Vat on works contract

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Taxation

Central State
Government Government

Direct Taxes Indirect Taxes Indirect Taxes

Goods – VAT, Octroi,
Excise/CST/Cu Service Tax Luxury Tax,
stoms Entry Tax

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• Problem given to Jinee


Contents
• Constitutional provisions

• What is works contract

• Works contract back-ground

21 August 2011 www.consultconstruction.com 4

Constitutional Provisions

Article - 246
Schedule VII

List-1 (Union List) LIST- 2 (State List)
Entry 92-A Entry 54

Taxes on the Sale or Purchase Taxes on the Sale or Purchase
of goods other than news of goods other than news
papers. Where such sale or papers, subject to provisions
purchase takes place in the of Entry 92 A of List 1
course of inter-state trade or
commerce.


• Supreme Court in a very old case of State of
Madras v. Gannon Dunkerley & Co. held that
– No tax can be levied on Works Contract
– No sale of goods involved in movable form

Works Contract to avoid Sales Tax


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

7 www.consultconstruction.com

What is Works Contract ?

• 46th amendment to the constitution does not provide any definition of
works contract.

• Works Contract is generally defined under CST and various State
Acts, as:
“Works Contract means a contract for carrying out any work which
includes
assembling, construction, building, altering, manufacturing, processing,
erection, installation, fitting out, improvement, repair or
commissioning of any movable or immovable property.”

• Predominant intention of the parties to the contract is not to sale or
purchase the goods but to carry out certain work for a lump sum
price

• Poser 1

Petitioners had relied on the following rulings in support of their plea that
there is no transfer of property in ink and consumables in the jobs of
printing in the contracts which were service contracts and passing of
property if any is merely incidental and not intended at all:

• R.M.D.C. Press (112 STC 30)
• M/s. Rainbow Colour Lab & Others (118 STC 9 S.C.)

Respondents on the other hand had relied on the following judgments:

• Sarvodaya Printing Press vs. State of Maharashtra (93 STC 387) as
approved by the Supreme Court — There is transfer of property in ink.
• Associated Cement Companies Ltd. vs. Commr. of Customers (124 STC
59) — Rainbow Colour Lab is no more good law
• Matushree Textiles Ltd. (132 STC 539) — Transfer of property in
colours and chemicals in the changed form of shade in the job of
printing and dyeing of cloth.


• The works contracts are not normal sales.

• For example, at the site of construction of a building, before
the Construction (works contract) commences, the goods
like cement, steel, sand etc. are lying but after the
Construction a building (immovable goods) comes to an
existence. This is the difference between the ` Normal” sale
and the “deemed sale” in the indivisible works contract .


Basic Sale of Goods vis-à-vis Works Contract

Sale of Goods Works Contract

Taxed as actual Sale : Seller & Buyer Taxed as Deemed Sale : Contractor &
Contractee
Absolute property of the maker when In WC, it is never an absolute property
produced / manufactured. Later on sold of the maker.
to buyer

The sale is ‘chattel as a chattel’ i.e. In WC, article produced becomes the
‘goods’ are sold as ‘goods’ property of buyer without first
becoming property of the maker.
Primary function - supply of materials Primary function - work and labour
Incidental - work or service Incidental - materials are supplied

TDS provisions are not applicable TDS provisions are applicable

Also works contract per se, does not include transfer of goods

VAT –
The Three words which have really tormented the contractors

Contractor


Registration Requirement
REGISTRATION:

Turnover Threshold –

Casual dealer
or auctioneer Turnover of taxable sales exceeding Rs.10,000

All Others Total Sales or Purchase turnover of more than
Rs.5,00,000 AND
turnover of taxable goods exceeding Rs.10,000


• Poser - 2


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. 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)

–Poser 3


VAT Basics
• Different acts for different states

• VAT a cost to most clients unlike service tax

• VAT is payable in all Works Contracts which
involve transfer of property in goods.

• Since the value of the Contract is indivisible,
various issues are involved with respect to
offering the VAT Liability.


Valuation Options under VAT


Valuation options under
Works Contract

• Actual Labour • Composition
deduction • Standard Labour
deduction


• Impact of exercising an option can be
significant.


• Basic Modes available in each state:-
– Composition – Pay flat rate of tax on the turnover towards civil
contracts, for e.g. 0.60% in Gujarat (No out-state purchases allowed), 4%
in Orissa, 3% in Rajasthan, 2% in Madhya Pradesh. Advisable in case of
Turnkey Contracts with significant material portion.

