The states have introduced the new value Added Tax
(VAT) System from 1 st April 2005. The other five States have also
followed from 1st April, 2006 and the State of Tamil Nadu has introduced
VAT System from 1.1.2007. At present , only Uttar Pradesh and
Pondicherry (U.T.) have not joined the VAT States / UTs . They may join
from 1 st April, 2007. Therefore, the VAT system is in force in most of
the States and the Union Territories in India.
All the VAT States have
incorporated in their respective State VAT Acts, the provisions of
`Works Contracts’ for levying the Sales Tax /VAT on the deemed sales
involved in the execution of works contracts. There is no Works Contract
Tax (WCT) now, it is a VAT on the Works Contract transactions (Deemed
Sales). The Advantage to the Contractors is that under the VAT system,
the Contractors like manufacturers can avail VAT set off / Credit of the
VAT paid to the local vendors, which was not available in the Pre-VAT
Regime.
Please note that there is an
Uniform Scheme of Taxation for levy of VAT on Works Contracts under all
the State VAT Acts. There is no separate or different taxation schemes
in different States like in pre-VAT period for works contracts . There
is a uniformity under the works contract provisions in the Post VAT
Regime. This is a positive factor for Contractors under VAT Regime. In
all the State VAT provisions, there are three options available for the
Contractors to levy VAT on deemed sales (Works Contracts) and VAT is
leviable on the `Material Value’ of the Contract. The said three options
(Uniform in all the VAT States) are as under,
A-2 – Standard Labour Deduction (Legal Option)
B - Composition Tax (Non Legal or Alternative Option)
Under the legal options A-1 and
A-2, the State Governments can levy VAT only on the `Material Value” of
the Contract and not on the `Labour Portion’ of the Contract. Please
note that the States are empowered to levy tax on “Material Value” and
not on “Material Cost” in the works contract. For example, VAT is
applicable on `Cement Block Value’ and not on ` Cement Cost’. Similarly,
VAT is applicable on `Wooden Furniture Value ’ and not on `Timber/Wood
Cost’ in the hands of the Contractor.
I have explained below, the said
three options available for the Contractor, executing indivisible Works
Contract under the State VAT Acts (Uniform Across the States). Except
the Rates of Composition Tax, the Rates of TDS deductions, Returns and
Payment dates, most of the Major Provisions are Similar / Uniform under
the State VAT Acts;
Actual Labour Deduction Option
A-1 Option (Levy of VAT on Works Contracts in the hands of the Contractor)
Under the legal option A-1, the VAT
is payable on the `Material Value’ of the Contract. The deductions are
available for arriving at the Material Value from the total contract
price. Such deductions are specified in the corresponding provisions of
the state VAT Acts which are based on the guidelines given by the
Supreme Court in the case of Gannon Dunkerley (88 STC 204) or the
Contractors can arrive at the Material value / price of the Contract by
adopting cost + value Addition method. In this method, the Contractor
adds to the `Material Cost’ which is determined by considering all the
purchase bills of the materials (imports, outside the State and within
the State), the margin on such material cost plus any incidental
expenses attributed towards the material value. In other words, the
Contractor determines the Material Price after adding Material Cost and
Margin to such cost .
The 4% or 12.5% VAT would be
applicable on such Material Value /Price, depending upon the
classification of such materials (Steel 4%, others 12.5% VAT) in which
the property passes to the contractee . In this option A-1, the
Contractor can avail full VAT set off / credit of the VAT paid to the
local vendors (Not on CST paid to the outside the State Vendors)
provided he obtains corresponding `Tax Invoices’ from his local vendors.
Therefore, the cost of VAT is zero for the Contractors in this legal
option. Similarly, the Contractee /Customer also can avail the full
benefit except on the purchases covered under the Negative list under
the State VAT Act on which No VAT set off/Credit is available. Mostly
the Civil Works , Construction jobs, errection of immovable property
(Structures) are covered in the Negative lists. On the other works
contract purchases, the full VAT set off / Credit is available to the
contractee /customer. The T.D.S. (works contract) provisions are
applicable to the contractee in this option which are discussed later.
In nutshell, in the option A-1
(Legal), the Contractor gets full VAT set off / credit on the VAT paid
on the inputs and the Contractee also gets the credit, if it is not in
the Negative list (Like processing Jobs, Job works, Printing Jobs,
Repair Jobs etc.) The Contractors are benefited under VAT System as the
Contractors can avail full set off / credit.
