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Work contract rate

neeraj (Job) (66 Points)

16 January 2012

Can any one help me about the rate of tax under work contract tax in uttar pradesh and relevant provision/ law reference for this purpose...?

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Hemant Kumar (Accounts Manager MBA (Fin) CMA*) (6450 Points)
Replied 16 January 2012

Works contract involving transfer of property in goods is an indivisible contract. It is indivisible in the sense that value of goods to be incorporated in any form in the works and value of labour & services to be rendered in execution of the contract have not been subject matter of bargain separately. Single amount has been subject matter of bargain.

In India, tax on sale of goods is levied under the Sales Tax Law (VAT Law) and tax on labour & services is levied under the Service Tax Law. Service tax is levied by the Central Government under the law enacted by the Parliament whereas sales tax is levied by different States under the VAT law of respective State.
Clause 29-A of Article 366 defines transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract as sale of such goods by the person who makes such transger and a purchase of such goods by the person to whom property in such goods is transferred.
The Central Sales Tax Act, 1956 and VAT laws of various States define term ‘works contract’ in almost similar terms. VAT law of Uttar Pradesh defines the term ‘works contract’ as under:

(au) "works contract" includes any agreement for carrying out, for cash, deferred payment or other valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.

The Central Sales Tax Act, 1956 defines the term ‘works contract’ as follows:

"works contract", means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property;

In cases of works contracts, difficulty in computing tax on sale of goods arises due to following reasons:

(i)

Values (amounts receivable) of labour & services and of goods are not separately known;

(ii)

However, if we are able to segregate value of labour & services and value of goods, then difficulty arises in segregating values of various goods taxable at different rates of tax.

Amount receivable for labour & services is not only the sum spent in rendering services. It also includes profit earned on labour & services. For so many reasons, value of labour & services and profit thereon cannot be found from the books of accounts kept by a contractor. Looking into this difficulty, several Sates have enacted a deeming provision for the purpose of determining value of goods. They have prescribed percentage value of total amount receivable for execution of the contract as percentage value of labour & services and profit thereon. Remaining amount of contract is deemed as the value of goods in which property in the execution of works contract passes from contractor to the contractee. In Uttar Pradesh, in the Uttar Pradesh Value Added Tax Rules, 2008, Rule 9 has been framed as under:

9.Determination of turnover of sale of goods involved in the execution of a works contract.

(1)

Subject to other provisions of these rules, the tax on turnover of sale of goods where such sale is affected by way of transfer of property in goods (whether as goods or in some other form) involved in the execution of a work contract shall be computed on the taxable turnover of sale of taxable goods. For the purposes of determining the taxable turnover of sale of such goods, the amounts specified below shall be deducted if included in the gross amount received or receivable in respect of the works contract:-

(a)

all amounts representing the value of goods consumed in execution of the works contract; in which property in goods is not transferred in the execution of the works contract;

(b)

all amounts representing the value of exempt goods and amount of profit thereon;

(c)

all amounts representing the rent paid or payable in respect of machinery and other equipments taken on hire for use in the execution of such works contract;

(d)

all amounts representing the value of service and labour and profit thereon;

(e)

all amounts representing the value of goods in which property has been transferred in the execution of the works contract as a result of sale in the course of inter-state trade or commerce;

(f)

all amounts representing the value of goods in which property has been transferred in the execution of the works contract as a result of sale in the course of export of goods out of the territory of India or sale in the course of import of goods into the territory of India;

(g)

all amounts representing the value of goods in which property has been transferred as a result of a sale outside the State;

(h)

all amounts representing the value of non-vat goods purchased from within the State in the circumstances in which the dealer executing the works contact himself is liable to pay tax on turnover of purchase of such goods;

(i)

all amounts representing value of non vat goods where such goods are purchased by the dealer from a registered dealer.

(j)

the amount representing the cost of establishment and other similar expenses of the contractor to the extent it is relatable to supply of labour and services, and profit thereon.

(k)

amount paid to sub-contractor for the execution of works contract on furnishing certificate obtained from the assessing authority of subcontractor certifying that:-

(i)

The subcontractor is registered dealer under the Act;

(ii)

The subcontractor has disclosed turnover in the relevant return of tax period and has paid tax according to the provisions of the Act.