– Actual – Identify the material consumed against the Running Account Bills
raised during the period. Advisable when major materials like Cement /
Steel are being supplied by the client.

For Ex. Value of Work is Rs. 20 Crores.
Expected cost of Transferable materials (VAT Rate – 4%) is 4 crores.
GP Rate is expected to be 20%.

VAT under Composition (M.P) – 2% of Rs.20 cr = Rs. 40 Lacs
under Normal Scheme – 4% of (Rs 1 cr) = Rs. 4 Lacs
Where 1 cr is the allocable GP to Transferable Purchases


• One of the paths is taking actual
deductions….


Supreme Court Judgement in the case of
Gannon Dunkerley & Company (88 STC 204)
Total Contact Value : xxxxx

Less : Prescribed deductions:

a) Labour charges for execution of Works Contract xxxxx
b) Amount paid to sub-contractor for labour and services xxxxx
c) Charges for planning, designing & Architect’s fees xxxxx
d) Charges for acquiring machines, tools etc. on hire or xxxxx
otherwise
e) Cost of consumable in which property does not pass
to contractee xxxxx
f) Cost of establishment relating to supply of labour xxxxx
and sevices
g) Other expenses relating to supply of labour and services xxxxx
h) Profit of contractor relating to labour & services xxxxx
-----------
BALANCE = Taxable Amount xxxxx
-----------

Poser - 4


WORKS CONTRACT TURNOVER- NON COMPOSITION METHOD

Analysis of prescribed deductions:

a) Labour charges for execution of Works Contract:
The value consists of mobilisation of men and material and
establishment of site office etc. As these are preliminary expenses
not involving value goods cannot be subjected to tax.

b) Amount paid to sub-contractor for labour and services:
Value relatable to sub-contractors turnover where sub-contractor is
engaged only for labour and services not involving supply of goods
Deduction available only for amt paid to registered sub-contractor if contract
involves usage of material.

c) Charges for planning, designing & Architect’s fees:
Value for planning, designing and architects fees relating to
construction of building or plant. As the expenses are in the nature
of services hence eligible for deduction



Analysis of prescribed deductions:

d) Charges for acquiring machines, tools etc. on hire or otherwise
These goods are either taken on hire or purchased as assets for use in the
process of execution of works contract. However, since the goods are neither
incorporated in works contract nor sold to the customer there is no transfer of
property in them and hence excluded for the levy of VAT. Nevertheless, Lease tax
or VAT is payable to the vendor from whom they are acquired.

Depreciation - L&T - 34 VST 53 – Karnataka High Court

e) Cost of consumable in which property does not pass to contractee
These are the items such as water, electricity, fuel, lubricating oils, electrodes etc,
which are getting consumed in the process of execution of works contract and
hence the property therein is not transferred to the contractee and hence are
excluded for the purpose of levy of tax.



Analysis of prescribed deductions

f) Cost of establishment relating to supply of labour and services
This cost is relatable to facility given to labor such accommodation and other
facilities to make them available at job site for purpose of carrying out labour
and rendering of services in connection with execution of works contract.

g) Other expenses relating to supply of labour and services
These are expenses in the nature of overheads, rent, salary, electricity,
telephone charges expended relating to works contract job.

h) Profit of contractor relating to labour & services
This is the profit earned by the contractor over the cost of labour and services
expended by him i.e. difference between the value recovered from the employer
and the cost incurred by the contractor

Poser - 5


Regular Mode

• The practical scenario is not so easy. In an unorganised sector, it
is very difficult to obtain the relevant details.

• Since the Sales Invoices are raised on a progressive basis, the
VAT liability also has to be discharged on a progressive basis.

• Identification of material transferred in each of the sales
invoices is required. But which is a big task if the inventory has
not been maintained in order.

• Further if you are working with a client like Reliance, when you
have 10-12 orders from 10-12 different group companies for the
same plant, the situation can be very tricky.

• Bifurcation of material into transferable and non-transferable
may not be easy.


• Basic Step is to sit with the Site Engineer and bifurcate all
the purchases into Transferable and Non-Transferable. For
Ex- Wooden Materials which are used for Shuttering
activity, are not transferred to the client and are consumed
and booked as “Consumables, Stores and Spares”.

