Recent Amendments and Issues. (Specially for Builders and Developers) under MVAT. By: CA. Umesh Sharma
A GENDA : To know the new provisions of works contract under Rule 58. In simple way Revised Taxation of Builders and Developers. Or Reconstruction of Tax Structure of Builders and Developers. Judgment of L&T and its impact on revision of rule 58. New rule: W.e.f 20-6-2006 New rule 58 (1), Actual & Notes to Abatement Method, of Cost of Land, etc. New rule 58 (1A) Cost of land and Interest in land. New rule 58 (1B)(a) Table of Stages of Construction. Circular no 6T,7T and 12T of 2014 and Issues in filing of revised returns? Summing up and Important points. But why all this.., 2
F OR SUCH DEALERS PROPER PLANNING WILL BE REQUIRED AS DEPT IS GUNNING THEM DOWN 3
And there are many moments in Law Practice of To be or not to be? 4
5 W ORKS C ONTRACT T AXATION –S OME P ECULIARITIES : Generally Indivisible Contracts are works contract i.e : (Goods + Services). In Hindustan Shipyard Ltd Case, SC has observed that no straight formula is there to determine a sale or works contract? Case to Case reference is required. No intention to purchase goods. Time of Sale: Generally, at the time goods are incorporated in work. Goods transferred v/s Consumed during the contract? Under MVAT Act, taxation of Works contract, following Options are available: Option 1: Normal Taxation after Deduction as per books from Contract Value. Option 2: Normal Taxation after % wise deduction from Contract Value. Option 3: Composition Scheme. 5% and 1%. All Options available Contract wise or lump sum basis. Turnover of sales of goods involved in contract value shall be determined after deduction as mentioned in rule 58. IMPACT: The balance amount shall be considered for calculating the turnover of tax and for applicability of MVAT audit.
J UDGMENT OF MCHI AND L & T ITS IMPACT ANALYSIS. 6
By the Forty-sixth Amendment, States have been empowered to bifurcate the contract and to levy sales tax on the value of the material in the execution of the works contract. Whether contract involved a dominant intention to transfer the property in goods, in our view, is not at all material. It is not necessary to ascertain what is the dominant intention of the contract. Even if the dominant intention of the contract is not to transfer the property in goods and rather it is the rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if it otherwise has elements of works contract. L ARSEN AND T OUBRO L IMITED AND ANOTHER VS S TATE OF K ARNATAKA AND ANOTHER [SUPREME COURT OF INDIA, 26 S EP 2013]
Once the characteristics or elements of works contract are satisfied in a contract then irrespective of additional obligations, such contract would be covered by the term works contract. Nothing in Article 366(29-A)(b) limits the term works contract to contract for labour and service only. L ARSEN AND T OUBRO L IMITED AND ANOTHER VS S TATE OF K ARNATAKA AND ANOTHER [SUPREME COURT OF INDIA, 26 S EP 2013]
For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, in our opinion, three conditions must be fulfilled: (i) there must be a works contract, (ii) the goods should have been involved in the execution of a works contract, and (iii) the property in those goods must be transferred to a third party either as goods or in some other form. In a building contract or any contract to do construction, the above three things are fully met. In a contract to build a flat there will necessarily be a sale of goods element. Works contracts also include building contracts and therefore without any fear of contradiction it can be stated that building contracts are species of the works contract. L ARSEN AND T OUBRO L IMITED AND ANOTHER VS S TATE OF K ARNATAKA AND ANOTHER [SUPREME COURT OF INDIA, 26 S EP 2013]
We have no doubt that the State legislatures lack legislative power to levy tax on the transfer of immovable property under Entry 54 of List II of the Seventh Schedule. However, the States do have competence to levy sales tax on the sale of goods in an agreement of sale of flat which also has a component of a deemed sale of goods. Aspects theory though does not allow the State legislature to entrench upon the Union List and tax services by including the cost of such service in the value of goods but that does not detract the State to tax the sale of goods element involved in the execution of works contract in a composite contract like contract for construction of building and sale of a flat therein. L ARSEN AND T OUBRO L IMITED AND ANOTHER VS S TATE OF K ARNATAKA AND ANOTHER [SUPREME COURT OF INDIA, 26 S EP 2013]
