What is Work Contract Tax?
As per Finance Act 2005, “Works Contract means a contract for carrying out any work which includes assembling, construction, building, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repairing or commissioning of any MOVABLE or IMMOVABLE property.”
Works Contract is a deemed sale which involves transfer of property in goods, during execution of works contract. (The goods maybe in the form of goods or any other form.)
1.]Gannon Dunkerley and Company and others V/s State of Rajasthan and others (1193) 88 STC 204 (SC):
As per this case law, goods involved in execution of works contract should be determined by deducting labour and service charges from the total contract value.
2.]BSNL 2006 (2) STR 161 SC and Prestige Engineering (I) ltd 1994 (73) ELT 497 (SC):
As per this case law, if transfer in property of goods is negligible no sales tax is attracted. For eg: a tailor using thread (Material) for stitching or a consultant providing his opinion in writing where the paper (Material) is transferred.
Ascertainment of Works Contract:
As per Article 366, a transaction can be termed as a Works Contract only when following points are satisfied:
1.] There must be an Individual Works Contract:
There must a single contract wherein fitting, labour, manufacturing etc work is done and goods are transferred. If there is only labour element the contract becomes purely labour contract.
2.] Goods must be involved in execution of Works Contract:
There should be certain transfer of property in goods whether it is incorporated in Works order or not.
3.] Form of Goods has no relevance:
Transfer of Property in goods must pass on as goods or in some other form. Its form is not relevant. The event of passing of goods makes the contract taxable as Works contract. (form of goods may be relevant for determination of rate of tax.)
4.] Property of goods must pass during the execution of Works Contract:
Property of Goods must pass during the execution of Works Contract neither before nor after it. If goods are transferred after the contract is executed than it becomes a different contract. Similarly, if goods are transferred before execution that becomes a different transaction.
5.] Transfer of property should be an integral part of Works contract:
Transferring property should be essential for completion of the contract. Here property can be movable or immovable.
6.] Transfer of property in goods maybe Intentional or Unintentional:
In execution of a contract property can be passed intentionally as stated in the Works Order or transfer of property in goods can be unintentional, like in a pure labour contract if goods are transferred for certain purpose, it qualifies that contract as Works contract.
7.] General points:
a) Contractor has to do some work on Contractee’s property.
b) If during execution of Contract, the goods lose their identity and are consumed, then no transfer in property of goods occurs.
c) Pure Labour and Service contracts do not come under Works contract. Hence they are outside the purview of VAT/Sales Tax.
Calculation of Taxable turnover under Works Contract:
Free e-Book on Compilation of Works Contract Provisions under VAT of all States