ISSUES RELATING TO WORKS CONTRACT UNDER MVAT ACT, 2002

ISSUES RELATING TO WORKS CONTRACT UNDER MVAT ACT, 2002 BY CA SAJJAN KANODIA 16/07/2016 FOR J. B. NAGAR CPE STUDY CIRCLE OF WIRC OF ICAI 1 • For a ...
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ISSUES RELATING TO WORKS CONTRACT UNDER MVAT ACT, 2002

BY CA SAJJAN KANODIA 16/07/2016 FOR J. B. NAGAR CPE STUDY CIRCLE OF WIRC OF ICAI

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• For a layman, Works Contract is a composite contract involving the sale of goods as well as the sale of services. For example, construction contract, maintenance contract etc. • Thus, Works Contract is a mixture of sale of goods involving transfer of property as well as provision of service.

SAJJAN KANODIA & CO.

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• Sale is defined in Clause (24) of Section 2 of MVAT Act, 2002. • “Sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly. • Sales in different forms viz. Sale of goods, works contract, hire purchase, etc. is defined in Explanations to Clause (24) of Section 2 of MVAT Act, 2002. SAJJAN KANODIA & CO.

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 Works Contract has been included under Explanation (b) of Clause 24 of Section 2 of MVAT Act, 2002 w.e.f. 20.06.2006.  (b)(i) the transfer of property in goods , otherwise than in pursuance of contract, for cash, deferred payment or other valuable consideration,  (b) (ii) The transfer of property in goods (whether as goods or in some other form) involved in the execution of a (including works contract) an 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

SAJJAN KANODIA & CO.

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Sale of Goods  Transfer of property and ownership  Intention to buy and sell goods  Property passes as per the terms of agreement

SAJJAN KANODIA & CO.

Works Contract  Transfer of Property involved in execution of works contract  No intention to buy and sell goods  Property passes based on the ‘accretion’ and ‘accession’

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Sale of Goods  Purchasing Raw Materials  Selling a Car  Purchasing a book  Buying clothes  Purchasing a machinery

SAJJAN KANODIA & CO.

Works Contract  Construction of a building  Setting up s plant at a factory  Repairs and maintenance of a house  Repairs of a car

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• Contracts can be Divisible as well as Indivisible contracts. • When the contract can be readily divided and the value of materials can be separately identified, then it is a divisible contract. • However, when the value of materials cannot be readily divided, it is an indivisible contract.

SAJJAN KANODIA & CO.

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• To determine the Sales Price under Works Contract, there are three broad methods namely: 1. Normal Method 2. Table Method (Lump sum / Standard Deduction Method) 3. Composition Method SAJJAN KANODIA & CO.

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 Works Contract under Normal Method are generally Divisible contracts.  The dealer is required to maintain specific books of accounts for individual category of expenses with detailed information.  The value of goods can be readily separated in this category of contracts by deducting value of all service portion.  The value of service portion consists of labour and service charges, payment to sub-contractor, planning, designing & architect’s fees, machinery and tools hire charges, expenses towards utility, consumption such as water, electricity, fuel etc. and profit attributable to the service portion of the contract. SAJJAN KANODIA & CO.

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Total Contract Value Less: Allowable Deductions a. Labour and Service charges for execution of W/C b. Amount paid to sub-contractor c. Planning, designing and architect’s charges d. Machinery & Tools Hire charges for execution of W/C e. Cost of consumables [Utilities e.g.: water, fuel, electricity etc.] (property not transferred) f. Other similar expenses related to supply of labour and services g. Profit earned related to supply of labour and services Balance Sales Price of goods in execution of W/C SAJJAN KANODIA & CO.

xxx xxx xxx xxx xxx xxx xxx xxx xxx 10

(Rs. In Lakhs) 100

Total Contract Value Less: Allowable Deductions a. Labour and Service charges for execution of W/C b. Amount paid to sub-contractor c. Planning, designing and architect’s charges d. Hire charges or otherwise for plant and machinery e. Cost of consumables f. Other similar expenses related to supply of labour and services g. Profit earned related to supply of labour and services Balance Sales Price of goods in execution of W/C SAJJAN KANODIA & CO.