However, in this option the
Contractor has to maintain proper books of accounts and the other
records to identify the material value of the Contract.
A-1 option is the Best option
available since the Contractor levies VAT only on the `Actual Material
Value’ of the contract, even though it is litigation prone option. Many
Contractors who execute big indivisible works contracts, Turnkey Jobs
opt for legal option A-1.
(Legal) (levy of VAT in the hands of the Contractor)
Under the legal option A-2, the VAT
is payable on the `Material Value’ of the Contract. The Material value
is calculated after deducting the `Labour Portion’ from the total
contract value / Price.
However, in this option a table is
available in the State VAT Act / Rules which shows `Standard Labour
portion’ attributed to the various works contracts. The Contractor has
to deduct such `Standard Labour portion’ shown in such tables from the
total Contract price to arrive at the `Material value’. The Contractor
would charge 12.5% VAT, on such material value. Each State has provided
the said `Standard Labour’ table , under this option. (Like in
Maharashtra for Civil Works it is 30%, for Plant & Machinery 15% ,
for AMCs 40% and for others 25% (Residuary)) .
The advantage in this option
compare to the A-1 option is that it is litigation free. The Sales Tax
Departments would allow the said ` labour portion deductions’ as the
same are provided in the VAT Rules itself. Also no identification record
has to be maintained by the contractor for the materials used in the
contracts. However, the Contractor has to consider both the options A-1
and A2 in the case where the Contractee/ Customer does not get the VAT
set off / credit and then selecting the cheaper option.
Like in A-1 option, in A-2 option
also, the Contractor gets full credit / set off on the VAT paid on the
inputs and the Contractee also gets full set off of the VAT paid
provided the said purchases are not in the Negative list of VAT set off /
credit. The TDS provisions are applicable to the contractee in this
option also which are discussed later.
( Levy of VAT in the hands of the Contractor )
Option B is the “Composition Tax”
option. This is a non legal alternative option, simplier option for
those Contractors who cannot maintain the proper Accounts, Record of the
material and other portion in their contracts. The contractee /
customer prefers this option as small amount of Composition Tax 2% / 4%
is payable to the Contractor instead of 12.5% VAT payable in legal
options. A-1 and A-2 . However , VAT credit/set off is not be available
to them in this option ( in this option , VAT Credit is available only
in the state of Maharashtra ) .
Under the “Composition” option, the
Contractor has to pay Composition Tax (VAT) on the total Contract value
/ price, No deduction of labour is available in this option. Similarly,
No VAT set off / Credit is available on the purchases of inputs to the
Contractors and the same is not available to the Contractees also.
(Except under Maharashtra VAT Act/Rules, partial VAT Credit is available
to both Contractor and Contractee in the Composition Tax option). The
Rates of Composition Tax differ from state to state. Generally it is 2%
(for civil contracts) @ 4% for other Contracts. However, exception is in
Maharashtra State where the Rate of Composition Tax is 5% on Civil
Contracts and 8% on other Contracts. In Maharashtra, in this option , in
excess over 4% Credit is available on the input purchases for civil
contracts (where composition Tax Rate is 5%) and 64% of the total credit
available for other Contracts ( where Composition Tax Rate is 8%). Thus
, partial VAT Credit is available to the Contractors in the Composition
Tax option. However, full credit is available to the Contractee in this
option in Maharashtra provided such purchases are not included in the
Negative list under MVAT Rules.
Therefore, except in Maharashtra,
in all other states No VAT set off / credit is available to both the
Contractor and the Contractee in the Composition tax option. The TDS
provisions of Works Contract are applicable to Conctractee in this
option which are discussed later.
In Short, in all the States only
the said 3 options (A-1, A-2 and B) are available in the hands of the
Contractors for levy of VAT on the local works contract transactions in
the VAT system. If no VAT set off/Credit is available to the Contractee /
Customer, then the Composition Tax option is the Cheapest since the
Rate of Composition Tax is lower than 12.5% VAT. Therefore , if the
Contractee / Customer can not avail the VAT set off / Credit in all the
three options , then , the VAT / Composition Tax paid to the contractor
is the cost to such Contractee /Customer, hence in such cases the
Contractor and Contractee should select the Best option available after
considering the Actual Figures in all the three options.
The States have provided separate
sections / Rules under the respective State VAT Acts for the works
contracts transactions which include said three options of levy of VAT ,
TDS , VAT Credits and Negative lists .
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