WORKS CONTRACT TGVAT ACT 2005 Satish Saraf Chartered Accountant +91 96 1818 4567 casaraf@yahoo.co.in

Agenda Provisions relating to Works Contract – TGVAT Act, 2005 T & AP HC Decision in the case of Omega Shelters (P) Limited Act No: 4 of 2015, Dt: 09-04-2015

What, Why, how 1. Nature of Contract – Predominance 2. Incidental - Supply of Goods Vs. Service 3. Accretion/ accession theory 4. Emergence of commercial commodity 5. Emergence of customized goods 6. Transfer of ownership – before they are used 7. Owner of the goods – supplied by the contractee 8. Price charged for separately for goods & labour or for both as a job. 9. goods used, are capable to remove in the same form in case of breach 10. Trade marks / patents etc. involved in the contract and their ownership Source: Works contracts by Dr. T. Ramesh Babu

Classification of Contracts The Contract may be for work to be done for remuneration and for supply of materials used in the execution of the works contract (Works Contract) The Contract may be a contract for work in which use of materials is accessory or incidental to the execution of the work (Labour Contract) The contract may be a contract for supply of goods where some work is required to be done incidental to the sale (Sale) Source: A Guide to Works Contract by M.G. Merchant

Classification & Types of Contracts Divisible Contracts Indivisible Contracts _______________________________________________________ Apex Court Re. State of A P Vs. Larsen & Tourbro Ltd – 17 VST 1 Divided Works Contract into two types Works Contract for Construction Works Contract in relation to movable property like repairs to vehicles, printing & Etc.

Definition - Section 2(45) Works Contact includes any agreement for carrying out for cash or deferred payment or for any other valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, laying, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.

Works Contracts – TGVAT Act, 2005 Guntur Branch of SIRC of ICAI Works Contracts – TGVAT Act, 2005 Incidence & levy of Tax Input Tax Credit Tax Deduction at Source Maintenance of Records Seminar on Works Contract - 27-10-2012

Guntur Branch of SIRC of ICAI SCHEME OF TAXATION Works Contract V A T Dealer Regular Proper Books No Proper Books Composition Other than Builders Builders T O T Dealer Seminar on Works Contract - 27-10-2012

Regular Proper Books of Accounts Guntur Branch of SIRC of ICAI Regular Proper Books of Accounts Value of goods incorporated at the time of execution. Value of Goods incorporated are taxed at Schedule rates. Input tax credit @ 75% Eligible to issue “Tax Invoice”. The value of sub contract is allowed as deduction. Seminar on Works Contract - 27-10-2012

Regular Proper Books of Accounts Guntur Branch of SIRC of ICAI Regular Proper Books of Accounts Value of Goods incorporated includes the following (Addition Method): Value of goods shall not be less than purchase value Seigniorage Charges, Blasting & Braking Charges, crushing, loading, unloading, transport, stacking, distribution charges & expenditure incurred for hot mixing & its transportation. Seminar on Works Contract - 27-10-2012

Regular Proper Books of Accounts Guntur Branch of SIRC of ICAI Regular Proper Books of Accounts Value of Goods incorporated does not include the following (Subtraction Method): Labour Charges & other related expenses Planning, designing & Architect fee. Plat & Machinery hire charges Cost of consumables (which is not transferred) like water, fuel & electricity etc Cost of establishment profit relating to supply of labour & services. Seminar on Works Contract - 27-10-2012

Regular Proper Books of Accounts Guntur Branch of SIRC of ICAI Regular Proper Books of Accounts While filing of returns the contractor may pay tax on the basis of addition method On completion of each contract or finalization of accounts the total value of goods incorporated should be arrived by subtracting method and the balance turnover and tax has to be declared and paid Ultimate effect is profit margin put to tax Seminar on Works Contract - 27-10-2012

Abatement – No proper books of a/c. Guntur Branch of SIRC of ICAI Abatement – No proper books of a/c. Total consideration taxable @ 14.5% subject to abatement (Rule 17(1)(g)) Ex: Civil works @ 30% (effective rate 10.15%) Not eligible for Input Tax Credit on Purchases Not eligible to issue “Tax Invoice” Sub – Contract value ???? [Rule 17(1)(g)] Seminar on Works Contract - 27-10-2012