5 7 9 4 10 6 13 46 11

 Works Contract under Table Method are generally Indivisible contracts.  Table Method is also known as Standard Deduction method or Lumpsum Method.  Where the dealer is not able to maintain separate set of books of accounts for the service and goods portion involved in the works contract, then he may resort to Table Method.  Table Method is generally adopted by smaller contractors who are not able to maintain specific books of accounts.  The dealer is not required to maintain specific books of accounts for individual category of expenses under this method.  The dealer is allowed certain percentage of deduction under this method towards value of service portion. The deduction percentage is defined according to nature of works contract. SAJJAN KANODIA & CO.

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The rates of deduction allowed from different category of works contract are given in table to Rule 58(1) as detailed below: Sr. No

Type of Works Contract

Amount to be deducted from the contract price (expressed as a percentage of contract price)

1.

Installation of plant and machinery

Fifteen per cent.

2.

Installation of air conditioners and air coolers.

Ten per cent.

3.

Installation of elevators (lifts) and escalators.

Fifteen per cent.

4.

Fixing of marble slabs, polished granite stones and tiles (other than mosaic tiles).

Twenty five per cent.

5.

Civil works like construction of buildings, bridges, roads, etc.

Thirty per cent.

SAJJAN KANODIA & CO.

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Sr. No

Type of Works Contract

Amount to be deducted from the contract price (expressed as a percentage of contract price)

6.

Construction of railway coaches on under carriages supplied by Railways.

Thirty per cent.

7.

Ship and boat building including construction of barges, ferries, trugs, trawlers and dragger.

Twenty per cent.

8..

Fixing of sanitary fittings for plumbing, drainage and the like.

Fifteen per cent.

9.

Painting and polishing.

Twenty per cent.

10.

Construction of bodies of motor vehicles and construction of trucks.

Twenty per cent.

11.

Laying of pipes.

Twenty per cent.

12.

Tyre re-treading.

Forty per cent.

13.

Dyeing and printing of textiles.

Forty per cent.

14.

Annual Maintenance contracts.

Forty per cent.

15.

Any other works contract.

Twenty five per cent.

SAJJAN KANODIA & CO.

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Suppose the Annual Maintenance Contract value entered by M/S ABC Pvt Ltd is Rs. 2 crores and the dealer has opted for Table Method (Standard Deduction Method), then the value of contract on which the liability under MVAT Act arises shall be computed as under : Solution: Contract Value : Rs. 2,00,00,000 Less: Standard Deduction @ 40% : (Rs. 80,00,000) Contract Value liable for tax under MVAT : Rs. 1,20,00,000

SAJJAN KANODIA & CO.

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a. According to Rule 58(1A) , in case where there is a construction contract, where along with the immovable property, the land or as the case maybe interest in land underlying the property is conveyed and the property in the goods (whether as goods or in any other form) involved in the execution of construction contract is also transferred to the purchaser, such transfer is liable to tax under this rule. The value of said goods at the time of the transfer shall be calculated after deduction of cost of land. b. Rule 58(1A) also provides the manner of calculation of land cost. It says, the cost of land shall be determined in accordance with the guidelines appended to the annual statement of rates prepared under the provisions of the Bombay Stamp Act (Determination of true market value of the property) Rules 1995 as applicable on the 1st January of the year in which the agreement to sell the property is registered. SAJJAN KANODIA & CO.

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Thus, the cost of land shall be the value of land for stamp duty purposes as applicable on the 1 January of the year of registration of agreement to sale. c. However, if the contractor feels that the actual cost of land is more than the value determined for stamp duty purposes, he can provide such facts before the Department of Town Planning and Valuation only after the payment of tax. On such actual cost being proved to be higher, then the actual cost of land be deducted and excess tax paid, if any, shall be refunded.

