Wct

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PRIYANKA (Querist)
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14 September 2011 What is the actual concept of WCT? when it is required to be cut? and what are the consequences if not cut by a co.?

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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15 September 2011 WORK CONTRACTS: DIFFICULTY IN COMPUTING VAT
Contracts of work which involve transfer of property in any goods in any shape attract liability of payment of VAT on the value of goods received or receivable in respect of such goods. As we know, in cases of work contracts, value of goods and value of labour and services is not separately bargained and single consolidated amount as contract amount is payable by contractee to the contractor. Looking into this aspect, most of the States have made a provision in their VAT laws of the following nature:
Where value of labour and services and profit accrued thereon is not determinable separately, certain prescribed percentage of total amount of contract shall be taken as the value of labour and services and profit accrued thereon. Different value percentages have been prescribed for contracts of different nature. In India, under the Uttar Pradesh VAT Act, 2008, the relevant rule (relevant sub-rule) runs as under:
“Where accounts maintained by the contractor do not show separately the value of labour and services and amount of profit accrued on such labour and services, or accounts maintained by the dealer are not worthy of credence or if the dealer has not maintained accounts, for the purpose of determining turnover of goods in which transfer of property in goods has taken place, in cases other than those mentioned in the table below, an amount, representing twenty percent of gross amount received or receivable, shall be deducted towards labour and services and amount of profit accrued thereon and in the cases described or mentioned in column 2 of the table given bellow, amount of deduction towards such labour and services and amount of profit accrued thereon shall be computed at the rate percentages, given in column 3 against the entry in column 2 of the table, of the amount received or receivable.

Table

Sl. no.
Description of works contracts

Rate

1

2

3

1-

Fabrication and installation of plant and machinery

10%

2-

Fabrication and erection of structural works including fabrication, supply and erection of iron trusses,purline.
10%

3-

Fabrication and installation of cranes and hoists

10%

4-

Fabrication and installation of elevator(lifts) and escalators

10%

5-

Supply and installation of air conditioning equipment including deep freezers, cold storage plants, humidification plants and dehumidifier

10%

6-

Supply and installation of air conditioners and air coolers

10%

7-

Supply and fitting of electrical goods, Supply and installation of electrical equipment including transformers

10%

8-

Supply and fixing of furnitures and fixtures, partitions, including contracts of interior decorations

10%

9-

Construction of railway coaches and wagons on under carriages supplied by railways

10%

10-

Construction of bodies of motor vehicle and construction of trailers

10%

11-

Fabrication and installation of rolling shutters and collapsible gates

30%

12-

Civil works like construction of building, bridge, roads, dams, barrages, spillways and diversions, sewages and drainage system

30%

13-

Installation of doors, doors frames, windows, window frames and grills

30%

14-

Supply and fixing of tiles, slabs, stone and sheets

30%

15-

Sanitary fitting for plumbing, for drainage or sewerage system

30%

16-

Whitewashing, painting, and polishing

40%

Explanation: For the purposes of this rule, where period of execution of a works contract is spread over several tax periods or several assessment years, the aggregate, of all amounts of deductions towards labour and services; and amount of profit accrued thereon, shall not exceed the percentage of the gross amount receivable in respect of execution of such works contract.”

Here one can notice that rule does not provide as to when and how amount relating to laid down percentage will be deducted. I mean to say that in similar types of two contracts of building contracts, one contractor may while building structure of unfinished building may deduct 30 percent amount of gross value of the contract and while completing remaining portion, i.e. plastering, installing electrical goods, fittings and fixtures, installation of air conditioners, flooring, woodwork, etc. does not deduct any amount from the value receivable in respect of this work because he has already exhausted the total amount deductible. Most of the goods in which material will be transferred in raising basic structure will involve goods which attract levy of tax at rate lower than the rate which will be attracted in respect of goods which will be involved while finishing the structure. Contrary a contractor may not deduct 30 percent of gross value while raising structure and instead he deducts this value when he completes finishing. In that case he will have to pay tax lesser amount of tax as compared to first contractor. Another aspect is that installation of air conditioners, fitting of electrical goods and appliances, fixing of tiles, etc. do not involve labour and service charges around thirty percent while construction of basic structure involves much labour and service. Can in two similar types of contracts two different contractors may be permitted to pay different amounts of tax?
Second important question is related to percent of deduction towards labour and services. Such percentage is based on totality of contract and not on individual parts of contracts. Hence turnover of goods is to be determined on the basis of totality. But the difficulty is that in advance contractor does not know what will be the exact value of procurement of goods in which property will be transferred. Also in many cases, a contractor cannot predict the source of procurement of goods.