Composition – Other than Builders Guntur Branch of SIRC of ICAI Composition – Other than Builders Taxable @ 5% on total value of consideration / contract – Sec.4(7)(b) Not eligible for Input tax credit Not eligible to issue Tax Invoice Must be registered as VAT dealer Application in form VAT-250 before commencement & for each contract Any part of work is sub-contracted, main contractor is taxable, sub-contractor is exempted for payment of tax. Seminar on Works Contract - 27-10-2012

Composition - Builders Guntur Branch of SIRC of ICAI Composition - Builders Any dealer engaged in Construction and selling of residential Apartments, houses, buildings or commercial complexes. Must be a VAT Dealer Application in Form VAT-250 for each contract before commencement of work Taxable @ 5% on 25% (effective rate 1.25%) Any part of work is sub-contracted, such part of contract value is exempted in the hands of sub- contractor. Seminar on Works Contract - 27-10-2012

Contractor – sub contractor Section 4(7)(h) No tax shall be payable by the main contractor Amount paid to sub-contractor The evidence of sub-contractor is registered under the Act, and The sub-contractor has paid tax on the amount received from the main contractor. State of AP Vs. L & T Ltd., (SC) 2008 AIR SCW 6358 or 17 VST 1

Guntur Branch of SIRC of ICAI Tax on Purchases Any Works Contractor under composition is liable to pay tax on the purchases, if the purchases are Non-VAT Dealer & out side the State. Value of such purchases are taxable at schedule rates Such Purchase value to be reduced from the value of composition Omitted by Act No: 21 of 2011, wef 15-09-2011 Seminar on Works Contract - 27-10-2012

Guntur Branch of SIRC of ICAI TOT Works Contractor Turnover between 7.50 & 50.00 Lakhs Taxable @ 1% on the value of goods incorporated If the value of goods incorporated is unable to determine, the entire proceeds are taxable @ 1% subject to deductions. Not eligible for input tax credit Not eligible to issue tax invoice. Seminar on Works Contract - 27-10-2012

Guntur Branch of SIRC of ICAI CST Works Contract Telangana – VAT dealer executing works out side the state with in the meaning of Section 3 of CST Act, 1956 Goods transferred in the same form or in other form Such transfer from Contractor to contractee are exempted from tax under TGVAT Act 2005. The contractor is liable to tax under CST Act (as per CST AP Rules) Seminar on Works Contract - 27-10-2012

Guntur Branch of SIRC of ICAI INPUT TAX CREDIT Dealer executing works contract with proper books of accounts Is eligible for ITC @ 75% on purchases made by him - Section 13 & Rule 20 Only this dealer is also eligible for issue of tax invoice, such that the contractee will get Input Tax Credit. Seminar on Works Contract - 27-10-2012

Contractor & Sub Contractor Guntur Branch of SIRC of ICAI Contractor & Sub Contractor Regular - with proper books of A/c’s: Contractor eligible for deduction. Tax Invoice issued by sub-contractor Sub-contractor must be a VAT Dealer Sub-Contractor is taxable at par with the contractor The proportionate TDS has to be transferred by the contractor to sub – contractor by issue of Form 501B (not Applicable in case of composition) Seminar on Works Contract - 27-10-2012

Contractor & Sub Contractor Guntur Branch of SIRC of ICAI Contractor & Sub Contractor Composition Contracts Sub Contractor Turnover is exempted in all kinds of composition contracts Other than Builders Builders Contractor not eligible for deduction Sub Contractor shall opt for composition and shall prove that the main contractor also opted for composition with Form 250 of the Main Contractor Seminar on Works Contract - 27-10-2012

Contractor & Sub Contractor DEDUCTION / EXEMPTION Regular Deduction Abatement Composition - Exemption

