Taxation of Works Contract under Value Added Tax
We have already seen how Service Tax is levied on Works Contract. In this article we will thoroughly cover all the provisions of VAT related to Works Contract.
What is Works Contract?
As per Section 2(43), Works Contract means a contract for carrying out any work which includes assembling, construction, building, altering, erection, processing, fitting, manufacturing, modification, fabrication, repairs and commissioning of any immovable or movable property, for cash , deferred payment or other valuable consideration.
Works Contract must Comprises following factors:
1. Contract must be composite i.e. where sale element and service element in contract cannot be segregated.
2. Involvement of Goods because in absence of goods the contract is only chargeable to service tax not VAT.
3. Transfer of Title of Goods is also necessary to levy VAT. Remember the goods/property must pass during the execution of the works contract, not before or after the execution of the works contract. For e.g. Outright Sale of already constructed immovable property cannot be subjected to VAT under Works Contract.
4. Identity of the Goods should remain as it is for levying VAT [Teaktek Processing Complex vs. State of Kerala 2004 136 STC 435].
If the contract in consideration fulfills all the above factors then it shall be treated as Works Contract.
How to Compute the Value of Goods to levy VAT?
Though Works Contract is composite but VAT is chargeable only on that part of the value of contract which related to transfer of property/goods.
Taxable Value = Value of property/goods transferred
The taxable value can be calculated by:
1 Addition Method: All the expenses incurred in bringing goods to the usable state shall be summed up with the profit margin prevalent in trade.
Taxable Value = Cost of Acquisition of Goods + Profit Margin + Cost of Conversion + any other costs in relation to the transfer of property.
2. Deduction Method: In this method the Taxable Value shall be calculated by deducting all the expenses related to service part of the contract.
Taxable Value = Contract Price – Labour – Other Expenses not related to goods.
How to Compute the VAT Liability on Taxable Value?
There are two schemes for determination of tax liability:
1.VAT rates specified in the schedule to VAT Act
In this scheme goods transferred in the execution of works contract has specified VAT rate and shall be dealt individually.
VAT rate on each good X rate specified in VAT act.
Total VAT liability shall be computed by adding all the VAT tax on each item.
Contractor needs to maintain books of account to avail the Input Credit of the VAT paid.
2. Composite Rate:
Tax liability is computed by levying a single composite rate on the entire value of contract without segregating the service part and sale part of the contract.
Contractor need not to maintain books of account under this scheme but he cannot avail the Input Credit of the Tax paid under Composite Scheme.
Composite Rate: Since VAT is a State act and every State has right to charge VAT at certain rate. But in general the Composite Rate lies between 2% to 5%.