(l)

Proportionate amount of actual cost of land required to be used in construction of building, by the builder contractor where cost of such land is included in the amount received or receivable from the purchaser.

Explanation:

(i)

For the purpose of clauses (a) and (e) to (h), the value of goods referred to in such clauses includes amount of profit thereon.

(ii)

Actual cost of land required to be used in construction of building, by the buiolder contractor means the value of land computed at rate notified by the Collector of the relevant district in accordance with procedure laid down for determination of the value of land for the purpose of payment of stamp duty under the Indian Stamp Act, 1899.

(2)

Where any amount has been deducted by the contractee from the amount of the contract on account of breach of any condition of the contract, such amount shall be deemed part of amount payable to the contractor in respect of such contract.

(3)

Where accounts maintained by the contractor do not show separately the value of labour and services and amount of profit accrued on such labour and services, or accounts maintained by the dealer are not worthy of credence or if the dealer has not maintained accounts, for the purpose of determining turnover of goods in which transfer of property in goods has taken place, in cases other than those mentioned in the table below, an amount, representing twenty percent of gross amount received or receivable, shall be deducted towards labour and services and amount of profit accrued thereon and in the cases described or mentioned in column 2 of the table given bellow, amount of deduction towards such labour and services and amount of profit accrued thereon shall be computed at the rate percentages, given in column 3 against the entry in column 2 of the table, of the amount received or receivable.

Table

Sl. no.	Descripttion of works contracts	Rate
1	2	3
1-	Fabrication and installation of plant and machinery	10%
2-	Fabrication and erection of structural works including fabrication, supply and erection of iron trusses, purline.	10%
3-	Fabrication and installation of cranes and hoists	10%
4-	Fabrication and installation of elevator(lifts) and escalators	10%
5-	Supply and installation of air conditioning equipment including deep freezers, cold storage plants, humidification plants and dehumidifier	10%
6-	Supply and installation of air conditioners and air coolers	10%
7-	Supply and fitting of electrical goods, Supply and installation of electrical equipment including transformers	10%
8-	Supply and fixing of furnitures and fixtures, partitions, including contracts of interior decorations	10%
9-	Construction of railway coaches and wagons on under carriages supplied by railways	10%
10-	Construction of bodies of motor vehicle and construction of trailers	10%
11-	Fabrication and installation of rolling shutters and collapsible gates	30%
12-	Civil works like construction of building, bridge, roads, dams, barrages, spillways and diversions, sewages and drainage system	30%
13-	Installation of doors, doors frames, windows, window frames and grills	30%
14-	Supply and fixing of tiles, slabs, stone and sheets	30%
15-	Sanitary fitting for plumbing, for drainage or sewerage system	30%
16-	Whitewashing, painting, and polishing	40%

Explanation: For the purposes of this rule, where period of execution of a works contract is spread over several tax periods or several assessment years, the aggregate, of all amounts of deductions towards labour and services; and amount of profit accrued thereon, shall not exceed the percentage of the gross amount receivable in respect of execution of such works contract.

Explanation: For the purposes of this rule,

(a)

where period of execution of a works contract is spread over several tax periods or several assessment years; or

(b)

where part of a works contract awarded to a sub-contractor relates to different category of works contract; or

(c)

where whole or part of a works contract is awarded to sub-contractors,

the amount towards labour and services and the amount of profit accrued thereon claimed by contractor and subcontractor together, shall not exceed the percentage of the gross amount received or receivable in respect of execution of each category of such works contract.

(4)

For removal of doubts it is hereby made clear that, for the purposes of this rule, in arriving at the turnover of sale of goods involved in the execution of a work contract, amounts of following nature shall not be deducted from the gross amount receivable.

(a)

any amount proposed to be deducted in the name of any tax or fee or any other levy;

(b)

any amount which has been deducted by the contractee from the contractor as demurrage or penalty or a fine or in any other name for breach of any conditions of the contract or otherwise;

(c)

any amount which has been deducted by the contractee from the contractor as compensation.

