The Indirect Tax structure in India is composed of a group of tax laws and regulations. It is levied upon different activities including manufacturing, sale, trading, services and imports. Wide range of Indirect taxes consisting of Service Tax, Value Added Tax, Excise Duty and Custom Duty is levied on services and goods respectively. However, the soon-to-be transition to Goods and Service Tax will amend the entire system of how Indirect Tax is levied presently.
Until that time, it is a hard to ignore fact, that several ambiguities exist on how and on what amount VAT & Service Tax is levied. In this article, we focus on bringing about some clarity regarding this issue.
Our center of emphasis in this article is on which amount Service Tax or VAT shall be levied in cases of Works Contract. It is a well-known fact that Works Contract is a composite Contract, i.e. it is a combination of both services and goods. Hence, there are many issues and point of views regarding leviability of both kinds of taxes on the same.
A works contract is split into contract of sale of goods for the purpose of levy of sales tax on the value of goods involved in execution of works contract and service contract to levy service tax on the value of service. As per the division of contract, sales tax is levied on the sale price of goods involved in execution of works contract and service tax on service value. Reliance can be placed on the case of State of Madras Vs. Gannon Dunkerley and Co. (Madras) Ltd wherein it was clarified that payment of Service Tax and VAT are mutually exclusive. Therefore, the taxes should be applicable having regard to the respective parameters of service tax and sales tax as envisaged in composite contract as contradistinguished from an indivisible contract. Further, according to 46th amendment, the works contract is divisible into contract for sale of goods and other for supply of labour and services, the value of goods involved in the execution of a works contract on which tax is leviable must exclude the charges which pertain to the contract for supply of labour and services.
Works contract being a composite contract shall be split into sale of goods and services as discussed above. It is also clear that VAT is levied only on the former, that is, on sale price for sale of goods. However, some states specifically define the term ‘Sale Price’. For example, under Goa Value Added Tax Act, 2005, u/s 2(ad) defines ‘sale price’ as the amount of valuable consideration received or receivable by a dealer for the sale of any goods less any sum allowed as cash discount, according to the practice normally prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before delivery thereof, excise duty, special excise duty or any other duty or taxes except the tax imposed under this Act.
In the above definition, it is clearly mentioned that any taxes except for VAT shall be included. Hence, there is abstruseness in interpreting the law as to on which amount the VAT shall be charged and whether contracts like works contract shall be split for the purpose of VAT and Service Tax or not.
The VAT laws are different for each state advancing the ambiguity to even a greater height. In such scenario, it is inevitable to rely on few cases and judgments.
In the case of M/S Sujata Painters Vs The State of Maharashtra, the commissioner held that the consideration would include service tax paid on the processing charges and therefore form part of sale price. It was held that service tax is payable in respect of goods and that it is separately recoverable from the customer as cost before delivery of goods and thus form sale price. The decision of Supreme Court in Hindustan Sugar Mill Vs. State of Rajasthan was also relied upon.
The main crux of the whole case was whether service tax paid by the company on the transaction forms the part of sale price and hence liable to VAT or not.
Taking into consideration the decision of Bombay High Court in Bata India Ltd. Vs. State of Maharashtra it was submitted that in invoice the service tax is shown separately and is collected by separate agreement. The tax so collected separately does not form the consideration and has no connection with the sale of goods. Section 2(25) clearly states that the tax so collected does not form part of sale price and it is very clear that service tax is excluded from the sale price. The relevant extract is produced below-
"Sale price" means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged.
Explanation II- Sale price shall not include tax paid or payable to a seller in respect of such sale.
Therefore, the legislative intention is clear not to include the service tax into the definition of sale price u/s 2(25) of MVAT Act. Therefore, it was submitted that the service tax cannot be read into the definition of sale price for the purpose of levy of sales tax. The decision of Supreme Court were also taken into consideration in Dr. Baliram Waman Hiray Vs. Justice B. Lentin and another, Tata Cummins Ltd. Vs. State of Jharkhand and others, Commissioner of Sales Tax, Uttar Pradesh, Lucknow Vs. Parson Tools and plants, Kanpur.
Hence, service tax and VAT are mutually exclusive. The VAT is levied on the value of goods supplied in execution of works contract, In addition, service tax cannot be permissible to be included in the definition of sale price so determined.
Despite of multiple judgements, due to divergence in the provisions of state VAT laws, the ambiguity still exists that whether VAT is levied on the amount inclusive of service tax or sale price excluding service tax?
However, all this obscurity about the amount on which VAT and Service Tax is to be levied is short lived. With the introduction of Goods and Service Tax (GST), both the taxes will be subsumed and single law will prevail. The introduction of new taxation system is expected to relieve the dealers and revenue department both, regarding leviability of taxes. GST has high outlooks on the way the system will deal with the current ambiguity and provide the much needed respite.
CS Priyanka Gupta
APRA & Associates