Works Contract - VAT and Service Tax Planning

Transcription

1 279 Works Contract - and Tax Planning Even after about 30 years of the 46 th Amendment to the Constitution of India, taxation of Works Contract is a subject matter of interpretations, controversies and complexities. It was expected to resolve the legal disputes by the introduction of levy of on element and on service element of a Works Contract, but it has further aggravated the situation and there are a number of judgements which are contradicted by another judgement on the same issue. The term Works Contract has a wide scope and different from General Sale. There is a transfer of property in definite form and the goods remain the same before or after the delivery in General Sale under Supply Contract, whereas the form of goods may be different before the delivery and after incorporation under Works Contract. Read on to know more CA. S. Ranga Swamy (The author is a member of the Institute. He can be reached at rangaswamys@ ivrinfra.com) Works Contract Tax and Taxable Event The 46 th Amendment to the Constitution of India in 1983, by insertion of clause (29A)(b) of Article 366, introduced a new definition to the word Sale which has enlarged the scope of tax on sale or purchase of goods by inclusion of a provision for tax on transfer of property in goods (whether as goods or in some other form) invoked in the execution of Works Contract being a deemed sale. The following Guidelines are drawn from various court judgments, to ascertain THE CHARTERED ACCOUNTANT august

2 280 TAXATION taxable event of Works Contract: There must exist an indivisible works contract and divisible contracts are outside scope. Both goods and services must be involved in the execution of works contract. Transfer of goods must be in tangible property and pass on either in the same form or in other form when incorporated in work. Form of goods has no relevance. In case goods are consumed and their identity is lost then no transfer of property occurs in those goods. Example:- electrodes, lubricants, power, fuel, gas, waste cotton etc. Passing of Property under Works Contract The property in goods passes under the theory of Accretion, Accession or Blending when s are incorporated in execution of works contract and not on bringing of goods to project site. Bills may be raised as and when s are brought on site or by stages at agreed terms & conditions, but it will not have any effect on the above principle of passing of property in goods as explained below- Accretion: A Contractor constructs a building on the land of Contractee using his own steel, bricks, sand, cement etc., which belongs to him till the stage of incorporation. But once the cement is pasted and bricks are applied on the land, these ingredients fasten themselves to the land and is not possible to remove without fundamental damage. Thus the ownership in these s gets transferred to contractee by inference through Accretion. Accession: A Car Garage undertakes the work of painting a car of Customer. The paint belongs to Car Garage till the stage of application on a car. But once the paint is applied on the car, the liquid paint gets attached on the metal of car and it is not possible to remove it without fundamental damage. Thus the ownership in paint gets transferred to Customer by inference through Accession. Blending: Another situation of Works Contract could be a case where multiple movable goods owned by Contractor are blended together to create new movable goods which are non-marketable in nature. For example, a printer who uses paper and ink to print cheque books for a bank. Aspects of Works Contract Contractor can discharge on of s incorporated under the following three options: i. : Under, can be arrived either by Value Mode (or) Value Addition Mode as explained below: Value Mode Under this mode, taxable of s will be arrived after allowing the deductions towards labour charges; payment to Sub-contractor for labour/ services; charges for planning, designing & architect; Charges for obtaining on hire the machinery & tools; cost of consumables such as water, electricity, fuels etc., and other similar expenses or cost of establishment relatable to supply of labour/services. Tax is payable at applicable rate to those taxable s under State Tariff. State can also levy uniform rate of tax on of s incorporated in work under a separate item in Tariff and such rate may be different from applicable rate to s individually. States like Assam, Delhi, Karnataka, Kerala, West Bengal etc., have specified a uniform rate on s other than Declared Goods as specified under Act,1956. Value Addition Mode Under this mode, Contractors can arrive at by adding cost of goods, cost of conversion and all other expenses such as loading/unloading, transport etc., plus the margin of profit on them. Tax cost will be less under when compared to other options since is payable only on actual of s incorporated in the work after adjustment of. However, the Contractor has to maintain proper books of accounts and other records to identify of s and labour. ii. Composition Composition Scheme is simple and convenient for Contractors who cannot maintain proper accounts. Under this method, tax is payable on total contract including labour at specified lumpsum rate. In states like Karnataka, Tamilnadu, Orissa, Delhi etc., Composition Option is to be exercised for all Works Contracts executed during a financial year and not permissible to opt each contract wise. is not available under this option except in Maharashtra State. tax is payable in states like Kerala, Karnataka etc., on interstate purchases but deduction of such turnover is allowed from total turnover and tax is payable on balance turnover only. Composition Option is not permissible in states like Gujarat, Himachal Pradesh, Tamil Nadu etc. if goods are imported from outside the state. Composition 84 THE CHARTERED ACCOUNTANT august 2013

