Critical Issues under RVAT related to Real Estate & Works Contracts Udaipur Yashasvi Sharma & Assocites

Key Points Key Points  Introduction/ journey of Works Contract taxation & judicial pronouncements.  46 th Constitutional Amendment & insertion of Article 366(29A).  Relevant provisions under RVAT: Section 4 R/W Rule 22A; Section 5(1) R/W Rule 17A; Section 8(3).  Critical Issues and discussion. Udaipur Yashasvi Sharma & Assocites

Introduction Introduction Madras High Court in the matter of Gannon Dunkerley & Co : Provinces have no power to levy tax on works contract transactions. {5 STC 216} Contracts are INDIVISIBLE & ENTIRE in nature. Cannot be divided in contract for sale of material and payment for services rendered. Udaipur Yashasvi Sharma & Assocites

 Hyderabad High Court followed the decision of Madras High Court in Jubilee Engg. {7 STC 423}  Kerala H.C. in Gannon Dunkerley {8 STC 347}and Rajasthan H.C. in Bhurama V/s. State of Rajasthan had divergent view while affirming the power of State to tax such transactions. {8 STC 463}  Supreme Court in State of Madras V/s. Gannon Dunkerley & Co. affirmed the view taken by Madras H.C. {9 STC 353} Udaipur Yashasvi Sharma & Assocites

 2005 landmark judgment of Apex Court in the matter of K.Raheja Corporation v. State of Karnataka. {5 SCC 162}  Later in the Year 2006 the Apex Court in the matter of Bharat Sanchar Nigam Limited decided that dominant nature test has no application to composite contract. {3 SCC 1} Udaipur Yashasvi Sharma & Assocites

 Though the judgment was rendered in the context of Entry 48 in List-II of the Seventh Schedule to the Govt. of India Act, 1935 but as per SC it is squarely applicable to the provisions of Entry 54 in List-II of the Seventh Schedule of the Constitution. Udaipur Yashasvi Sharma & Assocites

46th Constitutional Amendment: Insertion of Article 366(29A)  On the recommendation of 61st Law Commission and to empower the States to levy tax on Works Contracts- 46th Constitutional Amendment was made in 1982 effected from 2nd Feb  The validity of the amendment was upheld by the Hon’ble Apex Court in the matter of Builders’ Association of India. {73 STC 370} Udaipur Yashasvi Sharma & Assocites

Three conditions for deeming goods sold in execution of works contract: 1.There must be works contract. 2.Goods should be involved in execution of such works contract. 3.The property in those goods must be transferred to a third party as goods or in any other form. Udaipur Yashasvi Sharma & Assocites

Relevant provisions under RVAT:  Maintains proper books of accounts in which labour part may be correctly determined.  Does not maintain proper books of accounts where labour seems to be irrational or on higher side than the deduction of labour would be as per table provided in Rule 22A.  New Sub Clause (bb) added as reverse umbrella for main contractors/ awarders. Section 4 R/W Rule 22A Udaipur Yashasvi Sharma & Assocites

Lump sum payment in lieu of tax under Section 5(1) read with Rule 17A: Entry No. 6 of the Notification No. 18 dated & it was amended vide Notfn. No. 206 dated Specifically for registered dealers commonly known as builders/ developers who undertakes construction of flats, dwellings or buildings. Transfers goods alongwith land/ interest underlying in land. No ITC would be allowed. Tax would be paid as per Section 20. The payment which the dealer has to choose to pay Rs. 1,300/- or Rs. 8,000/- as the case may be. Udaipur Yashasvi Sharma & Assocites

Composition/ Exemption fees under Section 8(3):  Most popular amongst works contractors.  Most importantly the dealer has to purchase goods from the registered dealers of the state. This is a big minus going in for option-A. He may also purchase goods from outside state but the exemption amount would be very high in comparison to option-A.  The rate of exemption fee is 0.75% in option-A and 6% in option-B, of the total value of the contract.  Another ambiguity was there in clause 2.1(i) where word ”exclusively...” is used which is removed from new notification. Udaipur Yashasvi Sharma & Assocites