• You can then mark up the Purchases of Transferable with
GP rate and offer the relevant rate on a monthly basis.


Calculation sheet

S.N Purchases Basic VAT Whether T GP @ 20% = Deemed Sales VAT VAT
o. Cost In Input in / NT 25% on Rate Payable
Rs. Lacs Rs. Lacs Purchases

1 Binding Wire 100 10 T 25 125 10% 12.5

2 Wooden Ply 20 2 NT - - - -

3 Shalitex Board 50 5 T 12.5 62.5 10% 6.25

4 Nails 20 2 NT - - - -

5 Insert Plates 150 15 T 37.5 187.5 10% 18.75
SS

TOTAL 340 34 375 37.50

Eligible Input 30 37.5
Credit

Pay Difference 7.50

Further you need to make sure that Non-Transferable Purchases of Rs. 40 has been Shown under
the Head of Consumables, Stores and Spares in P&L Account.


Calculation of Sale Price of Works Contract
Composition Scheme – For contractors who do not wish to pay tax
based on the specific formula or after considering the lump sum
deductions
•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


• Composition for Turnkey Contracts –

– Composition for Certain Sections
– Composition for Certain Line Items
– Composition by splitting up value on the basis
of separate working


Types of composition
• For complete contract
– within 30 days of commencement of Work
• For Complete year
– Application within 30 days before to commencement of year
• For New Registered Dealer
– Within 90 Days from the effective date of registration

No condonation of delay – Matter Pending before Tribunal
Non receipt is assumed as granted


Deduction in composition scheme -
• Deduction of amount of entire sub-contract shall be made,
if any
• - If composition scheme opted than deduction is
available for amounts paid to sub-contractors (Rule
28(8)(c))
– – Both registered and unregistered?

• No Labour deduction in Works Contract, if composition is
opted,


Conditions for the composition Scheme:-

• Dealer must be Registered Dealer
• Conditions attached to Tax credit depending on state
to state
• Tax Invoice shall NOT be issued to the client
• Tax shall NOT be charged from the client
• Conditions attached with regard to making Interstate
/ OGS Purchases


TAXABILITY UNDER COMPOSITION METHOD

Particulars Gujarat VAT Mah VAT Mah VAT (Non-
(Construction) Construction)

Total Billing 120 120 120
Less : Paid to 20 20 20
Registered Sub-
contractor
Net 100 100 100
Composition Rate 0.6% 5% 8%
Tax Payable 0.60 5.00 8.00
Input Credit - 3.00 (Tax paid 4.00 (64% of
in excess of Local VAT)
4%)
Net Tax to be Paid 0.60 2.00 4.00


Continued…
• Once Application for composition is made and is not
rejected by the department, the acceptance is
presumed .

Option shall be final and is IRREVOCABLE.
(Rule 28(8)(i) )

Suggestion –
1. If you are applying a fresh registration, then its advisable to apply for
composition at the same time. (Permissible period of 90 days is likely to
lapse)
2. OGS items as Free Supply from the contractee.


When no records are maintained

Adhoc deduction is available in each of the state –

In Gujarat under Rule 18AA specifies the rate of deduction


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
Description of Works Contract Percentage of
Deduction

Construction, improvement, repair of any building, road, bridge, dam, canal or 30%
other immovable property
Installation, fabrication, assembling, commissioning or repair of any P&M 15%
Installation, fabrication, assembling, commissioning of Air conditioner, air cooler 10%

Assembling, fitting, re-assembling, improving, producing, repairing, furniture, 20%
fixtures (interior decoration)
Construction, fabrication, assembling, commissioning, repairs of bodies on 20%
chassis of motor vehicles
Overhauling or repairing or dismantling of any motor vehicles, vessels of every 20%
description meant for plying on water or any vessel propelled by mechanical
means, any air craft, etc

Here deduction is available for amounts paid to registered sub-
contractor.

Deductions under Maharashtra VAT

Sr.No. Nature of Contract % of deduction

1. Installation of Plant and Machinery 15

2. Installation of Air Conditioner and cooler 10

3. Installation of Elevators 15

4. Fixing of marble slabs, granite & tiles 25

5. Civil works like construction of Bldg. Roads etc. 30

6. Construction of Railway Coaches etc. 30
7. Ship and Boat building etc. 20
8. Sanitary Fittings, Plumbing, Drainage etc. 15
9. Painting and Polishing 20
10. Construction of Bodies of Motor Vehicles and Trucks 20
11. Laying of Pipes 20
12. Tyre re-treading 40
13. Dyeing and printing of Textile 40
14 Annual Maintenance Contract 40
15. Any Other Works Contract 25

21 August 2011 39

• Whether Sub-Contractors are liable to VAT?


