Odisha VAT Provisions - A study for construction and real estate sector

Introduction

The issue of taxability of works contracts under VAT and Service Tax is something which has confronted assessee leading to frequent referrals to Courts over the years. While the issue of taxability under Sales Tax has led to referrals over the last 50 years or so, the issue with regard to service tax is a more recent one. But often the issue of taxability centres around the basic nature of contracts and the valuation methodology that should be adopted under both Sales Tax/VAT and Service Tax.

The subject of works contract is one of the most confusing and litigated issues. The Constitution (Forty Sixth Amendment) Act, 1982 granted powers to State Governments to enact laws for providing the levy of tax on the transfer of property (whether as goods or in some other form) involved in the execution of works contracts. Builders and Developers undergo untold hardship and misery while computing the gross and taxable turnovers. Each State has prescribed its own law, rules and methodology for determining the gross and taxable turnovers./ in this article we will discuss the provisions of Odisha VAT act applicable to works contract including real estate sector.

Statutory provisions and back ground

Before the amendment of the constitution by its (Forty-Sixth Amendment) by a series of subsequent decisions, the Supreme Court has, on the basis of the decision in Gannon Dunkerley’s case, held various other transactions which resemble, in substance, transactions by way of sales, to be not liable to sales tax. As a result of these decisions, a transaction, in order to be subject to the levy of sales tax under entry 92A of the Union List or entry 54 of the State List, should have the ingredients, namely, parties competent to contract, mutual assent and transfer of property in goods from one of the parties to the contract to the other party thereto for a price.

In the 46th amendment of the constitution a new clause 29A have been inserted in article 366:-

”(29A) “tax on the sale or purchase of goods” includes-

(a) …….

(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;”

State Sales Tax laws were suitably amended their respective state sales tax laws, then to incorporate the provisions to tax works contract. In the VAT regime similar provisions also been brought out as deemed sale. Under present Odisha VAT act definition of sale include deemed sale since inception of law which is borrowed from Sales Tax act.

Under the Odisha Vat Act As per section 2(63) 'works contract' means a contract for construction, building, manufacture processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any property. Any person would be liable to pay tax when it reaches the prescribed limit of taxable turnover.

Further Clause 4 of section 10 of Odisha VAT Act any person executing any works contract in a financial year for a Taxable Total Turnover of  Rs. 50,000 or more, will be liable to be registered and to pay to the commercial tax department tax on such works contract as VAT.

VAT on real estate sector

The applicability of VAT on real estate sector, builder where composite contract have entered and value of land also included, have faced a long controversy since K. Raheja Development Corporation Vs State of Karnataka (2005 (5) TMI 7 – Supreme Court). However since the recent Land mark judgment M/s Larsen & Toubro Limited & Another Vs State of Karnataka & Another (2013 (9) TMI 853 (Supreme Court) the law have been pronounced clear and loud. In this case it is held that in a composite transaction covered by clauses of Article 366 (29A) of the Constitution of India (which would also cover a works contract), the dominant nature test would not be applicable and that the sale element of those contracts could be separated and subjected to sales tax or VAT.

Point of taxation

Indirect tax law provides the point of levy or the point of occurrence of liability to collect or pay to the concerned taxing authorities. Under Odisha VAT act clause 4 of section 11 express “the sale of goods shall, for the purposes of this Act, be deemed to have taken place, in the case of works contract, when the goods are incorporated in the course of execution of the works contract, whether or not there is receipt of payment for such sale”. Hence in case of works contract or similar contract of construction the liability occurs when the goods have been incorporated. 

Valuation of goods in the works contract and

It is a fact that the VAT can only be levied on the value of goods transferred in pursuance of contract and hence the value of goods out of value of works contract need to be derived or estimated.

When the value of material as well as labour or like charges are individually ascertainable, verifiable

Under section 11(2)(c) read with Rule 6(e) of the Odisha VAT Act and Odisha VAT Rules certain deductions are being specifically provided to arrive the sale value from the total value of the Contract. The deductions are as follows:-

(a) Labour charges for execution of work.

(b) Amount paid to a sub-contractor for labour and service.

(c) Charges for planning, designing and architect's fees.

(d) Charges for obtaining on hire or otherwise machinery and tools used for the execution of a works contract.

(e) Cost of consumables such as water, electricity, fuel etc. used in the execution of the works contract, the property in which is not transferred in the course of execution of a works contract.

(f) Cost of establishment of the contractor to the extent it is relatable to supply of labour and services.

(g) Other similar expenses relatable to supply of labour and services.

(h) Profit earned by the contractor to the extent it is relatable to supply of labour and services.

(i) Amounts paid to a sub-contractor as consideration for the execution of works contract whether wholly or partly, in a case where the contractor proves to the satisfaction of the assessing authority that tax has been paid by the sub-contractor on the turnover of the goods involved in the course of execution of such works contract.[ this last clause(i) inserted since 01.10.2015]

When the value of material as well as labour or like charges cannot be ascertainable, verifiable

The proviso to section 11(2)(c) and proviso to Rule 6(e) also address to certain situation where the actual cost of labor, services or like charges could not be ascertained or verifiable. The provision says that, where the works contractor fails to produce evidence in support of expenses towards labour and services etc. or such expenses are not ascertainable a lump sum amount as such charges shall be determined as a percentage of total value of the works contract at the rate provided in the Appendix to the Odisha Vat Rule. The said slab of applicable rate for deduction as applicable is given in the following table:

Composition scheme for works contract

The Odisha VAT Act also provides an option to all the dealers engaged in works contract and dealers undertaking the construction of flats, dwellings or buildings or premises and transferring them along with land or interest underlying the land to opt for a composition scheme notified under section 11(3). Government of Odisha have come out with two notifications dated 16.01.2016 made effective from 01.10.2015.