Critical Issues and Possible Solution Whether VAT/ Lump sum payment in lieu of tax/ exemption fees would be paid on the element of Service Tax as well which is included in the gross value of contracts? Answer would be Yes provided the service tax is included in the contract value and not charged extra. As per clause (36) to Section 2 of the RVAT Act all statutory levies are to included while calculating sale price. Udaipur Yashasvi Sharma & Assocites

Material provided FOC to the contractor by the awarder, is it taxable or not? Again it depends how the contract is drafted. Let us take an example: Contract of Rs. 1 Crore awarded. Awarder provided steel and cement worth Rs. 60 lacs. FOC to contractor and deducted the same from the contract value; in this case the VAT liability would arise in the hands of the awarder as he is transferring goods and receiving consideration indirectly. Further, if contract is of Rs. 40 lacs and awarder providing steel and cement of Rs. 60 lacs FOC to contractor; in that case no VAT liability on awarder as he is giving the material for his own use. Udaipur Yashasvi Sharma & Assocites

What would be the value of land which would be deducted while computing taxable value as per Rule 22A? As per Rule 22A(3) the value of land would be calculated as per Rule 58 of Rajasthan Stamp Rules as applicable on 1st January of the year in which agreement to sale was entered in to irrespective of whatever the rate on the date of agreement. Udaipur Yashasvi Sharma & Assocites

In all the three options condition of purchase from registered dealer of the state is provided. What could be the way out? This condition is provided to safeguard the interest of local business. Here the condition is registered dealer of the state. In my opinion we can purchase goods under Section 6(2) of CST Act where the purchaser and seller may be of the same state. It mitigates the condition of registered dealer of the state. This option may be examined. Udaipur Yashasvi Sharma & Assocites

As per Rule 22A(4) what is the meaning of “Occupancy certificate” and ”Completion of construction”? An occupancy certificate is an authorization issued by local body that building meets the required health and safety standards and can be inhabited. Udaipur Yashasvi Sharma & Assocites

In clause 2.1(i) of Notfn. No. 22 dated word “exclusively” is used, how it may effect the dealer who is trader also? Here the question arises that if the contract is completed, some stock is left and the dealer is selling that stock, can he claim the benefits here? In the context and as per the intention of the Govt. only those dealers who are exclusively engaged in execution of works contract can avail the benefit under Notfn. Issued under Section 8(3). In my opinion, the substantive part, i.e., clause 1 would prevail and by no ways the procedure may redundant the substance. However, safer option is to seek clarification from the State Government. Udaipur Yashasvi Sharma & Assocites

Contractor is working under the E.C. obtained prior to issued sub- contract after than what would be the position of sub-contractor? Would he be able to avail the umbrella benefit under this scheme? In my opinion Yes he can as clause 6.2 of the said scheme clearly states that if any work is pending of those contracts for which E.C. was obtained earlier, old rules would apply. Since the E.C. was obtained before therefore the provisions of old E.C. Notfn. would apply irrespective of awarding sub-contract on later date. Udaipur Yashasvi Sharma & Assocites

As per Notfn. No. 83 dated consideration received after would only be taxable and all the options are made available from ; in that case what would happen to the transactions between to ? This is critical question which is unanswered. I think it is mistake and to resolve the issue Govt. must made the scheme applicable w.r.e.f Udaipur Yashasvi Sharma & Assocites

Another critical issue is if the permission is granted to build ten floors and during the course of construction revised norms allowed fifteen floors. The builder has already booked some flats, now the question arises what would the cost of land to be deducted on additional five floors’ flats? In my opinion no additional deductions may be given made as the permissible land cost has already been taken deducted while calculating the earlier flats. Udaipur Yashasvi Sharma & Assocites

If due to damages the gross value of the contract increases and the awarder denies to pay the sum as the fault was on the part of the contractor, how the increased amount would be taxed? The contractor has to pay tax on the increased amount as awarder denied for it as a result of which the E.C. Also cannot be revised because the work order remains for the same amount. Udaipur Yashasvi Sharma & Assocites