3 281 Till GST Law is introduced it is essential to use the tool of integrated and Planning in order to minimise tax cost. Exercising a suitable option for payment of and is critical in tax planning which varies from one type of contract to another type of contract. It is difficult to frame one formula which is suitable to all situations. may be opted where contract price is inclusive of taxes and consisting of substantial of s with marginal element of labour/services. iii. labour deductions are prescribed under Laws to arrive at taxable based on type of contract. Tax is payable at the specified rate on taxable arrived after standard labour deduction in states like Andhra Pradesh, Jharkhand, Punjab, Assam etc., whereas at applicable rates of such goods in other states like Gujarat, Rajasthan, Maharashtra, Uttar Pradesh, Tamil Nadu etc. However, input credit is available under this method in most of states except in a few States like Andhra Pradesh, Jharkhand and Punjab. Tax cost is high under this option and hence not advisable to adopt it. / Planning Before exercising a right option for arriving at tax liability, Contractor has to analyse various components like labour/service charges, local/ interstate purchase of s, other expenses and effect of them on tax cost. Award excavation work contracts on Cubic Metre Basis instead of on Hire Charges Basis of earth moving machinery where is chargeable and ineligible item for input credit. Obtain Tax Invoice showing amount separately for availing input credit. Price reduction through passing on input credit can be sought by buyer. not payable on freight, delivery charges, erection and commissioning. not payable if goods are returned within 6 months. Registration Certificate should include all the items on which Contractor is entitled to purchase at concessional rate against issue of C-Form. Aspects on Works Contract Works Contract has been defined under Section 65B(54) of the Finance Act,1994 as a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, of any movable or immovable property. As per Rule 2A of (Determination of Value) Rules, 2006, of service of a Works Contract can be determined under following options: I: ( Portion) service in execution of Works Contract shall be equivalent to the Gross Amount charged less of property in goods transferred and /Sales Tax on such goods. Gross Amount includes / charges as enumerated in above paragraph under aspects of Works Contract- Value Mode. II: Abatement/Composition can also be determined on Total Amount of works contract as given below: A. At 40% for original works (at 25% where gross amount includes of land for residential unit having carpet area upto 2000 sq. ft. or where amount is less than Rs. 1 crore and at 30% for other than above); B. At 70% for maintenance or repair or reconditioning or restoration or servicing of any goods; C. At 60% on works not covered under above (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property. Total Amount means Gross Amount charged plus fair market of s issued to the contractor by contractee but excludes of s issued on chargeable basis to the contractor and thereon. Under both the above options, credit is available on Capital Goods and input services used for providing output service. Planning If the price is inclusive of taxes, then service tax element becomes one of the major cost elements. tax cost can be minimised through proper tax planning as given below: (A). In case of separate Supply Contract tax is not applicable on supply contract for THE CHARTERED ACCOUNTANT august

