20 January 2015
VAT Aspects in case of Works Contract.
Contractor can discharge VAT on value of materials incorporated under the following three options:
1.Regular Method: Under Regular Method, material value can be arrived by following methods:-
(i)Value Deduction Mode: Under this mode, taxable value of materials will be arrived after allowing the deductions towards labor charges; payment to Sub-contractor for labor/services; charges for planning, designing & architect; Charges for obtaining on hire the machinery & tools; cost of consumables such as water, electricity, fuels etc., and other similar expenses or cost of establishment relatable to supply of labor/services. Tax is payable at applicable rate to those taxable materials under State VAT Tariff. State can also levy uniform rate of tax on value of materials incorporated in work under a separate item in Tariff and such rate may be different from applicable rate to materials individually. States like Assam, Delhi, Karnataka, Kerala, West Bengal etc., have specified a uniform rate on materials other than Declared Goods as specified under CST Act,1956.
(ii)Value Addition Mode: Under this mode Contractors can arrive material value by adding cost of goods, cost of conversion and all other expenses such as loading/unloading, transport etc., plus margin of profit on them.
Tax cost will be less under ‘Regular Method’ when compared to other options since VAT is payable only on actual value of materials incorporated in the work after adjustment of VAT Input Credit. However, Contractor has to maintain proper books of accounts and other records to identify value of materials and labor.
2. Composition Method Composition Scheme is simple and convenient for Contractors who cannot maintain proper accounts. Under this method tax is payable on total contract value including labor at specified lumpsum rate. In States like Karnataka, Tamilnadu, Orissa, Delhi etc., Composition Option is to be exercised for all Works Contracts executed during financial year and not permissible to opt each contract wise. VAT Input Credit is not available under this option except in Maharashtra State. Purchase tax is payable in States like Kerala, Karnataka etc., on interstate purchases but deduction of such turnover is allowed from total turnover and tax is payable on balance turnover only. Composition Option is not permissible in States like Gujarat, Himachal Pradesh, Tamilnadu etc if goods are imported from outside State. Composition Method may be opted where contract price is inclusive of taxes and consisting of substantial portion of materials value with marginal element of labor/services.
3. Standard Deduction Method Standard labor deductions are prescribed under VAT Laws to arrive at taxable value based on type of contract. Tax is payable at the specified rate on taxable value arrived after standard labor deduction in States like Andhra Pradesh, Jharkhand, Punjab, Assam etc., whereas at applicable VAT rates of such goods in other States like Gujarat, Rajasthan, Maharashtra, Uttar Pradesh, Tamilnadu etc. However VAT input credit is available under this method in most of States except in few States like Andhra Pradesh, Jharkhand & Punjab. Tax cost is high under this option and hence not advisable to adopt it.
VAT / CST Planning: Before exercising a right option for arriving tax liability, Contractor has to analyze various components like labor/service charges, local/interstate purchase of materials, other expenses and effect of them on tax cost. Award excavation work contracts on Cubic Meter Basis instead of on Hire Charges Basis of earth moving machinery where VAT is chargeable and ineligible item for input credit. Obtain Tax Invoice showing VAT amount separately for availing VAT input credit. Price reduction through passing on VAT input credit can be sought by buyer. CST not payable on freight, delivery charges, erection and commissioning. CST not payable if goods are returned within 6 months. CST Registration Certificate should include all the items on which Contractor is entitled to purchase at concessional rate against issue of C-Form.
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