SAJJAN KANODIA & CO.

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a. As per the provisions of Rule 58(1B), where the dealer undertakes the construction of flats, dwellings, buildings or premises, and transfers them in pursuance of an agreement along with the land or interest underlying the land then, after deductions under sub rules (1) and (1A) from the total contract price, the value of the goods involved in the execution of works contract shall be determined after applying the percentage provided in column (3) of the following table depending upon the state at which the purchaser entered into the contract:

SAJJAN KANODIA & CO.

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Sr. No.

Stage during which the developer enters into a contract with the purchaser

Amount to be determined as value of goods involved in works contract.

1.

Before issue of the Commencement Certificate.

100 %

2.

From the Commencement Certificate to the completion of plinth level.

95 %

3.

After the completion of plinth level to the completion of 100% of RCC framework.

85 %

4.

After the completion of 100% RCC framework to the Occupancy Certificate.

55 %

5.

After the Occupancy Certificate

0%

SAJJAN KANODIA & CO.

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For determining the value of goods as per the above table, it shall be necessary for the dealer to furnish a certificate from the Local or Planning Authority certifying the date of completion of the stages referred above and where such authority does not have a procedure for providing such certificate then such certificate from a registered RCC consultant.

SAJJAN KANODIA & CO.

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Working for Rule 58(1B) for contractor following Rule 58(1) Table Method : Agreement Value : 1000 Less : Land Cost : 400 Balance : 600 Less : 30% Deduction as per Table : 180 Balance Value : 420 Assuming the developer has entered in a contract with the purchaser at the stage of “completion of plinth level to the completion of 100% of RCC framework” and accordingly, the Taxable Value of goods is 85% of 420 = Rs. 357/-. SAJJAN KANODIA & CO.

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 Works Contract under Composition Scheme are generally divided in three categories viz. a. b. c.

Composition scheme for Construction Contracts, Composition scheme for all contracts and Composition scheme for Builders & Developers.

SAJJAN KANODIA & CO.

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I. Composition Scheme for Construction Contracts  As per Notification No.VAT-1506/CR-134/Taxation-1 dt. 30.11.2006, dealer can opt for notified construction contracts under this composition scheme. The following category of construction contracts are notified under this scheme: A.       

Contracts for construction of – Buildings, Roads, Runways, Bridges, Railway Overbridges, Dams, Tunnels,

SAJJAN KANODIA & CO.

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 Canals,  Barrages,  Diversions,  Rail Trucks,  Cause ways,  Subways,  Spill ways,  Water supply schemes,  Sewerage works,  Drainage,  Swimming Pools, Water Purification plants,  Jetty’s. SAJJAN KANODIA & CO.

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B. Any works contract incidental or ancillary to the contracts mentioned in point no. A above, if such works contracts are awarded and executed before the completion of the said contracts.  Dealer has to pay VAT @ 5% on the total value of Contract.  Dealer can avail input credit in excess of 4% of purchase price. There will be 4% retention in setoff according to Rule 53(4)(b) of MVAT Rules.

SAJJAN KANODIA & CO.

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II. Composition Scheme for All Types of Works Contracts  Dealer may choose to pay VAT @ 8% on total contract value less the amount paid towards works contract executed by a registered sub-contractor. Dealer will be not be allowed 36% of total setoff amount and balance 64% setoff can be availed as per Rule 53(4)(a) of MVAT Rules.

SAJJAN KANODIA & CO.

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III. Composition Scheme for Builders and Developers  Dealers who undertakes construction of Flats, dwellings and buildings or premises may choose this scheme. Dealer is required to pay VAT @ 1% of the agreement amount specified in the agreement or agreements value adopted for stamp duty purposes whichever is higher. Dealers opting for this scheme can not claim input credit in respect of purchases made by him. Dealer is not allowed to make purchases against “C” Form. Dealer can not issue Tax Invoice and also not eligible to issue Form No.409 to the sub-contractors. SAJJAN KANODIA & CO.

