WORKS CONTRACT UNDER TAMIL NADU VALUE ADDED TAX ACT, 2006

[Mr. M. GOVINDARAJAN]

Definition

Section 2(43) of the Tamil Nadu Value Added Tax Act, 2006 (‘Act’ for short) defines the term ‘works contract’ which includes any agreement for carrying out for cash, deferred payment, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property.

 Taxable turnover

 Section 5 of the Act provides for levy of tax on the transfer of property in goods involved in the execution of works contract. Rule 8(5) provides the method of computing the taxable turnover of the dealer liable to pay tax. The taxable turnover in respect of the transfer of property in goods involved in the execution of works contract shall be arrived at after deducting the following amounts from the total turnover-

• all amounts involved in respect of goods involved in the execution of works contract in the course of export or import of goods or interstate trade or commerce;
• all amounts relating to the sale of any goods involved in the execution of works contract which are specifically exempted from tax under the Act;
• all amounts paid to sub contractors provided the dealer claiming deductions produces the proof that the sub contractor is a recognized dealer liable to pay tax and that the turnover of such amount is included in the return filed by the sub-contractor;
• all amounts towards labor charges and other charges not involving any transfer of property in goods. If such charges are not clearly ascertainable from the books of accounts, then the same shall be calculated at the rate specified in the table appended to the rule;
• all amounts including the tax collected and refunded to the customer or adjusted in respect of unexecuted portion of the contracts provided the turnover was included in the return and tax paid and the amount including the tax collected from customer is adjusted or refunded within a period of 6 months from the due date for filing of the return in which the said account was included and tax paid.

Dealers paying tax are entitled to input tax credit on goods mentioned in the I schedule purchased within the state and use in the contract.

Discharge of tax liability

The tax liability on works contract as per the provisions of the Act may be discharged in any of the following three methods:        

In the first method if the dealer is able to ascertain actual amount spent in respect of labour/service portion, then he may deduct such amount from the total value of the contract and for the balance which attributes the value of goods being sold is the taxable turnover.

Total value of the Contract                                          =       A

Labor Charges for execution of works contract

Amount paid to sub contractors for labor and

Service charges

Charges for Architect’s fees

Charges for machines, tools etc., on hire

Cost of consumables in which property does not

Pass to contractee

Cost of establishment relating to supply of labor

 And services

Other expenses

Profit of contractor

                                               TOTAL                         =       B

 

Taxable turnover Value        C                                  =       A - B

In this method the dealer is required to maintain books of accounts and to produce evidence before the authorities as and when required. The dealer is entitled to take input tax credit on the purchases on the inputs.

In the second method standard deduction as prescribed in the provisions in respect of labor can be deducted from the value of works contract. A standard deduction of 30% is available for civil works contract.   The balance 70% of the value is leviable to VAT. In this method also the dealer is required to maintain books of accounts.

In the third method is the method at compounded rate which is discussed in the next para.

Payment of tax on works contract at compounded rates

The dealer may opt to pay tax at compounded rates in respect of execution of works contract. In case of civil works contract and civil maintenance works contract 2% of the total contract value has to be paid as tax and in case of all other works contract 4% of the total contract value has to be paid as tax.

The option to pay tax at compounded rates must be executed while filing the first monthly return for the financial year or in the first monthly return after the commencement of the works contract. Such an option shall be final for the assessment year and so long as tax is paid under Section 6 the dealer need not maintain books of accounts as stipulated in the act and its rules and it is sufficient if he maintains the records in original of the works contract, the extent of execution of work and payment received/receivable. The dealer should not have procured any material for the purpose of execution of contract from any other than the State of Tamil Nadu. Dealers paying tax in this section are not entitled to input tax credit and cannot collect tax from their customers.

Explanation to Section 6 defines the term ‘civil works contract’ which includes civil works of construction of new buildings, bridges, road, runway, dam or canal including any lining, tiling, painting or decorating which is an inherent part of the new construction and any repair, maintenance, improvement or up gradation of such civil works by means of fixing and laying of all kinds of floor tiles, mosaic tiles, slabs, stores, marbles, glazed tiles, painting, polishing, partition, wall paneling, interior decoration, false ceiling, carpeting and extra fittings or any manner of improvement of an existing structure.

Tax deduction at source

Every person responsible for paying any sum to a contract has to deduct tax at source.   The amount of tax to be deducted is 2% of the total amount payable to the contract in case of civil works contract and civil maintenance works contract and 4% of the total amount payable to the contractor in case of all other works contract. Deduction need not be done where-

• No transfer of property in goods is involved;
• Transfer of property in goods is involved in the execution of works contract in the course of interstate trade or commerce or in the course of import;
• Contractor produces a certificate in the prescribed form from the assessing authority that he has no liability to pay or has paid the tax;
• The amount paid or credited or likely to be paid or credited during the year to the contractor does not or is not likely to exceed Rs.1 lakh.

The person deducting the amount has to deposit the same with the assessing authority or any authorized officer on or before the 20^th of the succeeding month along with Statement in Form R and thereafter within 15 days issue certificate in Form T to the contractor and send a copy of the same to the assessing authority of the contractor. Once the contractor produces the Form T the amount deducted as TDS shall be adjusted towards the liability.

Contravention of the said provision and non deduction of tax at source attracts interest @ 1.25% per month.