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Whether MVAT TDS credit can be transferred in favour of Sub contractor?

- Guiding sections are sec. 31(4) and Sec.45(4) of MVAT ACT., rule 50, Form 406, 407,408,409.

- Unlike Income tax, TDS under MVAT is single point, hence intention of legislature is to be looked differently than of Income Tax. Further liability under income tax is multi point whereas liability of VAT towards a particular contract is single point (Through Form 408/409) so one should not read/ interpret VAT TDS provisions at par with income tax.

- Sec. 45(4) deals with tax treatment of works contract in MVAT Act. As per the said section, particularly in case of sub contracted work, liability toward MVAT is joint and several between Main contractor and Sub contractor however the same can be transferred from Main contractor to Sub contractor if Sub contractor issues a declaration to that effect in Form 408 in favour of Main contractor ( sec.45(4)(f)) and vice versa will be the case where main contractor takes liability towards the said contract even if subletted in that case he should issue a declaration to that effect in Form 409 in favour of Sub contractor ( sec.45(4)(g)).

- Further deduction from payment of taxes shall be available to the Sub contractor or Main  contractor if he produces certificates in Form 406 or Form 407 respective as per sec.45(4)(e) i.e.If main contractor pays tax on behalf of the sub contractor, he shall issue certificate in form 406 and vice versa will be the case if Sub contractor pays tax on behalf of the main contractor he will issue certificate in form 407 infavour of main contractor.

- TDS in Income tax Act is Multi point i.e. to be deducted at every stage i.e from Main contractor, from Sub Contractor, from sub sub contractor and so on where as in MVAT TDS is Single point only i.e. TDS is being deducted at once only i.e. at the stage of Main Contractor and any subsequent payments to sub contractor do not attract TDS provisions in MVAT Act. In Income tax Act, the enjoyment of TDS is provided in sec.199 of I.T. Act 1962 which is worded as follows:

‘Any deduction of tax made in accordance with the forgoing provisions of this chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made ……

Whereas per Sec. 31(4) of MVAT act which specifically deals with enjoyment of tax so deducted and  states as follows:  “Any amount or any sum deducted in accordance with the provisions of this section and paid to the State Government  may be claimed as a payment of tax by the person making the said supply and credit for the payment maybe claimed by the said person in the period…………….”

- Here in above sub section important thing to be noted is that the law makers have used word may be and not shall be that means there is possibility of claimant of more than one and as the TDS under MVAT is single point, it is to be interpreted that the tax so deducted may be claimed by the main contractor or sub contractor or sub sub contractor and so on . That’s why it has been linked with the person making said supply and not only with main contractor. Further Sec.31(9) re iterates it by restricting sales tax officer that he can not demand tax from the person making said supply to the extent of tax so deducted. This means tax so deducted can be very well claimed as tax paid by the executer of the said works contract who so ever he may be.Sub contractor being supplier/ executer of the said works contract can very well claim the credit of the TDS in MVAT. As per the recent supreme court decision in case of Larsen and Toubro Vs. State of Andhra Pradesh, supreme court has affirmed that in case of Sub Contracting, sub contractor only is the person making said supply and not the main contractor by way of theory of accretion. In such cases Property in goods directly transfers from sub contractor to contractee and the main contractor no where comes in picture. Therefore in such cases only sub contractor can become the person making said supply and not the main contractor and there by giving credit to main contractor will automatically violate the provisions of sec.31(4). Thus the credit of the said TDS can very well be taken by the sub contractor as per sec.31(4) being the person making said supply. Here the TDS has been collected to take care of the WCT liability arising from execution of the said work hence if liability there of if passes on to the sub contractor then TDS thereof  can be very well be passed on to the sub contractor particularly when the WCT liability of the said work is said to be Joint and several between the Main contractor and the sub contractor. From combined reading of sec.45(4), 31, 31(4) and 31(9) it is clear that Government wants early tax collection of liability arising from execution of  works contract and intends to adjust it first against the liability arising from execution of the said work hence credit for TDS has been allowed to the person making said supply and not deductee in sec.31(4) and that’s why the  restrictive provision have been made in sec.31(9) which restricts the authority to recover the tax arisen from the said executed work to the extent of Tax so deducted. The person making the said supply is clearly decided by the honorable Supreme Court in L&T’ s case as the the sub contractor only the person making said supply.