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Vide amendment effected on 20.06.2006 in sub clause (ii) of the Explanation to Section 42(3) and Explanation added to Rule 58(1) it is provided that the deduction towards sub contract should be the quantum of price on which tax is paid by the sub contractor, if any, and the quantum of tax separately charged by the contractor if the contract provides for separate charging of tax or the aggregate value of the goods on which tax is paid and the quantum of said tax paid by the sub contractor or the sub contract value on which tax by way of composition is paid by the sub contractor, as the case may be.

SAJJAN KANODIA & CO.

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Suppose the total Contract value is Rs. 20 Lacs. Out of that contract worth Rs. 16Lacs was sub-contracted. Sub-contractor has raised a bill to the Main contractor of Rs. 16 Lacs plus composition sum of Rs. 1,28,000. Similarly Main contractor has raised a bill to the Principal of Rs. 20 Lacs plus composition sum of Rs. 1,60,000. In such a case when the Main contractor will work out his Vat liability he will do it as follows: Total Contract Value: 20,00,000 Add: Composition sum: 1,60,000 Total Value : 21,60,000 Less: Sub Contract Value : 17,28,000 Taxable Value : 4,32,000 Less : Tax Collected : 32,000 Net Taxable Turnover : 4,00,000 Tax payable @ 8% : 32,000 SAJJAN KANODIA & CO.

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 Form 233 has to be filed. Also, if the dealer is having interstate Works contract transactions, then Form IIIE (CST return) has to be filed. Returns\FORM-233.xls

SAJJAN KANODIA & CO.

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1. Basic Information of the dealer : a. TIN No, b. Periodicity of the return, c. Type of business activity, 2. Turnover of Sales details : a. GTO of sales b. Value of Goods return c. Turnover of Sales under Composition Scheme. d. Net Tax Amount e. Value of Branch / Consignments Transfers f. Computation of Tax Rate wise break up of sales SAJJAN KANODIA & CO.

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3. Turnover of Purchase details : a. GTO of purchases b. Value of Goods return c. Imports / Interstate Purchases d. Value of Branch / Consignments Transfers e. Value of exempted goods f. Computation of Tax Rate wise break up of purchases 4. Details of various reductions from eligible set off 5. Details of Tax paid Challans 6. Details of Signatory to the return SAJJAN KANODIA & CO.

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 Input Tax Credit in respect of goods used for Works contract: Sr No

Valuation Method

1.

Normal Method and Table Method

2.

Composition Scheme @ 8%

53(4)(a)

16/25th of the set off i.e. 64% of the set off

3.

Composition Scheme @ 5%

53(4)(b)

Retention of 4% from the amount of set off

SAJJAN KANODIA & CO.

Rule No

Input Tax Credit allowed

Full set off

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Rule 54(g) : Purchases effected by the employer by way of works contract when the contract results in immovable property other than plant and machinery Rule 54(h) : Purchases of any goods by a dealer, the property in which is not transferred (whether as goods or in some other form) to any other person, which are used in the erection of immovable property other than plant and machinery

SAJJAN KANODIA & CO.

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 TDS provisions are applicable for payments made for Works Contracts or other notified purchases.  The quantum of such deduction shall not exceed the quantum of tax payable towards such works contract.  No Works Contract TDS shall be deducted in respect of sale of purchase to which Section 8 of MVAT Act, 2002 applies. i.e. ‘Certain sales and purchases not to be liable to tax’ a. Sales/Purchases outside the state b. Sales/Purchases in the course of interstate trade and commerce c. Sales/Purchases in the course of import or export of goods SAJJAN KANODIA & CO.

