Contracts of work which involve transfer of property
in any goods in any shape attract liability of payment of VAT on the value of goods
received or receivable in respect of such goods. As we know, in cases of work contracts,
value of goods and value of labour and services is not separately bargained and
single consolidated amount as contract amount is payable by contractee to the contractor.
Looking into this aspect, most of the States have made a provision in their VAT
laws of the following nature:
Where value of labour and services and profit accrued
thereon is not determinable separately, certain prescribed percentage of total amount
of contract shall be taken as the value of labour and services and profit accrued
thereon. Different value percentages have been prescribed for contracts of different
nature. In India, under the Uttar Pradesh VAT Act, 2008, the relevant rule (relevant
sub-rule) runs as under:
“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
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.”
Here one can notice that rule does not provide as to
when and how amount relating to laid down percentage will be deducted. I mean to
say that in similar types of two contracts of building contracts, one contractor
may while building structure of unfinished building may deduct 30 percent amount
of gross value of the contract and while completing remaining portion, i.e. plastering,
installing electrical goods, fittings and fixtures, installation of air conditioners,
flooring, woodwork, etc. does not deduct any amount from the value receivable in
respect of this work because he has already exhausted the total amount deductible.
Most of the goods in which material will be transferred in raising basic structure
will involve goods which attract levy of tax at rate lower than the rate which will
be attracted in respect of goods which will be involved while finishing the structure.
Contrary a contractor may not deduct 30 percent of gross value while raising structure
and instead he deducts this value when he completes finishing. In that case he will
have to pay tax lesser amount of tax as compared to first contractor. Another
aspect is that installation of air conditioners, fitting of electrical goods and
appliances, fixing of tiles, etc. do not involve labour and service charges around
thirty percent while construction of basic structure involves much labour and service.
Can in two similar types of contracts two different contractors may be permitted
to pay different amounts of tax?
Second important question is related to percent of deduction
towards labour and services. Such percentage is based on totality of contract and
not on individual parts of contracts. Hence turnover of goods is to be determined
on the basis of totality. But the difficulty is that in advance contractor does
not know what will be the exact value of procurement of goods in which property
will be transferred. Also in many cases, a contractor cannot predict the source
of procurement of goods.
Third thing which draws our attention is that provision
relating to tax deduction at source (TDS) is also based on totality. Suppose that
a contract is completed in two different consecutive financial years. Let us assume
that in first year only labour work is done. Total payment received or receivable
does not relate to any transfer of property in goods. But under TDS provision certain
amount is deducted and deposited by the contractee into the Government Treasury.
In assessment order, assessing authority will pass an order for refund of such amount.
But in next year in which property in goods would have been transferred, assessing
authority will raise the demand of additional amount of tax. Question is has it
been intended behind the provision of TDS in case of the same contract.
After deducting the labour, services and profit on them,
remaining percentage of amount of contract value represents the value of goods,
received or receivable, in which property has been transferred in the execution
of the contract. But such provision has not fully relieved the contractor of the
difficulty in computing VAT. These difficulties may be attributed to following causes:
- Difference in cost of procurement of same goods from various sources or places;
- Variation in purchase prices, freight etc. of same goods purchased at different
- Variation in margins of profit in cases of different goods;
- Different VAT rates for different goods;
Looking into these aspects, presumptions laid down by
State Governments cannot be said to be complete. Therefore, a contractor, in order
to work out turnover of goods involved in the execution, himself, presumes, same
rate of profit for all types of goods. But a contractor is required to pay tax in
each tax period, therefore, by doing so he may not be justified when a contract
is completed in more than one tax period, especially when he has to make purchases
of same goods at different prices. A contractor, executing a big contract, is not
supposed to procure all goods in advance. He makes purchases of goods in phases.
In order to resolve the difficulty, what can be suggested is that State Government
should provide with the procedure for determining the turnover of various goods.
While doing so, it has to make certain assumptions. One assumption of prescribing
percentage of labour and services and profit accrued thereon has already been made.