Client’s material

Client can issue his material for use in execution of works contract awarded to
the contractor where:

a) Material can be issued as free supply not resulting in either recovery or
sale to contractor or

b) Material can be supplied on recovery basis or can be sold to the
contractor .(N.M. Goel 72 STC 368 (SC) )

• Value of material supplied not resulting in either recovery or sale, is outside
the scope of works contract turnover and hence not liable for tax.

• Value of material supplied on recovery basis or sold to the contractor will be
included in the scope of works contract turnover and hence liable for tax


Terms of Contract - Client’s material

To avoid litigation and tax being levied on value of the clients material, the dealer should
ensure to incorporate the following clauses in the contract.

a) The employer to issue his material free of cost..

b) The free issue material supplied by the employer shall be held in the custody of the
contractor as bailee.

c) Contractor to provide periodical statement of reconciliation.

d) The material in possession of the contractor shall not be diverted for any other use

e) The cost of the free issue material supplied by employer will be outside the scope of
contract and shall not be the part of consideration to be paid to the contractor.


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 – Some of the States
‒ 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

‒ Poser 6


Is VAT applicable to Builders /
Developers?

VAT


When is a job established as a Works Contract –

FACTS IN THE CASE OF SUPREME COURT JUDGEMENT
OF K. RAHEJA DEVELOPMENT CORPORATION

• Appellants were carrying on business as real estate developer.
• They entered into Development agreement with owners of land.
• The agreement was for carrying out construction on behalf of
somebody else.


Facts Contd….

• The land owner transferred only the ownership of land to the
purchaser and the appellant transferred structure by a separate
agreement for construction.
• The appellants were carrying out construction as developers for the
prospective purchaser.
• Agreement entered into before the completion of the unit, was
considered as Works Contract.
• Agreement entered into after the flat or unit already constructed
would not be within the ambit of works contract.


• On the basis of K Raheja, can we say that all
builders are liable to VAT?


Latest……
• However Supreme Court on Aug 19, 2008 has referred
the judgment for reconsideration to a larger bench
considering the Writ Petition filed by L&T on the count
that the judgement has adversely affected the entire
construction industry.


A small e.g. for Builders

Sale Value of Flat Rs.50 Lacs
Cost of Material Involved Rs. 20 Lacs
Cost of Labour Involved Rs. 10 Lacs
Market Value Land supported by Rs.5 Lacs
Valuation Certificate
(Advisable to show separately to avoid
litigation)
Profit Rs. 15 Lacs (30% Margin)

Tax under Regular Scheme Rs. 20 Lacs + Profit

Tax under Composition Scheme 0.6% on Rs. 45 Lacs

Entry Tax related issues under VAT
Inward Movement

1. Cement / Raw Steel / Motor Vehicle are liable to entry tax.
2. Authenticated Form 403 is required.
3. Invoice / delivery challan / LR to be made available at checkpost
4. For normal Items, Form 403 without authentication is required.
5. Scaffolding Pipes are not covered.

Outward Movement

1. Branch Transfers – Work Order / Declaration Form / Form 402.
2. Relevance of F Form – Ambika Steel.
3. Having registration / Work order from other state.

Any checkpost related issues ?


TDS Rate under GVAT

Person responsible for payment exceeding Rupees 1 crore for
works contract is responsible for deduction of tax at prescribed rates

TDS Rate : 0.6% in case of construction contract and 2% in case of others

Works Contractor is mandatorily required to obtain TDN No. from Commercial Tax
Department. Application in Form 706 to get TDN No. within 30 days of agreement.

TDS to be claimed in the year in which same is deducted and not in which the same is

?
paid.
Form 702 under Gujarat VAT to be attached with Invoice for lesser deduction.

Poser - 7

59A. DEFINITIONS - DEDUCTION AT SOURCE.