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 Any amount or any sum deducted on or after the 1st April 2016 in accordance with the provisions of this section and paid to the State Government may be, Claimed as a payment of tax by the person making the said supply to the employer, or  Transferred as a credit to the sub-contractor in the prescribed manner, if sub-contract has been awarded, in respect of the concerned contract.  The principal contractor shall be eligible to claim credit of such amount or sum, in the period in which the certificate for payment is furnished to him by the person deducting tax. The subcontractor may claim the credit of such amount in the period in which the principal contractor has transferred the credit of such amount to him or in any subsequent period. SAJJAN KANODIA & CO.

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 Every employer liable to deduct tax at source shall in the prescribed manner apply to the Commissioner for allotment of a sales tax deduction account number.  Every dealer who has furnished a return under this section , discovers any omission or incorrect statement may furnish a revised return within 9 months from the end of the year to which the return relates.

SAJJAN KANODIA & CO.

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 TDS payment by 21st of the next month by the contractee in Challan No . MTR-6. (PPT hyperlinks\MTR-6.pdf)  Every person who is required to remit tax, shall furnish a certificate in Form No. 402 to the deductee. (PPT hyperlinks\form-402.pdf)  Monthly TDS return in Form No. 424 is required to be filed. (PPT hyperlinks\FORM-424.xls)  A register in Form No. 404 is required to be maintained in respect of TDS deducted and TDS Certificates issued. (PPT hyperlinks\Form 404.pdf) SAJJAN KANODIA & CO.

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 A contractor may apply in Form No. 410 to his Assessing Authority for NO TDS only if it is not a works contract. (PPT hyperlinks\Form 410.pdf)  No TDS to be deducted on the amount of tax as well as Service Tax, if any, separately charged by the contractor.  Any advance payment made shall also be considered as a payment or discharge of the contract value in the execution of works contract.  If the TDS is not deducted by the contractee, still TDS is payable. SAJJAN KANODIA & CO.

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Sr. No.

Class of Employers

Amount to be deducted

1.

Central Government and State Government

2% of the amount payable (in case of a contractor who is a registered dealer) 5% in any other case.

2.

All industrial, commercial or trading undertakings, company or corporation of the Central Government or of any State Government, whether set up under Same as above. any special Law or not, and a Port Trust set up under the Major Ports Ac, 1963.

3.

A company registered under the Companies Act, 1956 / 2013

4.

A local authority, including a Municipal Corporation, Municipal Council, Zilla Parishad and Cantonment Board

SAJJAN KANODIA & CO.

Same as above.

Same as above.

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Sr. No.

Class of Employers

Amount to be deducted

5.

A registered dealer under MVAT Act, 2002

Same as above.

6.

An Insurance or Finance Corporation or Company, and Bank included in the Second Schedule to the Reserve bank of India Act, 1934 and any Schedules Bank Recognized by the RBI.

Same as above.

7.

Trusts, whether public or private

Same as above.

8.

Societies registered under the Societies Registration Act, 1860

Same as above.

9.

A co-operative housing society registered under the Maharashtra Co-operative Societies Act, 1960 which Same as above. has awarded contracts of value aggregating to Rs. 10 Lacs or more in the Previous year or in current year.

10.

A co-operative society excluding a Co-operative Housing Society registered under the Maharashtra Co-operative Societies Act, 1960.

SAJJAN KANODIA & CO.

Same as above. 41

Specific areas of due diligence by the VAT Auditor :  Schedule III : Details for the year  Annexure C : Details of TDS Certificates Received  Annexure D : Details of TDS Certificates issued  (PPT hyperlinks\Annexure to Form 704.xlsx)

SAJJAN KANODIA & CO.

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SAJJAN KANODIA & CO. CA SAJJAN KANODIA 406-B, SHUBHAM CENTRE NO.2, CARDINAL GRACIOUS ROAD, CHAKALA, ANDHERI (EAST), MUMBAI – 400 099. TEL NO. +91 22 2831 5756 / MOB. NO. +91 93222 10183 EMAIL ID: [email protected] 43

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