On Section 2(24): There is no doubt in our mind that the amendment in explanation b(ii) to Section 2(24) was brought because of the judgment of this Court in Raheja Development. We have already held that Raheja Development case lays down the correct legal position. Thus, in our view, there is no merit in the challenge to the constitutional validity to the provisions of explanation (b)(ii) to Section 2(24) of MVAT which were amended with effect from 20.06.2006. The Division Bench of the Bombay High Court took the view that the provision under challenge was not in breach of any constitutional boundaries. L ARSEN AND T OUBRO L IMITED AND ANOTHER VS S TATE OF K ARNATAKA AND ANOTHER [SUPREME COURT OF INDIA, 26 S EP 2013]
On Rule 58 (1A): The value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later. Taxing the sale of goods element in a works contract is permissible even after incorporation of goods provided tax is directed to the value of goods at the time of incorporation and does not purport to tax the transfer of immovable property. The mode of valuation of goods provided in Rule 58(1A) has to be read in the manner that meets this criteria and we read down Rule 58(1-A) accordingly. The Maharashtra Government has to bring clarity in Rule 58 (1-A) as indicated above. Subject to this, validity of Rule 58(1-A) of MVAT Rules is sustained. L ARSEN AND T OUBRO L IMITED AND ANOTHER VS S TATE OF K ARNATAKA AND ANOTHER [SUPREME COURT OF INDIA, 26 S EP 2013]
I MPACT : NEW RULE 58 INTRODUCED ON 29 TH J AN 2014 W. E. F 20-6-2006.
N EW R ULE 58: New rule: Retrospective W.e.f 20-6-2006 New rule 58 (1): Notes to Abatement Method of Cost of Land, etc. New rule 58 (1A): Cost of land and Interest in land. New rule 58 (1B)(a) :Table of Stages of Construction and Value of goods transferred. New rule 58(1C): Non compliance of stages of construction. New rule 58(2): Value so determined shall be the sale price of goods.
V ALUE OF LAND : OLD RULE 58(1A) The Cost of Land is to be determined first, from the total contract value u/s rule 58 (1A). Rule 58 (1A) specify How to determine the value of Land involved in contract? i.e.., The Stamp duty value as on 1 st Jan of the year in which the agreement to sell the property is registered. Subject to cap of 70% of the agreement value. Notification No.1512/CR-84,taxation 1 dt: 30 th July 2012, uploaded on 16 th Aug 2012 deleted the 70% cap of deduction of land cost proviso under rule 58(1A). Retrospective w.e.f 20 th June 2006. Once the cost of land is deducted from the total contract value, the other deductions as per rule 58 will be applicable. Accordingly the tax needs to be calculated on the value of goods involved in the total contract. 17
C HANGES IN VALUE OF LAND Sr. No.Old RuleNew Rule 1The Stamp duty value as on 1 st Jan of the year in which the agreement to sell the property is registered. 2No reference of Actual Cost of Land.Now reference of Actual Cost of land in proviso. It shall be open to the dealer to provide before the Department of Town Planning and Valuation that the actual cost of the land is higher than that determined in accordance with the Annual Statement of Rates (including guidelines) prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995 On such actual cost being proved to be higher than the Annual Statement of Rates, the actual cost of the land will be deducted and excess tax paid, if any, shall be refunded.] 18
P RACTICAL ISSUES IN DETERMINATION OF VALUE OF LAND. Interest in Land is exhaustive list like TDR cost, Premium, Local Authority taxes on land, NA Charges, etc. Now actual cost incurred can be taken into account based on stratification of the Department of Town Planning and Valuation. Very difficult to establish now for the earlier period hence in many cases there may be no impact on cost of land. Excess tax collected will be refunded? Indirect taxation, forfeiture of tax, pay back to costumer. Refer Q.8 of 12T of 2014: Town planning certification is must for actual cost. Procedure to issue certificate? yet to be drafted by the Town Planning dept. Refer Q.4 of 12T of 2014. Deduction of Land cost in first year or proportionately? Refer Q.10 of 12T. 19
O NCE LAND VALUE IS DETERMINED, FIND METHOD OF TAX AND NOW FIND STAGE OF CONSTRUCTION 20