Guntur Branch of SIRC of ICAI TDS under TGVAT Act Every contractee irrespective of their status shall deduct TDS on payments made to contractors @ 70% of 5%, or 70% of 2%, (as applicable) or Shall make an application to the concerned AC(CT) or CTO, to determine the quantum of TDS. Procedure for obtaining T D S Certificate. With in fifteen (15) days TDS to be deposited with the jurisdictional assessing authority of the contractor. Seminar on Works Contract - 27-10-2012

Records to be maintained Guntur Branch of SIRC of ICAI Records to be maintained Dealer executing Works Contract: Keep separate Accounts for each contract along with details of each contractee. Opting for Composition: Payments Received from contractee. Record of From 200 Records of TDS & TCS Seminar on Works Contract - 27-10-2012

Records to be maintained Guntur Branch of SIRC of ICAI Records to be maintained Not Opting for Composition: Particulars of goods procured for execution. Particulars of goods used in the execution. Details of payments received for each contract. Details of Labour Charges for works executed. Details of payments to Sub-Contractors. Details of charges of Planning, designing & architect’s fee. Details of charges paid for hiring machinery & tools Details of Cost paid towards consumables. Seminar on Works Contract - 27-10-2012

Records to be maintained Guntur Branch of SIRC of ICAI Records to be maintained Details of cost of establishment & apportionment towards each contract. Details of profit to the extent relatable to supply of labour & services. Details of goods exempted under Schedule –I used in the execution of contracts. Details of turnovers under Sec. 3 of CST Act used for the execution of Works. the above records are not maintained to the satisfaction of the assessing authority, he can reject the records and make assessment at the rate of 14.5% with abatement. Seminar on Works Contract - 27-10-2012

T & AP HC - Omega Shelters (P) Ltd Writ Petition No: 1528 of 2013, Dt: 24-04-2015. If dealers engaged in the construction and sale of residential apartments, houses, buildings or commercial complexes exercise the option, and comply with the conditions stipulated in Section 4(7)(d) and Rule 17(4), they cannot be denied the benefit of composition thereunder for the construction made by them, for the very same person, after execution of a registered deed for the sale of a semi-finished structure. Denial of the benefits of the composition scheme under Section 4(7)(d) to such dealers, for the post-sale construction made in terms of the initial agreement, is illegal and is contrary to the provisions of the AP VAT Act and the Rules made thereunder.

Act No: 4 of 2015, Dt: 09-04-2015 Bill No: 5 of 2015. Dt: 23-03-2015 Accent of Governor of Telangana obtained on 07-04-2015. Amendment of Section 13 (1) of TGVAT Act, 2005 Insertion of Section 13(1A) to TGVAT Act, 2005 Amendment of Section 20(1) of TGVAT Act, 2005 Amendment of Section 22 of TGVAT Act, 2005.

Amendment of Section 13(1) Input Tax Credit is allowed to the buying VAT Dealer provided The selling VAT dealer has paid the tax on the goods sold The purchase is with in the state of Telangana From a VAT Registered dealer. The goods purchased are being used for the purpose of Resale with in the State. Use as input in the manufacturing or processing of goods in the State. Use as packing materials Use as Capital goods in the manufacturing of taxable goods Sale in the course of inter state sale or commerce falling under sub section (1) of the CST Act, 1956. No ITC on Schedule – Vi Goods, if already ITC is allowed to re reversed

Section 13(1A) inserted Over rides the all sub-sections of Section 13. No Input Tax will be allowed Any Registered Dealer has sold goods The value of sales is lesser than the value of purchase ITC will be restricted to the extent of OTC

The Returns to be submitted along with annexures as may be prescribed Amendment of Section 20 Section 20(1) is amended The Returns to be submitted along with annexures as may be prescribed

Amendment of Section 22 Insertion of Sub Section 3-C and 3-D in Section 22 Sub Section 3-C TCS by FCI and Civil Supplies Corporation on purchase of Rice from Rice Millers at the rate prescribed under the relevant schedule. The TCS amount to be deposited on the next working day in the manner prescribed. Sub Section 3-D TCS by the Distilleries & Breweries on purchase of empty bottles from the dealers at the rate prescribed under the relevant schedule.

Guntur Branch of SIRC of ICAI Q & A Seminar on Works Contract - 27-10-2012