing needs to reflect GST efficiency • Stock level to be maintained as on transition date • Timing of acquisition of assets • Review impact on existing contracts • Focus on core activities vs. backward / forward integration • Ascertain change in documentation and processes • Identify changes to ERP system to be GST compliant • Assess need to re-engineer tax management function

  46. New dual GST: Transition matters • Treatment of unutilised tax credit balance as on transition date • Tax credit on capital goods where only partial tax credit taken in pre-GST regime • Treatment of tax already paid on goods lying in stock as on the transition date • Sales return of goods sold in pre-GST period • Taxation of contracts and services spread overpre-GST & post-GST period • ‘Change-in-law’ provisions in existing and new contracts

  47. Presented By • CA Swatantra Singh, B.Com , FCA, MBA • Email ID: singh.swatantra@gmail.com • New Delhi , 9811322785, • www.caindelhiindia.com, • www.carajput.com

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