O NCE LAND VALUE IS DETERMINED, FIND METHOD OF TAX AND NOW FIND STAGE OF CONSTRUCTION. Now lets look at each method and effect of new rules on tax liability for filing revised returns: Under MVAT Act, taxation of Works contract, following Options are available: Option 1: Normal Taxation after Deduction as per books from Contract Value. Option 2: Normal Taxation after % wise deduction from Contract Value. Now Turnover of sales of goods involved in contract value shall be determined after determination of stage of construction and as mentioned in rule 58 (1B). IMPACT: The balance amount shall be considered for calculating the turnover for applicability of MVAT audit. Please note that no effect of stages on following options: Option 3: Composition Scheme of 5%. Option 4: Composition Scheme of 1% w.e.f 1-4-2010. All Options available Contract wise or lump sum basis. 21
N EW R ULE 58(1 B ): TABLE OF STAGES OF CONSTRUCTION 58[(1B)(a): Where the dealer undertakes the construction of flats, dwellings, buildings or premises and transfers them in pursuance of an agreement along with the land or interest underlying the land then, after deductions under sub-rules (1) and (1A) from the total contract price, the value of the goods involved in the works contract shall be determined after applying the percentage provided in column (3) of the following TABLE depending upon the state at which the purchaser entered into contract. 22
Sr. No. Stage during which the developer enters into a contract with the purchaser. Amount to be determined as value of goods involved in works contract. (1)(2)(3) (a)Before issue of the Commencement Certificate.100% (b) From the Commencement Certificate to the completion of plinth level. 95% (c) After the completion of plinth level to the completion of 100% of RCC framework. 85% (d) After the completion of 100% RCC framework to the Occupancy Certificate. 55% (e)After the Occupancy Certificate.Nil% 23 N EW R ULE 58(1 B ): TABLE OF STAGES OF CONSTRUCTION
B EFORE ISSUE OF THE C OMMENCEMENT C ERTIFICATE. 24 100% taxable value of goods on booking.
F ROM THE C OMMENCEMENT C ERTIFICATE TO THE COMPLETION OF PLINTH LEVEL. 25 95% taxable value of goods on booking.
A FTER THE COMPLETION OF PLINTH LEVEL TO THE COMPLETION OF 100% OF RCC FRAMEWORK. 26 85% taxable value of goods on booking.
A FTER THE COMPLETION OF 100% RCC FRAMEWORK TO THE O CCUPANCY C ERTIFICATE. 27 55% taxable value of goods on booking.
A FTER THE O CCUPANCY C ERTIFICATE. 28 0% taxable value of goods on booking.
(b) For determining the value of goods as per the Table clause (a), it shall be necessary for the dealer to furnish a certificate from the Local or Planning Authority certifying the date of completion of the stages referred above and where such authority does not have a procedure for providing such certificate then such certificate from a registered RCC consultant. (1C) If the dealer fails to establish the stage during which the agreement with the purchaser is entered, then the entire value of goods as determined after deductions under sub-rules (1) and (1A) from the value of the entire contract, shall be taxable.] 29 N EW R ULE 58(1 B ) AND (1 C ): TABLE OF STAGES OF CONSTRUCTION
Rule 58(2): The value of goods so arrived at under sub- rule(1) 9 [,(1A) or, as the case may be, under sub-rule (1B)] shall, for the purposes of levy of tax, be the sale price or, as the case may be, the purchase price relating to the transfer of property in goods (whether as goods or in some other form ) involved in the execution of a works contract. 30 N EW R ULE 58(2): TABLE OF STAGES OF CONSTRUCTION
31 Sr. No. Stage during which the developer enters into a contract with the purchaser. Who can issue the certificate Amount to be determined as value of goods involved in works contract. (1)(2)(3) (a) Before issue of the Commencement Certificate. Local Authority100% (b) From the Commencement Certificate to the completion of plinth level. RCC Consultant (As there is no such procedure of LA) 95% (c) After the completion of plinth level to the completion of 100% of RCC framework. RCC Consultant (As there is no such procedure of LA) 85% (d) After the completion of 100% RCC framework to the Occupancy Certificate. Local Authority (What about Date of application to date of issue period?) 55% (e)After the Occupancy Certificate.Local AuthorityNil% I SSUES IN STAGES OF CONSTRUCTION
BIG I SSUE What is mean by Date of Contract? 32 Date of Purchaser entering into a Contract is the trigger point. 1 st advance receipt is a also a contract.
