5 Constitutional Amendment 46th Amendment made to the Constitution from February 2, 1983Outcome of the above:Permitted the States to levy tax on the Sale of goods involved in execution of all work contract.States have been given power to separate the contract between work and the labour and servicesIdentifying whether the goods retained their original identity after the work was executed or had been merged, integrated or becoming part and parcel of the works, buildings etc.All the States to power under this Constitution Amendment and made Amendments in their respective Sales Tax Law to levy tax on such sale either by making separate legislation or by amendment in existing sales tax law
6 Basic Sale of Goods vis-à-vis Works Contract Taxed as actual Sale : Seller & BuyerTaxed as Deemed Sale : Contractor & ContracteeAbsolute property of the maker when produced / manufactured. Later on sold to buyerIn WC, it is never an absolute property of the maker. Materials used in WC – may be makers absolute propertyThe sale is ‘chattel as a chattel’ i.e. ‘goods’ are sold as ‘goods’In WC, article produced becomes the property of buyer without first becoming property of the maker.Primary function - supply of materialsIncidental - work or servicePrimary function - work and labourIncidental - materials are suppliedTDS provisions are not applicableTDS provisions are applicable
7 Types of contractSupply of Materials and LabourWorks Contract (e.g. Construction of a building, roads, bridges, dams etc.)Supply of labour and supply of materials is incidental to the contractNot a Works contract (e.g. Painting, cleaning, overhauling, lubricating, greasing of an old machinery etc.)Pure Labour Contract – may involve materials for executing contractNot a Works contract (e.g. Semi-finished material supplied to Job-worker for further processing, tailor doing stitching work)
9 Works Contract under Gujarat VAT Section 2(23) :Definition of Sale includes transfer of property in goods, (whether as goods or in some other form) involved in the execution of a works contractGovernment of Gujarat has notified list of works contractNotified works contractList_of_Works_Contract.pdf
10 Works Contract under Gujarat VAT Act Valuation options underWorks ContractActual Labour deductionCompositionStandard Labour deduction
11 Calculation of Sale Price of Works Contract Actual labour deduction – Following deductions are allowed in case books of accounts are maintainedLabour charges & Service chargesSub-contract chargesPlanning, designing and architect's feesMachinery on hire and tools usedCost of consumables, the property in which is not transferredCost of establishment to the extent to it is relatable to the supply of labour and servicesOther similar expenses relatable to the supply of labour and servicesProfit earned by the contractor to the extent it is relatable to the supply of said labour and servicesIntention of the government is to levy tax ONLY on Material component
12 Calculation of Sale Price of Works Contract Indivisible Contract – in case separate books of A/c’s are not maintained – Lump sum deductions are allowedDescription of Works ContractPercentage of DeductionConstruction, improvement, repair of any building, road, bridge, dam, canal or other immovable property30%Installation, fabrication, assembling, commissioning or repair of any P&M15%Installation, fabrication, assembling, commissioning of Air conditioner, air cooler10%Assembling, fitting, re-assembling, improving, producing, repairing, furniture, fixtures (interior decoration)20%Construction, fabrication, assembling, commissioning, repairs of bodies on chassis of motor vehiclesOverhauling or repairing or dismantling of any motor vehicles, vessels of every description meant for plying on water or any vessel propelled by mechanical means, any air craft, etc* Amount to be deducted from the contract price (expressed as a percentage of contract
13 Calculation of Sale Price of Works Contract Indivisible Contract – in case separate books of A/c’s are not maintained – Lump sum deductions are allowedDescription of Works ContractPercentage of DeductionFitting out, assembling, altering, ornamenting, re-assembling, blending, finishing, furnishing, improving, processing, otherwise treating, adapting or fabricating of any goods15%Erection, installation and commissioning of wind turbine generator30%Fixing of marble, slabs, polished granite stones and tiles other than mosaic tiles20%Fixing of sanitary fittings and plumbingPainting and polishingLaying of pipes excluding plumbingTyre retreading* Amount to be deducted from the contract price (expressed as a percentage of contract pri
14 Calculation of Sale Price of Works Contract Indivisible Contract – in case separate books of A/c’s are not maintained – Lump sum deductions are allowedDescription of Works ContractPercentage of DeductionSupply of goods in providing know-how, designs, labour, supervision, inspection, training or other services with any of the operations specified above20%Dyeing and printing of textiles30%Printing contractsAny other works contractTo arrive at Taxable turnover above rates are applied after deducting payment made to specialised contractor, sub contractor (discharging liability separately)
15 Calculation of Sale Price of Works Contract Composition Scheme – For contractors who do not wish to pay tax based on the specific formula or after considering the lump sum deductionsRate of tax is 0.6% or 2% of the total contract value as under:0.6%- Construction contracts relating to roads, buildings,bridges, pipeline laying, dams, etc.2% - Other contracts including contracts for erection,installations etc.Restrictions:ITC not available on purchasesContractor not eligible to issue VAT Invoice and also can not charge tax in the invoice - Therefore, no ITC is available to the employerCannot import goods on interstate basis or branch transfer basis
16 TDS Rate under GVATPerson responsible for payment exceeding Rupees 1 crore for works contract is responsible for deduction of tax at prescribed ratesTDS Rate : 0.6% in case of construction contract and 2% in case of othersWorks Contractor is mandatorily required to obtain TAN No. from Commercial Tax Department.Pay the tax to the Government within statutory due date in Form-207 and issue certificate in Form-703 to the contractor evidencing the deduction of tax at source.File a return within 30 days of end of quarter in Form-704 and also file a annual statement within 30 days from end of financial year.