Another assumption may be that in cases of goods in which property is transferred,
for the purpose of determining profit or loss in respect of such goods, margin of
profit or loss, as the case may be, shall be treated to be same for all types of
Second difficulty arises when execution
of the contract extends beyond one tax period. Also in many cases, due to price
escalation, total contract values are revised. This suggests that in cases of work
contracts, method of payment of VAT cannot be similar to the method adopted in other
cases of normal sales and purchases. In these circumstances, method of payment of
VAT in cases of work contracts is to be separately provided. Liability of payment
of VAT should also be fixed accordingly.
There can be two ways for accepting payment
of VAT in cases of work contracts. The contractor should determine the total cost
value of goods on the basis on which it has submitted the tender or quotation for
obtaining the contract. After deducting the amount relating to labour and services
and profit accrued thereon from gross amount of contract, contractor should find
out the total turnover of goods in which property is to be transferred. This is
to be done on the basis of percentage of labour and services and profit accrued
thereon prescribed by the State Government. On this basis he should find out the
value proportion of various goods. For each tax period the contractor should work
out the amount receivable for part of the contract executed in that tax period.
After deducting labour and services part, he should divide the remaining value in
the ratio of cost value of goods initially worked out (Normally, for obtaining a
contract, every contractor prepares his tender on the basis of costing of project).
This value of various goods should be treated as turnover of sale of various goods.
He should be required to pay tax on this turnover of sale. In the tax period in
which contract is complete, the contractor should be required to work out revised
proportion of cost value of goods on the basis of actual quantity and value of goods
in which property has been transferred. He should compute the tax for whole of the
contract. For finding out the amount of tax payable for such tax period, from the
total liability, sum of earlier payments should be subtracted.
The process described above is simple but it has its
drawbacks. The main drawback is that in this process contractor pays tax on sale
of even those goods which have not been incorporated in the works or even have not
been purchased till then. For example, in work contract of machinery installation,
in first tax period only part of contract relating to construction of foundation
may be completed. This may involve iron-steel, bricks, cement, sand, rori, badarpur,
nut, bolts only. But if we adopt aforementioned procedure, apart from turnover of
sale of these goods, a part of turnover of machinery will also be computed. Similarly
in the tax period in which machinery will be installed, apart from turnover of machinery,
turnover of goods used in construction of foundation will also be determined. In
this method, though gross turnover of goods will relate to amount received or receivable
and according to prescribed rate percent of contract value and total tax liability
under the contract will remain unaffected, yet amounts paid in various tax periods
will not relate to goods in which property has been transferred in those tax periods.
Second method which I am going to propose here is based on actual goods in which
property is transferred in the relevant tax period. In this method too contractor
is required to compute value of goods receivable for goods in which property is
to be transferred. In this case he works cost prices of procurement of goods in
which property has been transferred and value addition or value reduction quotient
for such goods for each tax period. Thereby he can obtain turnover of goods
by multiplying cost of procurement by value addition or value reduction quotient.
In the tax period in which work contract is complete, the contractor determines
value addition quotient, turnover of sale and tax for all goods. After deducting
the sum of earlier payments from total amount of tax due, the contractor determines
the amount of tax payable for the last tax period. This process involves a lot of
computation work in each tax period. Also the computations do not reflect actual
amount of turnover and tax where price escalation factor is attracted.
Both ways suggest that method of determining turnover,
method of payment of tax and assessment of tax has to be necessarily different from
the procedures adopted for cases of normal sales. Final assessment in respect of
a contract can be done only in the year in which it is completed or terminated (incomplete
contracts). It will be better to have deeming provision in case of deemed sale in
cases of works contracts.
In my personal opinion, first option is easier compared
to second one. Where the Government has already prescribed a deeming provision,
it may extend it by adding that for the purpose of determination of turnover of
various goods involved in the execution of works contract, value addition or value
reduction, as the case may be, shall be treated uniform and for the purpose of assessment,
sale of all goods involved in the execution of works contract shall be deemed to
be sale in the tax period in which contract is completed or an incomplete contract
In many contracts, due to price escalation factor, value
of contract is settled at a latter date. But this part of value may also relate
to value of goods. In such cases, sometimes assessment of additional turnover may
not be possible under the existing law provisions. In my opinion, in respect of
such price where assessment of such escaped turnover is not possible under the existing
provisions, deeming provisions should be made to treat such value as part of the
turnover of goods, involved in the execution of the contract, for the assessment
year in which price is settled.