BIG I SSUE 33 Goods transferred after date of Contract is taxable. Hence purchases prior to that setoff issues. Rule 53(6), Taxable turnover will change. Refer Q.11 and 26 of 12T. Pre Contract Purchases (No setoff) Post Contract Purchases. ( Full setoff) and Sales. Date of Contract
N EW R ULE 58(1 B ): ISSUES IN TABLE OF STAGES OF CONSTRUCTION 34 Minimum 55% of value of goods may be taxed mandatorily, as Occupancy Certificate is received after construction is complete and all documents are submitted to Local Authority. Local Authority takes time to issue Occupancy Certificate, Whether date of application can be taken or date of issue? Technical words like of plinth level, of RCC framework, etc. needs to co-related with books of accounts. 100% RCC framework means 100% of the entire building? Q.2 of 12T. It should be per unit of sale. Agreement to sale needs to be checked for installments amount and stages of construction, generally it is mentioned. Building wise/Unit wise issues may arise in each case to case.
I SSUES IN STAGES OF CONSTRUCTION How to Find out Back dated stages for each Flat in case of Housing Projects. How to find bifurcate for Return Period. i.e., Monthly/quarterly/six monthly. How to take back dated certificate form RCC Consultant. What type of documents needs to be maintained to prove it? Unutilized deduction/expenses carry forward issues. Q.10 of 12T. 35
For Land Value: Date of 1 St Jan, in the year when agreement to Sell is registered. Where as: For Stages of construction: Date of entering into a contract. 36 DATES?
R ATE OF TAX ON SUCH GOODS USED AFTER STAGE OF CONSTRUCTION Rate of Tax is to be applied on the value of goods arrived after determination of stage of construction. Ratio of Rate of tax of purchases used after the stage of construction needs to be applied. Date of booking of invoice and date of entering into a contract needs to be correlated. Practically purchases are booked on date of receipt of Invoice, if goods received earlier then date of entering into contract, many peculiar issued may arise. Further receipts booked after and prior the date of contract and rate of tax on after the date of contract receipts and its reconciliation may arise. Practical implementation of new rule and filing revised return will be very difficult. If dealer fails then complete contract value will be taxed as per rule 58 (1C). 37
N OW LETS CHECK IMPACT OF NEW RULE ON (O PTION 1-D EDUCTION AS PER BOOKS ) 38
N OW LETS CHECK IMPACT OF NEW RULE ON (O PTION 1-D EDUCTION AS PER BOOKS ) Rule58: Determination of sale price and of purchase price in respect of sale by transfer of property in goods (whether as good or in some other for m) involved in the execution of a works contract:- (1)The value of the goods at the time of the transfer of property in the goods whether as goods or in some other form) involved in the execution of a works contract may be determined by effecting the following deductions from the value of the entire contract, in so far as the amounts relating to the deduction pertain to the said works contract: 39
D ETERMINATION OF SALE PRICE IN CASE OF WORKS CONTRACTS AS PER R ULE 58. (WITHIN MAHARASHTRA STATE) (O PTION 1-D EDUCTION AS PER BOOKS ) (a) labour and service charges for the execution of the works. (b) amounts paid by way of price for sub-contract, if any, to sub-contractors; (c) charges for planning, designing and architects fees; (d) charges for obtaining on hire or otherwise, machinery and tools for the executi on of the works contract; (e) cost of consumables such as water, electricity, fuel used in the execution of wo rks contract, the property in which is not transferred in the course of execution of the works contract; (f) cost of establishment of the contractor to the extent to which it is relatable to supply of the said labour and services; (g) other similar expenses relatable to the said supply of labour and services, wher e the labour and services are subsequent to the said transfer of property; (h) profit earned by the contractor to the extent it is relatable to the supply of said labour and services. 40
