Works contract

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Govardhan Reddy (Querist)
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23 October 2013 pls explain the implications of VAT in works contract where 1) contract is of composite nature and no material is supplied by contractee for for the contract. 2) contract is of composite nature and free material is supplied by contractee. 3) contract is of composite nature and material is supplied by contractee on cost recovery basis .

CA UMESH DULAL

CA UMESH DULAL (Expert)
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23 October 2013 If you have opted for composition scheme, then pay the tax at the rate applicable to you on total amount billed by you

if you have not opted for composition scheme,
take deduction on account of labour and other service.

if you have maintained proper books and can derive the value of goods transferred, then pay tax on value of goods transferred.

otherwise, check the type of your work contract and vat rule to find the abatement of labour and other service portion

MJ Krishnamurthy

MJ Krishnamurthy (Expert)
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23 October 2013 In addition to the above points Please note : Sl No (1) is normal contract,labour at actuals +profit(GP)(or 30% in some cases) to be reduced fro the gross receipts and pay vat on the balance after taking set off of ITC.Sl No(2) this is pure labour contract and no VAT liability arises. Sl No(3) ,Here you have to include the value of material(goods consumed) in the invoice,collect output tax from the contractee and pay in full to the govt(if TDS not done).In this case ITC will not be available because the contractee has purchased most of the material on his name and paid for it.The contarctor may avail ITC of the goods purchased and used in the works.TDS made by the contractee can be claimed as set off against the payable output tax.Cost of the contract raises by the ITC value and there will be tax on ITC.....mjk

Govardhan Reddy

Govardhan Reddy (Querist)
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24 October 2013 thank u sir..

Govardhan Reddy

Govardhan Reddy (Querist)
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24 October 2013 but let me tell you in our company there are some contracts in which contractors will provide the required material as well as labour for the contract. in this contract if the contractor provides separate bill for labor and material, do we need to pay VAT on the value of material used in the contract?
pls guide.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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03 August 2025 You're dealing with composite works contracts under the pre-GST VAT regime (as of 2013), particularly under Andhra Pradesh VAT. Let's address your queries step by step and clarify each scenario.
🔷 Q1: VAT Implications in Composite Works Contract
Let's break it down by the 3 scenarios you mentioned.
✅ 1) Composite Contract – No Material Supplied by Contractee (Normal Case)
📌 Nature:
Contractor provides both materials and labour
Contractee (client) supplies nothing
🔍 VAT Treatment:
VAT is applicable on the value of materials used in the contract.
If books are maintained, contractor can segregate labour and material cost, and pay VAT only on material value.
ITC (Input Tax Credit) is allowed on purchases used in the works contract.
🔧 Example:
Gross contract: ₹10,00,000
Labour: ₹3,00,000 (as per actuals or standard % like 30%)
Material: ₹7,00,000 → VAT payable on this amount
VAT @ 5%: ₹35,000
You can claim ITC for tax paid on purchases.
✅ 2) Composite Contract – Free Material Supplied by Contractee
📌 Nature:
Contractee supplies all materials free of cost
Contractor supplies labour only
🔍 VAT Treatment:
This is effectively a pure labour contract.
No transfer of property in goods from contractor to contractee.
Therefore, no VAT liability arises on the contractor.
❗ Note:
If contractor adds consumables (e.g., welding rods, bolts), VAT may apply only on those if they are billed.
✅ 3) Composite Contract – Material Supplied by Contractee on Cost Recovery Basis
📌 Nature:
Contractee supplies materials to the contractor, but recovers the cost later
So, the contractor uses the materials, and their value is added to contract cost
🔍 VAT Treatment:
In such cases, contractor is considered to have used and transferred those materials to the contractee.
VAT is payable on value of materials used, including cost recovered by contractee.
Contractor should include the material value in invoice and charge VAT.
ITC not available on such materials if invoice is in contractee’s name (since the contractor didn't buy them).
Example:
Material cost recovered: ₹5,00,000
Contractor adds it in the bill
VAT is charged on ₹5,00,000 (even though he didn’t purchase it himself)
No ITC since material not purchased in contractor’s name
🔷 Q2: If Contractor Provides Separate Bills for Labour and Material – Is VAT Payable on Material Portion?
✅ Yes, VAT is payable on value of materials, even if billed separately.
When contractor transfers property in goods (materials), it's a deemed sale under VAT laws.
Separate billing for labour and material does not exempt from VAT.
VAT must be charged on the invoice for material.
✅ Good Practice:
Issue two invoices or a bifurcated single invoice:
One for materials (VAT charged)
One for labour/services (No VAT, but may be subject to Service Tax under old regime)
🔷 Q3: Summary Table
Scenario VAT Applicable? ITC Allowed? Notes
Contractor provides all material & labour ✅ Yes (on material value) ✅ Yes (on own purchases) Use books or standard deduction
Contractee provides free material ❌ No ❌ No Pure labour contract
Contractee provides material on cost recovery ✅ Yes ❌ No (if not in contractor's name) VAT on recovered material value
🔷 Other Notes:
If you're under VAT composition scheme (e.g., pay 5% on total contract), then:
You cannot claim ITC
You pay VAT on full contract value, regardless of actual material use
✅ Final Advice:
Maintain clear contracts with breakup of material and labour
Insist on material invoices in your (contractor's) name to avail ITC
Use proper invoice format with bifurcation for labour & material
Ensure VAT registration (TIN) if you supply materials

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