“TAX ON WORKS CONTRACTS” 

A BIRDS EYE VIEW

           

            A sale is defined as “ Transfer of Property in goods for a valuable consideration”.  There are contracts for sale of goods, execution of work and for both.  Out right sales of goods is taxable.  Pure labour work is not taxable and what about the works contract with involvement of goods?  Here some goods are used or in the execution of that work and the cost of goods is collected from the party along with labour charges.  Is this a transfer of property amounting to sale?

            Earlier in Constitution of India there was provision to levy sales tax only on the sales of goods and not on the goods involved in works contract.  46^th Amendment on 02.02.1983 provided it and this was upheld by Supreme Court in 1989 in Builders Associations Vs Union of India reported in 73 STC 370 and again in 1993 in Ganon & Dukerly and Co. Vs State of Rajasthan reported in 88 STC 204. 

            On 26.06.86 section 3-B was inserted as a separate charging section in the TNGST Act 1959.  It was held valid by Madras High Court in 1995 in Tamil Nadu Mosaic manufacturer Association Vs State of TamilNadu reported in 97 STC 503.

            Assessments between 02.02.83 and 25.06.86 were cancelled by the department as there was no separate charging section.

TAXABILITY UNDER TNGST ACT

            The significant points for consideration whether a contract is liable to tax under section 3-B of the TNGST Act.

1.      Pure labour contract not involving any goods was exempted.

2.      Purchase price + Profit was liable to tax if it was purchased from other state against ‘C’ form or imported from other countries.

3.      Local Tax suffered single point goods and exempted goods were not liable.

4.      Goods used in works contract in the course export was exempted.

5.      If such contractor paid the tax, no tax for main contractor.

6.      If the value of goods is not separable from the total contract value, certain percentage as per section 3–B(2)(e) is to deducted for labour and balance taxable as the value of goods.

7.      There was compounding tax provision under section 7(c) and 2% on total contract value was payable by the civil contractor and 4% by others.

8.      TDS: Any person engaging a civil contractor must deduct TDS @ 2% on the Contract value paid.  But if the contractor was a registered dealer and pays tax regularly, a certificate from the Assessing Officer of the contractor can be produced to avoid TDS.

TAXABILITY UNDER VAT ACT

            The basic principle of works contract tax remains the same.  No major changes in the provisions of section 3-B of TNGST Act , but they were provided in Rule 8(5) of TNVAT Rules 2006.

           

            As in the case of sales, tax is payable at every stage after deducting the tax paid in the precious stage (ITC).

            Here also the compounding provision continues, but the compounding tax payer is prohibited from purchasing goods against ‘C’ form in other states.

            The TDS procedure is the same as in TNGST Act.

WORKS CONTRACT TAX CST ACT

           

Prior to 11.05.2002, there was no provision under CST Act to levy tax on interstate works contract.  On 11.05.2002, “Sale” under 2 (g) of the CST Act was redefined which empowers to levy CST.

            “C” Forms can be issued for works contract as the transfer of property is a deemed ‘Sale’ under works contract.

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