D ETERMINATION OF SALE PRICE IN CASE OF WORKS CONTRACTS AS PER R ULE 58. (WITHIN MAHARASHTRA STATE) (O PTION 1-D EDUCTION AS PER BOOKS ) Total Contract Value (Value of Entire Contract)Say Rs.1000 Less: Allowable Deductions Stamp duty Value of land as per rule 58 (1A) or Actual Cost of Land, Cost of Interest in Land like TDR, etc. Rs.200 Sub – Contract Value paid to RD sub-contractor.Rs. 100 Labour Charges for execution of WC.Rs. 10 Planning, Designing & Architects feesRs. 10 Hire Charges or otherwise, for obtaining Machinery & ToolsRs. 10 Cost of Consumables in which there is no transfer of property e.g.: Water, Electricity, Fuel, etc.. Rs. 10 Cost of Establishment relatable to supply of labour & servicesRs. 100 Similar other expenses relatable to supply of Labour & ServicesRs. 50 Profit relatable to supply of Labour & Services Rs. 10 SUB-TOTALRs. 500 Balance sales Price ----- Deemed Sale Value of Goods involved in execution of WC, Find stage of construction of unit and apply the % to find value of goods transfer based on date of entering into contract. = Rs. 500 Thereafter apply ratio rates of purchase side i.e, purchases after the date of booking on Balance amount 41
How to calculate Purchase Ratio: Consider only goods transferred after date of entering into contract. Do not consider Consumable, Capital Goods, etc. Consider all Purchases i.e, MS plus OMS. For OMS and URD purchases, apply local rate of tax on sale of such goods. Bifurcate Rate wise. i.e, 5% or 12.5% Calculate ratio rate wise of total purchases. Apply this ratio of rates on value of goods determined. 42 S OME ISSUES UNDER OPTION 1:
N OW LETS CHECK IMPACT OF NEW RULE ON (O PTION 2-D EDUCTION AS PER % OR ABATEMENT METHOD ) 1. Where the contractor has not maintained accounts which enable proper evaluation of different deductions as below or where the Commr. finds that the accounts are not sufficiently clear or intelligible, then the Contractor or Commr. may in lieu of deductions as below, deduct a Lump sum deduction as provided in the Table u/r 58, to determine the SP of goods involved in WC. 2. Deduction of the Stamp duty value of Land as per rule 58 (1A) or Actual Cost of land and interest in land. 3. The Sub-Contract Value shall be deducted from the Total Contract Value and 4. Thereafter the lump sum Deduction of 30% allowable as per Table shall be made to arrive at the SP of goods involved in WC. 5. Balance sales Price ----- Deemed Sale Value of Goods involved in execution of WC, Find stage of construction of unit and apply the % to find value of goods transfer based on date of entering into contract. 3. The value of goods so arrived at shall be the SP or PP relating to the transfer of property in goods involved in execution of WC, for the purposes of levy of tax@ 0 / 1% /5% / 12.5%, as applicable. 4. RD can collect the tax separately, to the extent payable, on any sale of goods [Sec. 60(2)] 5. Where RD has not collected the tax separately, the tax element can be reduced from the `Sale Price for the levy of tax [Rule 57(1)] 43
O PTION 1 & 2: R ATE OF T AX. Schedule A0%Exempted Goods – Daily Necessities Schedule B1%Bullion, Jewelry, Precious Stones Schedule C4% or 5% IT Products, Declared Goods, Industrial Inputs, Telecom, Products, Drugs & Medicines, Renewable Energy Devices & other products. (Steel, Sand, Metal, etc.) Schedule D20% - 34% Motor Spirits, ATF, etc.. Schedule E12.5%Residuary Entry (Cement, Tiles, bath fittings, etc.). 44 Schedules and Rates of Tax For Goods Involved in Works Contract after the date of entering in contract and % of stage of construction.
