Query in tnvat under composite method

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raja (Querist)
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29 September 2015 Dear Sir / Madam, We have awarded a civil contract to Contractor “A” under composite method. Hence “A” is claiming service tax 14% on 40% value of the contract value. As per TNVAT act he can’t claim vat under this method. During scrutiny of TNVAT & Service Tax documents, we came to know he is paying vat as per sec 5 of tn vat act as per gross profit method. My query is if one contractor is doing business under composite method and raising bills how he can pay vat under gross profit method by the way of splitting the materials like 5% & 14.5% and without claiming the amount from Employer. Is there any dispute will arise in case of any scrutiny comes from the vat department. Kindly guide us for better clarification.

raja

raja (Querist)
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30 September 2015 Dear Experts,

Pls help on this

raja

raja (Querist)
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03 October 2015 Dear Sirs,

Pls help on this

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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10 August 2024 In the context of Tamil Nadu Value Added Tax (TNVAT) and the composite method for civil contracts, the situation you’ve described raises several points of concern. Here’s a detailed explanation and guidance:

### **Understanding the Composite Method and VAT**

**1. Composite Method for Civil Contracts:**
- Under the composite method, a contractor is required to pay VAT on a presumptive basis, which is generally a percentage of the total contract value, as per the TNVAT Act. This method simplifies the calculation by avoiding detailed computation of input tax credits and other specifics.

**2. Service Tax and VAT:**
- **Service Tax**: Under the composite method for civil contracts, service tax is generally charged on a portion of the contract value (e.g., 40% of the total value) as per the service tax rules.
- **VAT**: For VAT, the contractor should typically follow the composite method prescribed under the TNVAT Act. This means they should not be able to claim VAT in the traditional manner where they compute VAT on the gross profit method, which involves detailed computations of input VAT and output VAT.

### **Issues with Current Practice**

**1. Claiming Service Tax on Composite Method:**
- If Contractor “A” is claiming 14% service tax on 40% of the contract value, this aligns with the composite method for service tax but not necessarily with VAT treatment.

**2. VAT Treatment under Composite Method:**
- Under TNVAT, when using the composite method, the contractor should not be claiming VAT as per the gross profit method. The composite method generally involves paying VAT on a percentage of the total contract value without detailed input-output VAT calculations.
- If the contractor is paying VAT as per Section 5 of the TNVAT Act under the gross profit method (which involves detailed calculations of VAT on materials and splitting of VAT rates like 5% and 14.5%), this is inconsistent with the composite method.

### **Potential Issues and Scrutiny**

**1. **Inconsistency in VAT Payment:**
- If a contractor is using the composite method for civil contracts, they should not be applying VAT as per the gross profit method. This inconsistency can lead to disputes or issues during a VAT audit or scrutiny.

**2. **Potential Disputes:**
- During a scrutiny by the VAT department, discrepancies between the composite method and the gross profit method could raise questions. The VAT authorities might challenge the VAT treatment if it does not align with the prescribed method under TNVAT.

**3. **Employer’s Liability:**
- As an employer or party awarding the contract, you should ensure that the contractor follows the correct VAT treatment. If the contractor is incorrectly applying VAT, you may need to address this issue to avoid potential disputes or liabilities.

### **Guidance and Actions**

1. **Review Contract and VAT Compliance:**
- Verify the contract terms and ensure they align with the TNVAT Act’s provisions for composite contracts.
- Confirm that the contractor is following the correct method for VAT under TNVAT.

2. **Consult with VAT Professionals:**
- Seek advice from VAT professionals or consultants to ensure that both you and the contractor are compliant with the TNVAT Act and to address any discrepancies in VAT treatment.

3. **Addressing the Issue with Contractor:**
- Discuss the VAT treatment with the contractor and request clarification on their VAT computation method. Ensure they correct their VAT treatment if it does not align with the composite method.

4. **Prepare for Scrutiny:**
- Maintain thorough records of contracts, VAT payments, and service tax documentation. Be prepared to explain and justify the VAT treatment if questioned during scrutiny.

### **Summary**

If Contractor “A” is using the composite method for the contract but is paying VAT under the gross profit method, this inconsistency can lead to potential disputes with the VAT authorities. It is important to ensure that the contractor adheres to the prescribed VAT treatment under the TNVAT Act. Consulting with VAT professionals and reviewing the contractor’s VAT practices can help resolve any discrepancies and ensure compliance.

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