• (c). "specified sale price" in relation to the transfer of property in goods
(whether as goods or in some other form) involved in the execution of a works
contract, means

such amount as is arrived at by deducting from the amount of valuable
consideration paid or payable to a person for execution of such works contract,

the amount representing labour charges for such execution and the price paid
or payable for the goods purchased in the course of inter-state trade or
commerce or in the course of import of goods into the territory of India for the
use in execution of such works contract; and

• (d). "specified works contract" means a works contract, the specified sale price
of which exceed one crore rupees.


Inter-state
WorksContract


Background – CST Transactions

Position before 6th Constitutional amendment

• Only states were empowered to levy tax

• Interstate sale not contemplated

• CST Act was not in existence

• Branch transfers were not taxable


Background – CST Transactions
Methodology of levy of tax

• Consumption Theory
As per provisions of Explanation to Article 286 (1) (as stood in the beginning), only consuming state
was competent to levy tax. State of Bombay v. United Motors (India) Ltd.(4 STC 133 )

• Nexus Theory
Theory of nexus resulted in levy of tax on same transaction by multiple
states. This theory was disapproved by Supreme Court in the case of
Popatlal Shah v. State of Madras (4 STC 188)

• Bengal Immunity v. State of Bihar (6 STC 446 )
It was held that the State Government cannot impose tax on sale or purchase of goods taking place
in the course of inter-state trade except when the parliament by Act so provides.

• 6th Constitutional amendment
The 6th Constitutional amendment was made on recommendation of Taxation Enquiry Committee.


Jurisdiction for levy of works contract tax

• Prior to the decision of supreme court in the case of BAI States took liberty
levy tax on the entire value of the works contract including interstate
transactions on the assumptions that :

• A) In an indivisible works contract the transfer of property in goods is effected
in the state in which the contract is executed.

• B) Since the transfer of property takes place within the state the taxation field
for deemed sale in the nature of works contract was exclusively with in the
domain of Entry 54 of List II of the VII Schedule to the constitution and hence
the entire turnover in respect of works contract should be subjected to tax
under local law not withstanding the nature of interstate transactions involved
therein


Amendment to CST Act – 11.05.2002

Consequent to the 46th Amendment to the Constitution of India, it became possible for the
states to levy tax on deemed sale transactions like works contract

Although Article 366 was amended to widen the scope of definition of sale to cover
deemed sale in it’s ambit, state could not levy tax on transactions relating to inter-state
works contract as;

a) there was no authority to levy tax on transactions relating to inter-state works
contract in absence of amendment to definition of sale to cover works contract
transactions therein under CST Act.

b) states were loosing revenue on transactions of inter-state works contract

c) CST Act was amended almost after two decades from 46th amendment enabling
states to levy tax on transactions of inter-state works contract effective from
11.05.2002


Impact of CST Amendment

1) Consequent to the amendment to CST Act, with effect from 11.05.2002,
the definition of sale includes deemed sales.

2) Works contract under CST Act, has been defined under section 2 (ja) as
“Works Contract means 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”

3) Despite wider scope of definition of works contract under CST Act, only
goods involved in the execution of works contract as defined under Article
366 (29A) (b) can only be taxed and nothing beyond that.


Works contract v. provision under CST Act

• Execution of works contract in respect of immovable property like Lump Sum
Turn Key (LSTK) or EPC Contract, construction of buildings, bridges, dams or
in respect of movable property like repairs of machinery, equipments etc.
requires

a) sourcing of materials from outside the state
b) sourcing of material from outside the country or
c) dispatch of machinery and equipments outside the state or country after
repair

• These types of transactions in the nature of works contract can be taxed only
under CST Act.

• The relevant provisions for levy of tax contained in section 3. 4 and 5 of the
CST Act


Works contract v. provision under CST Act

• Supreme Court in the case of Gannon Dunkerely and Co. (88 STC 204) (at page
No. 288) held:

“ We are of the view that even in absence of any amendment having been
made in the Central Sales Tax Act (after 46th amendment) expressly
including transfer of property in goods involved in the execution of works
contract, the provisions contained in section 3, 4, and 5 would be
applicable for such transfer and the legislative powers of the state to
impose tax on such transfers under entry 54 of the state list will have to
be exercised keeping in view the provisions contained in section 3, 4, and
5 of the Central Sales Tax Act.”


Taxability of inter-state works contract
relating to repairs and servicing

• Normally the job is carried on movable goods / equipments

• After job is done the equipment is despatched outside state

• CST is levied in the state from which the equipment is despatched after
repair

• Taxable turnover to be determined by actual deduction method as
prescribed under CST Act.