S ET OFF ON G OODS USED IN WC & G ENERAL CONDITIONS CONTD ….. Issues in Main contractors & Sub contractors – Relationship shall be deemed to be that of the Principal & Agent [Sec 45(4)]. Their liability to pay tax shall be joint & several. Deductions will be given to either, based on producing prescribed certificates Payment made by Main Contractor – issue Form 406 & 409 to Sub-Contractor Payment made by Sub-Contractor – issue Form 407 & 408 to Main Contractor 45
S CHEME OF C OMPOSITION FROM 20 TH J UNE 2006 Lump sum or Contract Wise or Portion of individual Contract wise taxation: New Explanation--whether in respect of the entire turnover of sales effected by way of works contract or in respect of any portion of the turnover corresponding to individual works contract, pay lump-sum by way of composition : Two Type of Contracts: 1) Construction Contract and 2) Non-Construction Contract. Definition of Construction Contract is given. For Construction Contract rate of Composition is 5%. With retention of 4%. For other than Construction Contract rate of Composition is 8%. With retention of 36% of tax. Deduction of land cost or Cost of Interest in land u/s rule 58(1A) and 58(1B) is not allowed under this composition scheme. Deduction of tax paid by sub-contractor even under composition allowed: the amount payable towards sub-contract involving goods means the aggregate value of the goods on which tax is paid and the quantum of said tax paid by the sub- contractor or the sub-contract value on which tax by way of composition is paid by the sub-contractor, as the case may be. 46
O VER ALL EFFECT OF NEW RULE 58 47 Taxability of Contracts entered before 20 th June 2006. Whether taxable or not? Project wise Assessment.
S UMMING UP : I MPORTANT POINTS TO REMEMBER : For the Period from 20 th June 2006 to 31 st March 2010: Find the Actual cost of land, if higher than revised returns subject of conditions. Find the Cost of Interest in Land, if higher then revised returns. Find the Stage of Construction and apply the % of value of goods on the date of entering into contract. Please remember 1 st Advance date. Practically difficult task other full value is taxable, hence no need to file revised return. If books of accounts are appropriately maintained by dealer- go for Actual basis i.e.., Option 1st. If Actual basis is not possible then for Option 2 (i.e., % basis) If 5% Composition Scheme. (No revision of returns required) Even if after revision, refund arises, if collection from customer is made then, it may be forfeited or it will have to be refunded back to customer. Audit Report of 12-13 can be filed up to 10 th May 2014. (other than composition dealer) From 1 st April 2010 onwards: Go for 1% Composition Scheme. 48
H OW TO FILE REVISED RETURN ? Circular No.7T of 2014 Revised return can be filed for the period 20-6-2006 to 31-12-2013. Annual Return for the one year may be filed. Refer Q.20 of 12T. To be filed on or before 30 th April 2014. Even if assessment and appeal completed, option to file revised return available. No option of Cost plus method. No option of filing original return of above period. Late fees and penalty, etc. may be applicable. Q21 of 12T. Interest will be applicable as per law. Refer Q.22 of 12T. Refund after assessment. Q.18 of 12T. 49
F ALL OUT OF NEW RULE 58 STO SAYING TO DEALER :
T HANKS, I N P RACTICE, TAKE CARE OF CHANGES IN LAW, …,
K EEP LEARNING, S ORRY FOR ANY M ISTAKE, KEEP SMILING, ENJOY SUMMER HOLIDAYS WITH NATURE