· Government of Odisha, department of finance dated 16/01/2016 no 1457/FIN-CT1-TAX-0035/2015- applicable to dealers transferring goods involved in the execution of works contact

· Government of Odisha, department of finance dated 16/01/2016 no 1461/FIN-CT1-TAX-0035/2015- applicable to dealers who undertakes the construction of flats, dwellings or buildings or premises and transfer of property along with land or interest underlying land to pay tax in lieu of VAT.

Composition Scheme for Works contractor

1. Applicability- the scheme would be available to a dealer who is liable to pay tax on the sales effected by way of transfer of property in goods (whether as goods or in some other form (involved in the execution of works contract.

2.  Eligibility-The dealer opting for composition under this notification-

• Shall not claim any input tax credit under the Act;
• Shall not claim any deduction with respect to labour and like charges provided under section11(2);
• Shall not issue any ‘Tax Invoices’; and
• Shall maintain accounts and records as required under section 61 of the Act.

3. Procedure to avail the scheme:-

a. The dealer who opts for payment of tax by way of composition shall make an application electronically in form C-1 together with the details of work(s).

b. An option once exercised shall remain binding on the dealer until he opts to go out of the scheme by exercising option in Form C-2

c. Upon receipt on an application, the assessing authority may, grant permission to the dealer for payment of tax by way of composition from such date in Form C-1

4. Compliances- Every dealer opting for composition under this scheme shall furnish return for each tax period in Form C-5 within twenty-one days from the date of expiry of such tax period.

5. TDS Provisions- the TDS proviso will be applicable to the dealer as a contractor. In case the dealer furnish to the assessing authority, the details of the contractee in Form C-4, the assessing authority in form C-3 shall intimate to the contractee (deducting authority) to deduct tax at source at such rate and on such percentage of the gross value of the works, as specified in this notification.

6.  Liability- the liability on the works contractor would be in lieu of amount of tax payable by him under section 9 (a).

7. Types of Dealer executing works contract- Type A and Type B

Type A Dealer:- registered dealer who opt to pay composition tax under this Scheme shall,-

1) Shall not purchase or procure goods from any place outside Odisha at any time during the period for which he opts to avail this Scheme; and

2) Shall not sell or supply goods to any place outside Odisha at any time during the period for which he opts to avail this Scheme.

3)  However, he may procure his own plant & Machinery and Equipments from outside Odisha, meant exclusively for use in execution of the works contract by him or by way of inward transfer of stocks from other States or by way of imports;;

Type B Dealer:-  A registered dealer opting to pay composition tax under this Scheme shall be entitled to

1. Make interstate purchases of goods required for the execution of the contract under this Scheme as a registered dealer.

2. By way of inward transfer of stocks from other States or by way of imports from other countries solely for the purposes of utilizing the same in the execution of works contract in Odisha only.

3. Provided the dealer shall use the material or goods imported or procured from outside Odisha strictly for use in execution of the works contract.

8. Rate of Tax applicable- the following is the table where the rate of tax under composition is being given

Composition scheme for real estate developer, builder

1. Applicability to dealer- the scheme would be available to a dealer who undertakes the construction of flats, dwellings or buildings or premises and transfer of property along-with land or interest underlying the land to pay tax, by way of composition, in lieu of VAT.

2.  Applicable to amount- the scheme can only applicable to All the payments received on or after 01.10.2015 towards construction of flats dwellings or buildings or premises and transfer of property along-with land or interest underlying the land shall be covered under this composition scheme.

3. Eligibility-The dealer opting for composition under this notification-

• Shall not claim any input tax credit under the Act;
• Shall not claim any deduction with respect to labour and like changes provided under section11(2);
• Shall not issue any ‘Tax Invoices’; and
• Shall maintain accounts and records as required under section 61 of the Act.

4.  Procedure to avail the scheme:-

a.  The dealer who opts for payment of tax by way of composition shall make an application electronically in form C-1 together with the details of work(s).

b. An option once exercised shall remain binding on the dealer until he opts to go out of the scheme by exercising option in Form C-2

c. Upon receipt on an application, the assessing authority may, grant permission to the dealer for payment of tax by way of composition from such date in Form C-1

5. Compliances- Every dealer opting for composition under this scheme shall furnish return for each tax period in Form C-5 within twenty-one days from the date of expiry of such tax period.

6. Liability and valuation - the liability on the dealer under the scheme would be in lieu of VAT on the aggregate amount. The aggregate amount would be the actual value of the contract or the value determined for stamp duty under the Odisha Stamp Rules, 1952, whichever is higher,  

7. Rate of Tax applicable- The Applicable rate of tax would be 3.5% on the aggregate amount.

Tax Deducted at Source (TDS)

Under section 54 read with Rule 58 of the Odisha Vat Act and Odisha Vat Rules, tax need to be deducted by certain specified persons while paying to a dealer with respect to the works contract being executed by such dealer.

· However in case the TDS is being made on principal contractor, there will no requirement of TDS in case of all future subcontracts.

· Further the principal contractor would be able to transfer the tax credit proportionately to the subcontractor account electronically.

· The applicable rate of deduction is normally at 4% of the value of the works contract [section 54(1)].

· However in the case of a dealer obtained a certificate for no deduction or lower deduction the deduction rate will be applicable at such rate for such specific dealer only. [Section 54(5)]

· If principal contractor avail no (/Lower rate deduction) deduction certificate for a works, the subsequent sub-contractors for the same project need not required any certificate further.