17 Gujarat VAT – Compliance at a Glance TDS Rate0.6% in case of construction contract and 2% in case of othersRemittance of tax deductedTo be deposited to within 22 days in Form 207 from the end of the respective monthTDS Certificate to be issuedCertificate to be issued in ‘Form 703’Records to be maintained for TDS by ContracteeIn ‘Form 705’ on monthly basisTDS Return to be submittedIn ‘Form 704’ within 30 days from the end of the quarterMonthly Return to be submittedIn ‘Form 201’ within 30 days including e return for specified dealersAnnual Return to be submittedIn ‘Form 205’ within 9 months from the end of the year including e return for specified dealersTDS Rate2% in case of construction contract and 4% in case of othersRemittance of tax deductedTo be deposited to within 10 days from the end of the respective monthTDS Certificate to be issuedImmediately after deduction in ‘Form 402’Books of accounts / records to be maintainedIn ‘Form 404’ showing tax deducted, remittance made, TDS certificate issued etc.Annual Return to be submittedIn ‘Form 405’ within 3 months from the end of the yearTax Deduction account number‘Form 401’ – not required afterSubmission of statement to assessing authority of contractor‘Form 403’ – not required after
18 Gujarat VAT – Input Tax Credit ITC available on all inputs used in works contract other than composition method subject to fulfilment of conditionsBroad Restrictions on ITC:CST purchasesCapital goods used in works contractLease goodsGoods purchased from Lump sum dealerGoods not connected with businessVehicles, equipments, accessories or spare partsFuel used in motor vehiclesGoods used as fuel in generation of electrical energyITC to be reversed by 4% in case of branch transfer
20 Inter-State Works Contract Finance Act 2002, had made certain amendment in the Central Sales Tax Act 1956, to include inter-state sales of goods involved in the execution of works contract taxable from May 11, 2002clause (ja) in Section 2 of the CST Act was inserted which define work contract as:-A contract for carrying out any work – Which includes assembling,construction, building, altering, manufacturing, processing, fabricating,erection, installation, fitting out, improvement, repair or commissioningof any movable or immovable property.Citus of taxation will come only when:Contractor executes works in another states andThe property over the goods passes from him to his customer either by transfer of document of title over the goods when they are in transit from his state to another state or directly on their incorporation in the works.
21 How to determine the taxable turnover? Proviso to Section 2(h) of the CST Act provides the meaning of sale price as under:-‘sale price’ in relation to transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract, shall be determined in the prescribed manner by making such deduction from the total consideration for the works contract as may be prescribed and such price shall be deemed to the sale price for the purpose of this clause.However no deductions has been prescribed under the CST Act .Section 8A of the CST Act does not prescribe any mechanism regarding how to determine the turnover in case of a works contract.Section 13 (1)(aa) of the CST Act empowers the Central Government to make rules providing for “the manner of determination of the sale price and the deductions from the total consideration for a works contract under the proviso to Section 2(h)”.However no rules has been framed by the Central Government in this regard.Section 13 (3) the CST Act empowers the State Government to make Rules, not inconsistent with the provisions of this Act and the Rules made under sub-section (1), to carry out the purpose of this Act
22 How to determine the taxable turnover? However no specific rules have been made by the State Government in respect of an inter-state works contract.So, what are the remedies available in this matter -Recourse needs to be taken to the Supreme Court judgment in the case of “M/s. Mahim Patram Private Limited v. Union of India (2007)”.Brief facts of the case:-Appellant was engaged in the printing of question papers for various universities and boards situated outside the State of Uttar Pradesh;As the goods have moved from one State to another, it was an inter-state works contract;The appellant had contended that in absence of the provisions for determining the ‘sale price’; taxable turnover cannot be computed under Section 8A and CST cannot be levied.