• Set-off of local VAT paid on input used in works contract can be claimed
if the local VAT Act, so provides.


• Poser 8


Taxability of works contract transactions under CST Act

Normally goods used in the execution of a works contract fall under following categories

1) Manufactured/bought out goods dispatched for execution of works contract in another
state for
a) lump sum transfers for use in various contracts
b) transfer for use in manufacture of goods to be used in execution of works contract
c) use in specific works contract in pursuance of the contract received

2) Goods purchased from outside state in which works contract is executed for
a) use as raw material or components in manufacture of goods to be used in execution of
works contract
b) use in works contract as purchased as per billing schedule (sale occasioning inter-state
sale)
c) use in works contract after sale is effected to the employer under section 6(2) of the
CST Act
3) Goods imported from outside the country for
a) use in execution of works contract but not imported in pursuance of the contract
b) use in works contract but imported on behalf of the customer (Sale occasioning import)

4) Goods imported by the employer and given to contractor as free issue (FIM) for use in
works contract


Taxability of manufactured/bought out goods dispatched by the
contractor for execution of w/c in another state
[2006] 144 STC 0605- State of Karnataka and others vs. ECE Industries Limited (Karnataka High Court)

Transfer of goods
________________________________________________________

Transfer of goods for spe-
Transfer for use in manuf- cific works contact in pur-
Lumpsum transfer for
acture of goods to be used suance of the contract
various contracts to be
in execution of w/c received
executed in another state

Goods despatched in pur-
Goods transferred are not
Goods are not transferred suance of the contract for
the specific goods as per
in pursuance of the use therein as despatched
specific contract contract received

To be treated as stock trans. To be treated as inter-state
To be treated as stock transfer.
F form to be obtained from Sale from despatching state.
F form to be obtained from
receiving state. No tax is No tax is payable in receiving
receiving state. No tax is
payable either in receiving state. Exemption to be claimed
payable either in receiving or
or in despatching state. Under Local Act.
in despatching state. However,
However local tax is payable (EEC 38 STC 475)
local tax is payable when used
on FG used in Works contract
in W/C in receiving state.
in receiving state.


Taxability of goods purchased from outside state
Purchase of goods from outside state
__________________________________________________

Purchase of RM/Comp.for Purchases of goods, where Purchases of gods under
use in mafr. of goods to Delivery taken by contractor Section 6(2) for use in
To be used in execution for use in execution of works execution of works contract
of works contract. contract in the same form. in the same form.

1) Goods purchased are
1) Goods purchased are as 1) 4% CST is payable to
not as per billing
per billing schedule. vendor against Form C
Schedule
2) 4% CST is payable to 2) Subsequent sale to
2) 2% CST is payable to
vendor against Form C customer exempt u/s 6(2)
vendor against Form C

1) No tax is payable in
Local tax is payable on FG receiving state, being
manufactured and used in 1) Customer to receive material
purchases in pursuance
execution of works contract and give as FIM to contractor
of contract of sale
2) Contractor to raise bill on
(6VST374)
customer u/s 6(2)
2) Exemption to be claimed
under local Act.(6VST374)


Some Tips :-
• Free Supply vs Price Deduction by Contractee

• If the client in his WO mentions VAT – Extra, WCT – Extra

• Unregistered sub-contractor is making any taxable
purchases,

• Compare outstate suppliers’ with CST rates with the
Gujarat suppliers’ before & After VAT rate.

• In case of stock transfer, if VAT reversal rate comes more
than 2% go for CST sales in place of stock transfer.
?
• VAT on Concrete is 15%, but VAT on Sand/Aggregate is
5%, so what you transfer is important. – Cement is Free issue.


Back to Back Contracts
• L&T Judgement –
Property passes on from the Sub-contractor to the Client and
contractor is just an agent.

• Impact -
Mr X has awarded contract to Mr Y at Rs.100 cr.
Mr Y has sublet the complete job to Mr Z at Rs.80 cr.
Mr Y does not need to pay any tax on the portion of Rs.20 cr as there is no element of
transfer of property as per Sale of goods Act.

Suggestion – Projects with huge margins can be subletted to any sister concern to reduce VAT

? implications.

Section 80 Determination in the case of Paharpur Cooling Tower dated 15-4-2010 in Gujarat
VAT has reaffirmed the view.


• Any queries on VAT


Vat on works contract

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