4 282 TAXATION sale/trading of goods as per Section 66D of Act under Negative List. (B). In case of separate Contract Pay on service contract and avail credit on capital goods/input services. may be deducted in arriving taxable service. If is also included in taxable service, then excise duty credit on such can be availed in terms of Rule 2(k) of Rules and as per clause (iv) of Notification No.33/ ST dated (C). In case of Works Contract which is Divisible or Separate Contracts issued on split basis for supply and service s Pay on service only as specified in the above option (B). (D). In case of Works Contract which is indivisible Option I-Pay on service as specified in above paragraph I. Option II-Pay on specified percentage i.e., 40% or 60% or 70 Total Amount as enumerated in above paragraph II under /Abatement. Option III-Pay on Total Gross Bill Value including both and service. Eligible for on Capital Goods and s under the above three options. However, excise duty credit on inputs is available for III only in terms of Rule 2(k) of Rules since tax is paid on also. The net effect of tax liability for construction of a Commercial Building is given in the following tables for the selected states - Gujarat & Tamil Nadu: I. Portion is 40% or 60% and Portion is 60% or 40% Plan Particulars % I II III- 100% R60 I II III 100% Total Tax Less : on cement, steel etc., on Capital Goods Total THE CHARTERED ACCOUNTANT august 2013

5 283 Plan Particulars Net Tax % I II I III III- II 100% 100% R Plan in Gujarat % R60 0.6%* Steel 5% Cement 15% Aggregates 5% Others 15% Less: 0.6%* Steel 50% 50% Cement 50% 50% Aggregates 100% Others 50% 50% Net Plan in Tamil Nadu % R %* Steel 5% Cement 14.5% Aggregates 5% Others 14.5% Less: credit 2%* Steel 50% 50% Cement 50% 50% Aggregates 100% Others 50% 50% Net THE CHARTERED ACCOUNTANT august

6 284 TAXATION II. Portion is 30% or 70% and Portion is 70% or 30% Plan Particulars Plan in Gujarat % R70 0.6%* R30 0.6%* Steel 5% Cement 15% Aggregates 5% Others 15% Less: Steel 50% 50% Cement 50% 50% Aggregates 100% Others 50% 50% Net % R30 I II III- 100% R70 I II III 100% Total Tax Less : on cement, steel etc., on Capital Goods Total Net Tax THE CHARTERED ACCOUNTANT august 2013

7 285 Plan in Tamil Nadu % R70 2%* R30 Steel 5% Cement 14.5% Aggregates 5% Others 14.5% Less: credit 6%* Steel 50% Cement 50% Aggregates 100% Others 50% Net The following interpretations have been made for the workings given in the above tables: is worked on 90 Cost of Excisable s/ s and on capital goods as R0.25 for Turnover of R100/-. A of s are purchased within the State and input credit is worked out at applicable rates taking purchase cost as 90% of Sale Value. is allowed at 30% on Civil Work and is payable on balance at applicable rates to goods. s from outside state are not permissible in Gujarat & Tamilnadu under Composition and hence assumed that s are procured within the state. The Finance Manager has to consider the following points which were emerged from the above analysis for selection of a suitable option for tax payment- In case of Turnkey Projects or EPC Contracts, is beneficial by payment of service tax on service and on. I is beneficial for service tax payment on Contract which consists of more than 60% and service less than 40%. II is beneficial in case is less than 60% and service is more than 40%. Hence, it is advisable to obtain the breakup of supply and service in a contract to exercise a suitable option. Conclusion Till GST Law is introduced, it is essential to use the tool of integrated and Planning in order to minimise tax cost. Exercising a suitable option for payment of and Tax is critical in tax planning which varies from one type of contract to another type of contract. It is difficult to frame one formula which is suitable to all situations. It is depending upon so many factors such as type of contract/project or service, / purchases, deploying own assets or hiring of equipments etc. Since the profit margin will be marginal and varies from 3% to 10% depending upon various factors in respect of construction industry, sometimes the element of tax cost may change the profit margin if not planned properly. Hence, integrated and planning helps the management in minimisation of tax cost. In this process, the Finance Manager plays a decisive role. THE CHARTERED ACCOUNTANT august