In the said decision, Supreme court clearly states that in case of sub contracting, the property in material directly passes from sub contractor to the Employer and the main contractor no where comes in picture, there by the Sub contractor only becomes the Person making Said Supply. Therefore giving the credit of TDS to the main contractor when Sub contractor has executed the said works contract will violet the provisions of Sec.31(4).

If that is not the correct interpretation then when it is a single point TDS , they would have worded it straight way as ‘ the credit of the same will be enjoyed by the main contractor’. But as they have worded and linked it to the person making said supply and particularly when they have made TDS as single point, to collect the legitimate tax at the earliest, collecting the WCT at source to take care of WCT liability arising from execution of the said work, its non transferability to sub contractor will certainly hamper the intention of the legislature and would lead to Loss of revenue. 

- Yes, if the MVAT TDS is not allowed to be transferred to sub contractor through Form 406/407 then there is possibility of  LOSS OF REVENUE which can be explained as follows:

Generally acts takes first and we account for it subsequently and there after tax treatment is being given to the said act. In case of 100% sub contracting, practically what happens, as against work done of Rs.100/-by the sub contractor,payment of bill being received by the main contractor from the respective department after deducting there from S.D @ say 2%, ITDS @ 2%, MVAT TDS @ 2% comes to Rs.94/- From this amount so received the main contractor further deducts his commission  say @ 3% and I.TAX deduction @ 1% and pays Rs.92/- to the sub contractor (here his own ITDS @2%+ 1% from payment= 3%). Thus he recovers well as MVAT TDS from subcontractor. There by there is no profit no loss so far as MVAT TDS is concerned. NOW, if we do not allow to transfer the MVAT TDS credit to sub contractor, then funny thing will happen while calculating tax position which is as follows:

Main contractors MVAT calculations:

Gross contract receipts: Rs.100.00

Less sub contracted work ( Form 408 taken from sub contractor): Rs.100.00

There fore Taxable contract value:  NIL

Tax Payable:  NIL

Tax paid  -TDS: Rs.2.00

There fore Refund due: Rs.2.00

Importantly note here that already the main contractor has recovered the MVAT TDS amount from the subcontractor through his payments and further he will be going to receive the refund from Govt. There by he will make profit of Rs.2/- and at the same time Govt. will not receive any single penny against the said work in spite of this TDS exercise. Instead it will have to run behind sub contractor for tax payment. Funny  no? Further here Govt.have restrictive provision of sec.31(9), due to which Govt. will not get a single penny from sub contractor due to restrictive provisions of Sec.31(9). Thus there arises LOSS OF REVENUE.So question arises whether for such purposes these TDS provisions have been brought in? certainly  not.  Legislature has certainly made it clear but we people are not ready to interpret it properly. Everybody knows Tax liability is more important than its payment. In MVAT act one can very well pass on Tax liability to sub contractor by issuing declaration in Form 408 then what’s problem in transferring TDS? We should be possessive while interpreting a law provision.

a. A corollary can be given in MVAT it self. In MVAT, one can enjoy Input tax credit by producing just Tax Invoice. Then why one can not enjoy MVAT TDS by producing Certificate in Form 406? Almost all the details are there in Form 406.Certainly it should be. If not then question arises that what is the purpose of FORM 406/407 provided in MVAT Act?

b. Lastly Under Income tax Act, there is no bar for Tax deduction at higher rate, on the same lines there is no bar in MVAT act in transferring MVAT TDS credit to the sub contractor.   

My view is supported by opinion given on similar case in Sales Tax Review Feb.2008 and supreme court’s decision in case of State of Andhra Pradesh & othrs. Vs. Larsen & toubro  Appeal no.5239 of 2008.

In view of above mentioned submission it is requested that the necessary clarificatary  amendment to be done in existing law and procedures to interpret the allowability of credit MVAT TDS to sub contractors that too with retrospective effect so that the bottleneck created will be removed and pendency accumulated will be cleared. 

CA Gopal Navandar, Aurangabad.


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Gopal Navandar
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