Before going to next step of determining turnover of individual goods, I would also like to clarify that amount, arrived at after deducting amount receivable towards labour and services and profit thereon, is the gross turnover of goods in which properly has been transferred in any form and does not include turnover of goods which other wise have been used or consumed in the execution of the contract. For example turnover of fuel used/consumed, lubricants; water, electricity etc. is not included in the turnover arrived at. Value of such goods is part of labour & services.
In a works contract, tax is leviable on transfer of property in goods (whether as goods or in some other form) involved in the execution of the works contract. Transfer of property in goods takes place at the time when goods are incorporated in the works.
In this article, for convenience, goods, those may involved in the execution of a works contract and in which transfer of property might take place, are being referred to as the goods to be incorporated in the works. Meanings of other similar expressions are to be construed accordingly.
Now for computing tax on turnover of goods, we see if total turnover of goods is taxable at the same rate of tax then there is no difficulty in computing tax. We can find out amount of tax by using the formula –

Tax amount =Turnover of sale of goods × rate percent of tax /100

But where total turnover of goods consists of goods taxable at different tax rates then we have to find out turnover of goods for each tax rate slab separately. For example, a contract of building construction may involve bricks, cement, sand, marble, iron steel, badarpur, wood, colour, paint and hardware. In Uttar Pradesh, sale of iron-steel is taxable @ 4%, sale of bricks, hardware and sand is taxable @ 5%, sale of paints, colours, marble and timber (wood) is taxable @ 13.5% and sale of cement is taxable @ 15.5%.
Therefore, for the purpose of computing tax on all goods, we will need separate values (turnover) of goods taxable at same rate of tax, i.e.

(i)

Turnover of goods taxable @ 4%;

(ii)

Turnover of goods taxable @ 5%;

(iii)

Turnover of goods taxable @ 13.5%;

(iv)

Turnover of goods taxable @ 15.5%;

We see that no provision has been made for the purpose of determining such turnover of goods for each tax rate slab. (I do not know, if some State has provided such mechanism). In such circumstances, we are left with only remedy that we should segregate the total turnover in the ratio of their purchase prices assuming that purchase values of same goods earn equal percent of profit or loss. For this purpose we should know the purchase values of goods in which property has been transferred and the rate of tax applicable to sale of such goods.
We must not forget that we have to find out purchase values of those goods in which property is transferred during the relevant tax period. Goods incorporated in the works during a particular period may be the goods purchased during the same tax period as well as goods purchased in some earlier tax period. Purchase values of only those goods are to be considered which have been incorporated in the works for which payment has become due irrespective of date of purchase of such goods.
Now for goods of each tax rate, we will compute ratio of gross turnover to their purchase value. For this purpose we will add purchase values of all goods taxable at different tax rate slabs separately and work out value addition factor as under:-

Value addition factor = Gross turnover of sale of all goods / Gross purchase value of all goods

Now for each tax rate slab, we will compute WCT as under:-

(1)

WCT for goods atracting tax rate slab of 4% =(purchase value of such goods × value addition factor) × 4 / 100

(2)

WCT for goods atracting tax rate slab of 5% =(purchase value of such goods × value addition factor) × 5 / 100

(3)

WCT for goods atracting tax rate slab of 13.5% =(purchase value of such goods × value addition factor) × 13.5 / 100

(4)

WCT for goods atracting tax rate slab of 15.5% =(purchase value of such goods × value addition factor) × 15.5 / 100

Total WCT will be aggregate of amounts as computed above.

For a particular tax period, amount receivable, in respect of the contract executed, is the amount for which normally running bill is raised. Where more than one bills have been raised for the works contract executed during a tax period then sum of amounts will be taken as amount receivable.

The moment at which transfer of property takes place, the Hon’ble Supreme Court has held that in a works contract transfer of property in goods takes place at the time of incorporation of goods in the works. We know that as soon as sale gets completed the payment becomes due.

Where sale is subject to approval, the sale will be complete only after the purchaser gives its approval. On completed sale, the selling dealer is required to pay tax, irrespective of payment mode or date.

