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All state under their respective VAT law has made the provision for deduction of VAT from payment to be made to the contractor at the time of payment. Every contractee make payment to the contractor to discharge his liability in pursuance of work contract. At the time of making payment to the contractor, either in cash or in any other form, he shall deduct an amount toward the tax payable under the HVAT ACT.

Provided that any Individual or HUF not registered under this Act, shall not be liable for deduction of such tax.


2.1  Rate of TDS and maintenance of records




Any Contractee

Any type of work

Not exceeding 10%(as notified by state government)

Any Contractee

Execution of the work contract in the state

At the rate of 5% (Notification Dated 20.6.14)

Every government agency, public sector undertaking

Procuring food grains in the state at the minimum support price

At the rate of 5% (Notification dated 24.5.11)


Every contractee shall keep the record of payment and tax deducted at source for the period of 5 years. The accounts shall be kept separately in respect of each works contract or the   contract for the supply of goods and each contractor or supplier, as the case may be.

The assessing authority may, at any time within three years of the close of the year to which any account required to be maintained by an assessee under section 24(1) of HVAT ACT, 2002, and require him to produce the same.

2.2  Furnishing of returns and payment of tax

a. Furnishing of returns: Every contractee is required to furnish return at regular intervals to such authority as may be prescribed.

b. Time of payment of tax: The Deducted amount should be paid within 15 days of close of the month into government treasury in form VAT-C1.

c. Manner of payment:

i. Any person who has to pay any amount due under this Act shall present a duly filled in challan in form VAT-C1 in quintuplicate along with the amount to be deposited either in cash or through a crossed bank draft or pay order in favour of the assessing authority, drawn on Scheduled Bank.

ii. Any amount due under the Act may also be paid by submitting a refund adjustment order in Form VAT-G9 or interest payment order in Form VAT-G10 to the assessing authority.

iii. In exceptional circumstances payment of any amount due under the Act may also be received in cash by the Commissioner or by an officer appointed to assist him under section 55(1) of the Act against receipt in Form VAT-G4 but it should be deposited on the same or next working day.

2.3  Issuance of certificate and credit taken by payee

As per section 24(3) of HVAT ACT, every person shall issue a certificate of tax deduction and payment to the payee. The payee shall be entitled to deduct the amount shown in the certificate from the amount of tax due from him and shall pay the balance in the manner laid down in rule 35(as given in above point 3 ‘Manner of Payment’) of HVAT Rules, and any amount paid in excess shall be refundable on assessment.

2.4  Power of Commissioner to grant relief to payee from deduction of tax

On application made to the commissioner, he may order no deduction from the payment made shall be effected or that deduction shall be effected at a lower rate to any person. rate. For availing this relief there are some condition which should be first satisfied.

Conditions to be satisfied:

i. such  person is a registered dealer;

ii. he has not elected to pay lump sum in lieu of sales tax; and

iii. non - deduction or deduction at a lower rate, as the case may be, shall neither adversely effect nor delay the recovery of tax from him.

2.5 Consequences of failure to deduct or payment of tax

As per section 24(1) & (3) of the HVAT ACT, if any person fail to deduct the whole or any part of the tax as required by or under the provisions of the above referred section. Then, the authority at any time within five years of the close of the year when he fail to so, direct him by giving him an order in writing, after giving him the reasonable opportunity of being heard, to pay, by way of penalty, a sum equal to the amount of tax which he failed to deduct or pay.

2.6 Case Laws

(a) Rajiv Gumber v Bharat Sanchar Nigam Ltd. (2002) 20 PHT 130 (P&H)

Before deducting the tax, the contractor must observe whether the contractor is accountable to pay any sales tax or not.

(b) Rainbow Color Lab v State of M.P.(2000) 15 PHT 98 (SC).

Unless there is sale and purchase of goods, either in fact or deemed, and which sale is primarily deliberated and incidental to the contract, the State cannot impose sales tax on a works contract simply in the form of the stretched definition as integrated in article 366(29A)(b) by Constitutional 46th Amendment.

(c) Hindustan Construction Co. Ltd. v State of Haryana.( 1998) 11 PHT 106 (P&H) = (1998) 109 STC 185.

Deduction of sales tax is not permissible at the time of giving advance to the contractor for obtaining plant, machinery, equipments etc. for the implementation of works contract. The permissible accountability to deduct sales tax arises at the time of making the disbursement towards the running account bill of the works executed up to the date of disbursement.

(d) Commissioner of Sales Tax v S. Kumar Ltd.(1997) 106 STC 185.         

Before levying penalty, mens rea must be proved. Finding that the assessee had filed incorrect return itself is not satisfactory to levy penalty.

(e) Steel Authority of India Ltd. v State of Orissa(2000) 15 PHT 104 (SC)

State is inexperienced to levy sales tax or deduct tax at source in the dealings of inter-State sales or outside sales or sales in the course of import. This is beyond the powers of State Legislature.

(f)  State of Chhattisgarh and others v M/s. VTP Constructions (2008) 31 PHT 10 (SC).

Provisions providing deduction of tax at source from works contractor without providing the provisions of deductions in respect of inter state sales or sale in the course of import or sales outside the sale for which the State is not even competent to levy held to be invalid and liable to be set aside.


I hope after reading the above article, you must have understand the provisions related to deduction of tax at source under HVAT Act. Here I am concluding the whole article. Every contractee shall deduct the amount at the time of making payment to the contractor toward the tax payable under the HVAT ACT. Every contractee shall keep the record of payment made by him or tax deducted at source for the period of five years. Contractee shall furnish the return to the authority at regular intervals. Commissioner have the power to grant relief  to payee for deduction of tax at source.

CA. Rajat Mohan


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Rajat Mohan
Category VAT   Report

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