23 How to determine the taxable turnover? The learned Supreme Court decided as under:Section 9(2) of the CST Act empowers the assessing officer to ‘assess, reassess, collect and enforce payment of tax, including any interest or penalty payable by a dealer under this Act as if the tax, interest or penalty payable by such dealer under this Act is a tax, interest or penalty payable under the general sales tax law of the State’.Thus the powers conferred and the procedures laid down under the State sales tax laws would, therefore be applicable for the purpose of carrying out the assessment under the CST Act.
24 How to determine the taxable turnover? In view of the above ruling, provisions made in a particular State (from where the goods are moving) for determining the taxable turnover and the sale price in case of a works contract would be applicable accordingly in case of an inter-state works contract .
25 Rate of Tax ApplicableAfter determining the ‘sale price’ and the ‘turnover’ as per the provisions of the State Act, rates of CST prescribed under Section 8 of the CST Act would be applicable.Section 8 of the CST Act provides the following rates in case of an inter-state saleIf sale is made to a registered dealer against Form ‘C’ – 2%If sale is made to a registered dealer without form ‘C’ – rate applicable in the respective StateIf the sale is made to an un-registered dealer – rate applicable in the State from where the goods are moving in the course of inter-state trade or commerce.
27 Description of Service Following are relevant taxable services involved in the Works ContractDescription of ServiceTaxable w. e. fCommercial or Industrial Construction services10/9/2004Erection, Commissioning or Installation Services1/7/2003Construction of Complex Residential services18/4/2005Works contract services1/6/2007
28 Works Contract service – Inserted from 1st June 2007 Section 65(105)(zzzza) of the Finance Act defines taxable service as:“any service provided or to be provided to any person by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airport ports, railways, transport terminals, bridges, tunnels and dams”Explanation to this sub-clause defines ‘works contract’ :Works contract means a contract wherein – Transfer of property in goods involved in the execution of such contract is leivable to tax as sale of goods and such contract is for the purpose of carrying out specified works.
29 Works Contract service – Inserted from 1st June 2007 Specified works are:(a) Erection, commissioning or installation of plant ,machinery equipment orstructures, whether pre-fabricated or otherwise, installation of electrical andelectronic devices, plumbing, drain laying or other installations or transport offluids. heating ,ventilation on air-conditioning related pipe work, duct work andsheet metal work, thermal insulation, sound insulation, fire proofing or waterproofing, lift and escalator ,fire escape staircases or elevators or(b) Construction of a new building or a civil structure or a part thereof or of a pipeline or conduit ,primary for the purpose of commercial or industry or(c) Construction of a new residential complex or a part thereof or(d) Completion and finishing services, repairs, alteration, renovation or restoration ofor similar services in relation to (b) and (c)(e) Turnkey projects including, engineering, procurement and construction orcommissioning (EPC) projects.
30 Works Contract service – Inserted from 1st June 2007 Two essential conditions for taxability under works contract service are –There must be transfer of property in goods involved in the execution of specified works contractsSuch transfer is leviable to tax as sales of goods.
31 Appropriate Classification under Service Tax Legislation If the specified work contract involves transfer of property and on which VAT/Sales tax is payable the service will be taxable under Works contract ServiceIf the Contract is a simple service contract i.e. no material is involved or even if some material is involved, VAT/Sales tax is not payable the service would be classified under respective category of Construction or Erection and Commissioning Service
32 Works Contract Service Valuation optionsComputation as per Valuation RulesComposition
33 Valuation of works contract service Computation as per Valuation RulesValue of works contract shall be equivalent to gross amount charged for the works contract less value of transfer of property in goods involved in execution of the said works contract. Along with value of Material VAT/CST paid to be deducted.Following to be included :Labour charges & Service chargesSub-contract chargesPlanning, designing and architect's feesMachinery on hire and tools usedCost of consumables, the property in which is not transferredCost of establishment to the extent to it is relatable to the supply of labour and servicesOther similar expenses relatable to the supply of labour and servicesProfit earned by the contractor to the extent it is relatable to the supply of said labour and servicesOther similar expenses relatable to supply of labour and servicesProfit earned by the service provider relatable to supply of labour and services.