Now we take an example of construction of buildings. Let us assume that during a particular month, the contractor is entitled to receive Rs. 1,50,00,000.00 in respect of works contract executed during such month. Purchase values of goods in which property has been transferred are as follows:-

Sl. No.	Name of goods	Purchase value of goods	Tax rate percent
1.	Bricks	50,00,000.00	5
2.	Cement	15,00,000.00	15.5
3.	Timber (wood)	3,00,000.00	13.5
4.	Marble	5,00,000.00	13.5
5.	Sand	1,00,000.00	5
6.	Iron-steel	15,00,000.00	4
7.	Badarpur	1,00,000.00	13.5

Total purchase value of goods incorporated in the works= 90,00,000.00

Now, if perecentage value of labour & services and profit on them is 30 percent of amount receivable (say);

Then percentage of value of goods and profit thereon=100- 30 i.e. 70 percent of amount receivable (let us call it goods value percent)

Therefore, total amount receivable for goods incorporated in the works= amount receivable xgoods value percent / 100

Which gives total receivable value of goods = 1,05,00,000.00

Now for each tax rate slab, we will compute value of all goods as under:

(1) Purchase value of goods for tax rate slab of 4% = 15,00,000.00

(2) Purchase value of goods for tax rate slab of 5% = 51,00,000.00

(3) Purchase value of goods for tax rate slab of 13.5% = 9,00,000.00

(4) Purchase value of goods for tax rate slab of 15.5% = 15,00,000.00

Total purchase value of goods incorporated in the works = 90,00,000.00

Value addition factor =total receivable value of goods/ total purchase value of all goods incorporated

Which gives us, Value addition factor=1,05,00,000 /90,00,000

Or Value addition factor=7/6

Now turnover of sale of goods for –

(i) all goods taxable @ 4%

= (purchase value of all goods taxable @ 4%) x value addition factor

=15,00,000 x 7/6 =17,50,000.00

(ii) all goods taxable @ 5%

= (purchase value of all goods taxable @ 5%) x value addition factor

=51,00,000 x 7/6 =59,50,000.00

(iii) all goods taxable @ 13.5%

= (purchase value of all goods taxable @ 13.5%) x value addition factor

=9,00,000 x 7 / 6 =10,50,000.00

(iv) all goods taxable @ 15.5%

= (purchase value of all goods taxable @ 15.5%) x value addition factor

=15,00,000 x 7 / 6 =17,50,000.00

Now we can compute tax using formula: amount of tax =turnover of sale x rate of tax /100

(i) Tax for goods taxtable @ 4%

=17,50,000 x 4/100 =70,000.00

(ii) Tax for goods taxtable @ 5%

=59,50,000 x 5/100 =2,97,500.00

(iii) Tax for goods taxtable @ 13.5%

=10,50,000 x 13.5 / 100 =1,41,750.00

(iv) Tax for goods taxtable @ 15.5%

=17,50,000 x 15.5 / 100 =2,71,250.00

Total Tax or WCT

=70,000.00 + 2,97,500.00 + 1,41,750.00 + 2,71,250.00

=7,80,500.00

Where benefit of inter-state sales, sales outside the State or sales in the course of import of goods into the territory of India is to be claimed

Where WCT payable under the State VAT Law is to be computed, exemption on sales falling under sections 3, 4 & 5 of the Central Sales Tax Act, 1956 is available. These are sales which take place-

1. in the course of inter-state trade or commerce;
2. outside the State; and
3. in the course of import of the goods into the territory of India.

In such a case, for the purpose of computing value addition factor, we will include purchase values of such goods including all expenses in tax rate slab wise gross purchases. But for the purpose of computing taxable turnover of sale of goods, we will not include purchase values of goods falling under section 3, 4 and 5 of the Central Sales Tax Act, 1956.

Thus we see that for computing WCT, we need –
(1) Total amount receivable for the works executed during the tax period;
(2) Percentage of labour & service and profit thereon.
(3) Tax rate slab-wise purchase values of all goods in which transfer of property has taken place during the tax period.
(4) Tax rate slab-wise purchase values of goods in which property has been transferred as a result of inter-state sale, sale outside the State and sale in the course of the import of goods (section 3 & section 5 of the CST Act) where exemption on such sales is to be claimed.

Computation of purchase values of goods

For all computations, purchase value should include freight and other expenses incurred including taxes and levies paid or payable in bringing goods to work site. Where purchase value is not available, fair purchase price in the local market may be taken.

Go through : https://www.taxtalkindia.com/docs/WCT.html