Under the State Sales Tax Laws, before the 46 th
Amendment to the Constitution of India, the Sales Tax was applicable
only on the sales covered under the sale of goods Act (Normal sale). The
indivisible works contracts were not covered under the State Sales tax
Acts since works contracts were not normal sales. The Supreme Court
confirmed this legal status in its land mark judgment in the case of
Gammon & Dunkerely (9 STC 353). Due to this legal status, the states
were denied the levy of Sales Tax on the indivisible works contracts.
Such contractors were outside the clutches of sales tax laws.
The then Finance Ministers of the
States have requested the then Union Finance Minister to take necessary
legal steps so as to levy Sales Tax on indivisible works contracts.
Finally, the 46 th amendment to the
Constitution of India has been made on 2 nd February, 1983 to add a
sub-article (29-4) as under,
“(b) a tax on the transfer of
property in goods (whether a goods or in some other form) involved in
the execution of a works contract”.
After the said 46 th Amendment to
the Constitution, the States were empowered to levy Sales Tax / Works
Contract Tax on such sales, called as “Deemed sales” involved in the
execution of works contract. Due to the said amendment, the concept of
`Deemed Sale’ was introduced. The important features of deemed sales are
as under,
(a) It is not a normal sale as defined under sale of goods Act but a deemed sale of goods subject to sales tax by the States.
(b) In the `deemed sales’ the
states can levy Sales tax only on `the transfer of property in goods” .
In other words , the states can levy Sales Tax / VAT only on the
`Material Value’ of the works contract and not on the `labour portion’
of the works contract.
( c ) If in a contract there is no
transfer of property in goods from the contractor to the contractee,
then No sales tax is applicable on such contracts, called as “ Pure
Labour Jobs”.
(d) Under the deemed Sale , an
artificial break up of indivisible works contract has to be made to
arrive at the `material’ value and the `labour’ value of the contract.
Therefore, after the 46 th
Amendment to the Constitution of India, the States are empowered to levy
sales tax (now VAT) on such deemed sales but only on the `Material
Value’ of the works contract. The High Courts and the Supreme Court have
suggested methods on “How to arrive at a material value from the total
Contract Price”. (Gannon Dunkerly’s SC Judgement 1993 ) (88 STC 204).
The Supreme Court has also allowed
the States to come out with an alternative method to levy Sales Tax on
Works contract, if to arrive at material value is difficult. The states
have come out with a alternative method called as “Composition Tax”
method to tax the indivisible works contract, which is a non-legal
/alternative method. The small percentage like 1%, 2%, 4%, 8% as
Composition Tax is levied but on the total contract price without any
deduction which is available in the legal options under the State Sales
Tax / VAT Acts. After, the said amendment to the Constitution certain
States a namely Maharashtra & Delhi have come out with separate
`Works Contract’ Acts. The other states incorporated the separate
provision to levy Sales Tax on the deemed sales in the works contracts.
Under the State Sales Tax Acts or separate Works Contract Acts, No
contractor or contractee were entitled to claim any set off of Sales Tax
paid to their vendors. There was a double taxation in the hands of
Contractors in the Sales Tax Regime.
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