34 Valuation of works contract service Computation as per Valuation Rules - Tax rate and CENVATService 10.3% to be paid on taxable value arrivedCENVAT credit on Input services and Capital goods can be availed
35 Valuation of works contract service Computation as per Composition schemeOptional Composition schemeService Tax (including Ed. Cess and SHE Cess) is 4.12 % of the total value of the works contract.Intimation to the department for availment of this option prior to execution of Works Contract.Once opted, can not change the option till completion of the contract.Value of free issue items also to be included in Gross ValueCENVAT credit on Input services and Capital goods can be availed
36 Goods & Services Tax(GST) • Indicated roll-out date is April 1, 2011
37 The Gist of Proposed GST: Taxes to be subsumed Central LeviesState Levies• Value added tax• Excise duty• Entertainment tax• Additional excise duties• Luxury tax• Excise duty under Medicinal andToiletries Preparation Act• Tax on lottery, betting & gambling• Service tax• Entry tax• Additional and special additional• Surcharges and cessescustoms duties• Surcharges and cessesCentral GSTState GST
38 What prompted the GST?• Several indirect taxes at Central and State level• Tax on tax in current Central Excise and State VAT mechanism• No harmony in rates of VAT on similar commodities from one State to another• CENVAT credit & VAT input tax set-off not comprehensive due to restrictive provisions• Break in credit chain in inter-State transactions• Multiple taxes leading to complexity in compliance
39 The Gist of GST: Uniformity in structure • 1st Discussion paper on GST released by the Empowered Committee on 10th Nov’2009As far as practicable there will be uniform procedures across various statutes concerning:- ChargeabilityTaxable eventTaxable personValuation- Classification• Rules for taking and utilisation of credit for CGST and SGST would be aligned, but no cross utilisation of credit between these two taxes
40 The Gist of GST: Scope and coverage • CGST and SGST would be applicable on all transactions of goods and except:- Exempted goods and services-Transactions which are below the prescribed threshold - Goods outside the purview of GST:GoodsTreatment under GSTProducts containingOutside the purview of GST, State Government toalcohollevy taxes as at presentCentral Government to levy excise duty on tobaccoTobacco Productsproducts over and above GSTOutside the purview of GST, will be subject to salesPetroleum Productstax / value added tax Levied by State Governemntand to cess, excise duty by Central Government
41 The Gist of GST: Rates and thresholds • Two-tier rate structure for both CGST and SGST- Standard rate for most goods and services- Lower rate for essential commodities and precious metals• Threshold limits:Threshold limits for :TaxGoodsServicesCGSTRs. 150 LakhYet to be decidedSGSTRs. 10 LakhRs. 10 Lakh• Composition scheme with floor rate of 0.5% to beavailable for taxpayers having annual turnover belowRs. 50 Lakh
42 The Gist of GST: Input tax credit Mechanism Input Tax Credits (ITC)CGSTIGSTagainstSGSTIGSTagainstIGSTCGSTSGSTagainst
43 The Gist of GST: Inter-State transactions • Inter-State sale of goods and services will be taxed under the innovative Integrated GST (IGST) model• IGST model would work as follows:- The Central Government would levy IGST at the rate of CGST + SGST on all inter-State sale transactions- To pay this IGST, the inter-State seller may use credit of CGST, SGST and IGST on his inputs- The inter-State purchaser may use the credit of the IGST paid on his purchases to discharge the output tax liability on his taxable supply of goods or services
44 The Gist of GST: Exports and imports • Exports would be zero-rated• Exports to processing zones of SEZ will also be zero rated- No benefit would be allowed for the sales from SEZ to Domestic Tariff Area• Imports of goods and services would be subject to CGST and SGST based on destination principle:- SGST revenue will accrue to the State where the imported goods and services are consumed- Both CGST and SGST paid on import of goods and services will be available as credit
45 Impact on businesses: Decision matrices • Product Pricing needs to reflect GST efficiency• Stock level to be maintained as on transition date• Timing of acquisition of assets• Review impact on existing contracts• Focus on core activities vs. backward / forwardintegration• Ascertain change in documentation and processes• Identify changes to ERP system to be GST compliant• Assess need to re-engineer tax management function
46 New dual GST: Transition matters • Treatment of unutilised tax credit balance as on transition date• Tax credit on capital goods where only partial tax credit taken in pre-GST regime• Treatment of tax already paid on goods lying in stock as on the transition date• Sales return of goods sold in pre-GST period• Taxation of contracts and services spread over pre-GST & post-GST period•‘Change-in-law’ provisions in existing and new contracts