TDS for the works contract tax liability under TN VAT act

In Tamil Nadu, The Tamil Nadu Value Added Tax, 2006 received the accent of the Governor of Tamil Nadu on the 14th of December, 2006 and was enacted in the Legislature as Act No. 36 of 2006. This act repealed TNGST Act, 1959 and TNAST Act, 1970.

The bare Provisions relating to Tax deduction a  t Source is contained in Section 13 which is reproduced below;

Section 13.(1) Notwithstanding anything contained in this Act, every person responsible for paying any sum to any dealer for execution of works contract shall, at the time of payment of such sum, deduct an amount calculated, at the following rate, namely:-

Deduction of tax at source in works contract:

(i) Civil works contract –two per cent of the total amount payable to such dealer;

(ii) Civil maintenance works contract –two per cent of the total amount payable to such dealer;

(iii) All other works contracts –five per cent {4% till 12th Feb 2012} of the total amount payable to such dealers:

Provided that no deduction under sub-section (1) shall be made where –

(a) no transfer of property in goods (whether as goods or in some other form) is involved in the execution of works contract; or

(b) transfer of property in goods (whether as goods or in some other form) is involved in the execution of works contract in the course of inter-State trade or commerce or in the course of import; or

(c) the dealer produces a certificate in such form as may be prescribed from the assessing authority concerned that he has no liability to pay or has paid the tax under section 5:

Provided further that no such deduction shall be made under this section, where the amount or the aggregate of the amount paid or credited or likely to be paid or credited, during the year, by such person to the dealer for execution of the works contract including civil works contract does not or is not likely to, exceed rupees one lakh.

Explanation.– For the purpose of this section –

1.(a) the term ‘ person’ shall include –

(i) the Central or a State Government;

(ii) a local authority;

(iii) a corporation or body established by or under a Central or State Act;

(iv) a company incorporated under the Companies Act, 1956 including a Central or State Government undertaking;

(v) a society including a co-operative society;

(vi) an educational institution; or

(vii) a trust;

1.(b) the term “civil works contract” shall have the same meaning as in the Explanation to section 6.

(2) Any person making such deduction shall deposit the sum so deducted to such authority, in such manner and within such time, as may be prescribed.

(3) Any person, who makes the deduction and deposit, shall within fifteen days of such deposit, issue to the said dealer a certificate in the prescribed form for each deduction separately, and send a copy of the certificate of deduction to the assessing authority, having jurisdiction over the said dealer together with such documents, as may be prescribed.

(4) On furnishing a certificate of deduction referred to in sub-section (3), the amount deposited under sub-section (2), shall be adjusted by the assessing authority towards tax liability of the dealer under section 5 or section 6 as the case may be, and shall constitute a good and sufficient discharge of the liability of the person making deduction to the extent of the amount deposited:

Provided that the burden of proving that the tax on such works contract has already been deposited and of establishing the exact quantum of tax so deposited shall be on the dealer claiming the deduction.

(5) Any person who contravenes the provisions of sub-section (1) or sub-section (2), shall pay, in addition to the amount required to be deducted and deposited, interest at one and a quarter per cent per month of such amount for the entire period of default.

(6) Where the dealer proves to the satisfaction of the assessing authority that he is not liable to pay tax under section 5, the assessing authority shall refund the amount deposited under sub-section (2), after adjusting the arrears of tax, if any, due from the dealer, in such manner as may be prescribed.

(7) The tax or interest under this section shall become due without any notice of demand on the date of accrual for the payment by the person as provided under sub-sections (1) and (2).

(8) If any person contravenes the provisions of sub-section (1) or sub-section (2), the whole amount of tax payable shall be recovered from such person and all provisions of this Act for the recovery of tax including those relating to levy of penalty and interest shall apply, as if the person is an assessee for the purpose of this Act.

What does the TNVAT Rules Say about the TDS?

Rule No. 9 governs the TDS provisions found in Section 13 of the TNVAT Act. The following is the reproduction of rule 9 of TNVAT Rules.

9. Tax deduction at source.—

(1) Any person who makes a deduction under section 13, shall deposit the sum so deducted to the assessing authority having jurisdiction over the person or to any other authority authorized by the Deputy Commissioner to receive such payment, on or before the 20th day of the succeeding month in which the deduction was made with a statement in Form R.

(2) The certificate that a dealer has no liability to pay or has paid the tax under section 5, referred to in clause (b) of the first proviso to sub-section (1) of section 13 shall be in Form S.

(3) The certificate of deduction of tax referred to in sub-section (3) of section 13 shall be in Form T.

(4) The notice in writing, indicating the amount payable under the Act, referred to in sub-section (5) of section 45 shall be in Form U.

Conclusion:

As provided in Section 13 of TNVAT Act and Rule 9 of TNVAT Rules, it could be concluded that tax should be deducted on TOTAL PAYMENT, if it exceeds or is likely to exceed Rs. ONE LAKH per annum, at the rates prescribed in section 13 and should be handled as directed in rule 9.

Mismatching issues and the difficulties faced by the dealers:

Let me take up a hypothetical issue to pinpoint the issue and the hypothetical situation is as follows:

An employer contractor, say a state or central Government Department (here in after called as Govt dept), who is not a registered dealer under the VAT act, who extended a contract (here in after called as works contract), to an employee contractor to execute the CIVIL contract works, who is a registered dealer under the act (herein after called as dealer), for a consideration of Rs.100 lakhs. Additional details are:

i) Date of order/ assignment: 30th Sep 2010

ii) Date of acceptance of the contract and execution of agreement: 10th October 2010

iii) Date of commencement of execution of work/ Contract: 15th October 2010

iv) Date of completion of works execution  28th Nov 2010

v) Date of Tax Invoice issued by the dealer: 29th Nov 2010

vi) Date of payment by the Govt dept to the dealer: 10th Dec 2010

In the given hypothetical case, considering the nature of work and its quantum of payment to the contractor, the percentage of WCT TDS is 2% and the quantum of TDS amount is Rs.2 lakhs.

In the given hypothetical case, considering the provisions of Rule 9 (1) due date for depositing the tax deduction by the govt department is “20th Jan 201” with statement in Form R, with the assessing authority of the dealer.

And considering the provisions of Sec 13, the govt. dept., can take 15 days time to issued TDS certificate in  Form – T, to the dealer. If so, in the given case the dealer will get the WCT-TDS certificate only on 5th or 6th of Feb 2011 only and hence at the earliest the dealer can adjust the WCT-TDS made by the Govt department only against the tax liability for the month of Jan 2011, in the return filed on 20th Feb 2011.

On the other hand, the dealer who has raised the tax invoice on 29th Nov 2010, has to settle the tax liability with the VAT authorities not later than 20th Dec 2010 and the amount involved in the given case Rs.2 lakhs. Considering the mismatching issues, highlighted herein above, the contractor working capital is blocked to the extent of Rs.2 lakhs till he adjust the credit of Rs.2 lakhs as against the actual tax dues, tax dues of any other projects or get the refund, whichever is later.

In the absence of clear cut provisions to remove these anomalies the dealers will always try to resolve the issue without cutting their working capital and/or with little cost as additional burden. one of the best example to obtain form S by the dealer from his assessing authority by making the advance payment of the said 2 lakhs to him and stay away from the burden of working capital blocking with the VAT authorities.

The readers are informed to note that the facts and information’s stated in this article is only the opinion of the author and in no way it is binding on part of the judiciaries, however assesses can use the concepts and logical used in this article in support of their cases.