Third thing which draws our attention is that provision relating to tax deduction at source (TDS) is also based on totality. Suppose that a contract is completed in two different consecutive financial years. Let us assume that in first year only labour work is done. Total payment received or receivable does not relate to any transfer of property in goods. But under TDS provision certain amount is deducted and deposited by the contractee into the Government Treasury. In assessment order, assessing authority will pass an order for refund of such amount. But in next year in which property in goods would have been transferred, assessing authority will raise the demand of additional amount of tax. Question is has it been intended behind the provision of TDS in case of the same contract.
After deducting the labour, services and profit on them, remaining percentage of amount of contract value represents the value of goods, received or receivable, in which property has been transferred in the execution of the contract. But such provision has not fully relieved the contractor of the difficulty in computing VAT. These difficulties may be attributed to following causes:

Difference in cost of procurement of same goods from various sources or places;
Variation in purchase prices, freight etc. of same goods purchased at different occasions;
Variation in margins of profit in cases of different goods;
Different VAT rates for different goods;
Looking into these aspects, presumptions laid down by State Governments cannot be said to be complete. Therefore, a contractor, in order to work out turnover of goods involved in the execution, himself, presumes, same rate of profit for all types of goods. But a contractor is required to pay tax in each tax period, therefore, by doing so he may not be justified when a contract is completed in more than one tax period, especially when he has to make purchases of same goods at different prices. A contractor, executing a big contract, is not supposed to procure all goods in advance. He makes purchases of goods in phases.
In order to resolve the difficulty, what can be suggested is that State Government should provide with the procedure for determining the turnover of various goods. While doing so, it has to make certain assumptions. One assumption of prescribing percentage of labour and services and profit accrued thereon has already been made. Another assumption may be that in cases of goods in which property is transferred, for the purpose of determining profit or loss in respect of such goods, margin of profit or loss, as the case may be, shall be treated to be same for all types of goods.
Second difficulty arises when execution of the contract extends beyond one tax period. Also in many cases, due to price escalation, total contract values are revised. This suggests that in cases of work contracts, method of payment of VAT cannot be similar to the method adopted in other cases of normal sales and purchases. In these circumstances, method of payment of VAT in cases of work contracts is to be separately provided. Liability of payment of VAT should also be fixed accordingly.
There can be two ways for accepting payment of VAT in cases of work contracts. The contractor should determine the total cost value of goods on the basis on which it has submitted the tender or quotation for obtaining the contract. After deducting the amount relating to labour and services and profit accrued thereon from gross amount of contract, contractor should find out the total turnover of goods in which property is to be transferred. This is to be done on the basis of percentage of labour and services and profit accrued thereon prescribed by the State Government. On this basis he should find out the value proportion of various goods. For each tax period the contractor should work out the amount receivable for part of the contract executed in that tax period. After deducting labour and services part, he should divide the remaining value in the ratio of cost value of goods initially worked out (Normally, for obtaining a contract, every contractor prepares his tender on the basis of costing of project). This value of various goods should be treated as turnover of sale of various goods. He should be required to pay tax on this turnover of sale. In the tax period in which contract is complete, the contractor should be required to work out revised proportion of cost value of goods on the basis of actual quantity and value of goods in which property has been transferred. He should compute the tax for whole of the contract. For finding out the amount of tax payable for such tax period, from the total liability, sum of earlier payments should be subtracted.
The process described above is simple but it has its drawbacks. The main drawback is that in this process contractor pays tax on sale of even those goods which have not been incorporated in the works or even have not been purchased till then. For example, in work contract of machinery installation, in first tax period only part of contract relating to construction of foundation may be completed. This may involve iron-steel, bricks, cement, sand, rori, badarpur, nut, bolts only. But if we adopt aforementioned procedure, apart from turnover of sale of these goods, a part of turnover of machinery will also be computed. Similarly in the tax period in which machinery will be installed, apart from turnover of machinery, turnover of goods used in construction of foundation will also be determined. In this method, though gross turnover of goods will relate to amount received or receivable and according to prescribed rate percent of contract value and total tax liability under the contract will remain unaffected, yet amounts paid in various tax periods will not relate to goods in which property has been transferred in those tax periods.
Second method which I am going to propose here is based on actual goods in which property is transferred in the relevant tax period. In this method too contractor is required to compute value of goods receivable for goods in which property is to be transferred. In this case he works cost prices of procurement of goods in which property has been transferred and value addition or value reduction quotient for such goods for each tax period. Thereby he can obtain turnover of goods by multiplying cost of procurement by value addition or value reduction quotient. In the tax period in which work contract is complete, the contractor determines value addition quotient, turnover of sale and tax for all goods. After deducting the sum of earlier payments from total amount of tax due, the contractor determines the amount of tax payable for the last tax period. This process involves a lot of computation work in each tax period. Also the computations do not reflect actual amount of turnover and tax where price escalation factor is attracted.
Both ways suggest that method of determining turnover, method of payment of tax and assessment of tax has to be necessarily different from the procedures adopted for cases of normal sales. Final assessment in respect of a contract can be done only in the year in which it is completed or terminated (incomplete contracts). It will be better to have deeming provision in case of deemed sale in cases of works contracts.
In my personal opinion, first option is easier compared to second one. Where the Government has already prescribed a deeming provision, it may extend it by adding that for the purpose of determination of turnover of various goods involved in the execution of works contract, value addition or value reduction, as the case may be, shall be treated uniform and for the purpose of assessment, sale of all goods involved in the execution of works contract shall be deemed to be sale in the tax period in which contract is completed or an incomplete contract is terminated.
In many contracts, due to price escalation factor, value of contract is settled at a latter date. But this part of value may also relate to value of goods. In such cases, sometimes assessment of additional turnover may not be possible under the existing law provisions. In my opinion, in respect of such price where assessment of such escaped turnover is not possible under the existing provisions, deeming provisions should be made to treat such value as part of the turnover of goods, involved in the execution of the contract, for the assessment year in which price is settled.