Set off under works contract

This query is : Resolved

Priti Dhoke (Querist)
Follow

16 October 2015 One of my client is registered under works contract in MVAT and ST with 60% material and 40% service tax. i just want to know wheather he is under composition scheme or not.

If he is under composition scheme then how much set-off will be applicable to his for the purchase of materials.

Please revert back as soon as poosible.(on urgent basis).

thanku in advance.

Priti Dhoke

Priti Dhoke (Querist)
Follow

19 October 2015 Dear Sir,

Please Reply on the above query.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
Follow

25 July 2025 In the context of a Works Contract under MVAT and Service Tax, let's break down your query:

1. Is the Client Under Composition Scheme?
The Composition Scheme under MVAT applies to works contractors who meet specific criteria. Under this scheme, contractors can pay tax at a prescribed percentage on their total contract value, without having to maintain detailed records of the actual purchases and sales.

The key points to determine if your client is under the Composition Scheme are:

Eligibility Criteria:

The contractor must be engaged solely in works contracts.

The annual turnover (including the value of works contracts) should not exceed a specific threshold limit (e.g., Rs. 50 lakhs in Maharashtra under MVAT).

If the contractor opts for the Composition Scheme, he cannot claim input tax credit (ITC) on purchases related to the works contract.

Composition Rate:

The composition rate for works contractors is typically around 5% (for example, in Maharashtra, it is generally 5% of the total contract value).

To check if your client is under the Composition Scheme, you need to verify:

Whether your client is paying tax on a composition basis (a fixed percentage on total contract value).

Whether they are opting for the composition scheme in their MVAT registration (they will have declared this at the time of registration).

2. Set-Off on Materials Purchased (Under Regular Scheme):
If your client is not under the Composition Scheme and is paying tax under the regular scheme, they will be eligible to claim set-off on the tax paid on materials purchased for the execution of the works contract.

For example, if the contract involves 60% materials and 40% service (like in your case), your client would be required to charge Service Tax (on the service portion) and MVAT (on the material portion).

Set-off for Purchase of Materials:

Under the regular scheme, your client can claim input tax credit (ITC) on the tax paid on the purchase of materials.

The set-off will be applicable only on the material portion of the contract, i.e., 60% of the contract value. The set-off will be for the MVAT paid on the purchase of materials.

In other words, if the contract value is split into 60% material and 40% service, your client can claim set-off on the 60% material portion for MVAT.

However, no input tax credit can be claimed on the service portion (40%), as the service is taxable under Service Tax and not under MVAT.

3. Set-Off Under the Composition Scheme (If Applicable):
If your client is under the Composition Scheme, the situation is different:

No input tax credit (ITC) can be claimed on purchases.

The contractor pays a fixed percentage on the contract value (e.g., 5% of the total contract value) instead of paying tax on each material or service.

Thus, if your client is under the Composition Scheme, they will not be able to claim any set-off on the purchase of materials.

Summary:
If under the Composition Scheme: No set-off is available for the purchase of materials.

If not under the Composition Scheme (i.e., under the regular scheme): Set-off is available on the 60% material portion for MVAT paid on the purchase of materials, but not on the service portion (40%).

Action Steps:

Verify if your client has opted for the Composition Scheme under MVAT.

If your client is not under the Composition Scheme, ensure they are claiming set-off on material purchases at 60% (for material portion) of the total contract value.

Ensure that the MVAT paid on material purchases is eligible for input tax credit, which is crucial for set-off claims.

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now