This document discusses works contracts under Indian tax law. It begins by defining works contracts and distinguishing between divisible and indivisible works contracts. It then discusses a key Supreme Court case that determined works contracts do not constitute a "sale of goods" and thus are not subject to sales tax. The document outlines the types of expenses that can be deducted from the contractual transfer price to determine the taxable amount. It provides examples of how tax is calculated for works contracts in two case studies. Finally, it briefly discusses the composition scheme option for works contracts to pay a compounded 2% tax rate instead of the standard rates.
3. Definition
• Work Contract is a deemed Sale, which
involves the transfer of property in goods
(whether as goods or in some other form)
involved in the execution of a works
contract.
4. Works Contract – Genesis
– Before proceeding to delve into the concept of works
contract, it is important to first understand its origin
– Works contract term was first coined or incorporated in
the sales tax / VAT
– Entry 54 of the State List :Taxes on ‘Sale of goods’:
State Governments levy VAT under this entry
– Entry 92A of the Union List :Taxes on ‘Sale of goods’
in the course of interstate trade: Central Government
levies CST under this entry
– Sales of Goods Act, 1930: A contract of sale of goods is
a contract whereby the seller transfers or agrees to
transfer the property in goods to the buyer for a price.
There may be a contract of sale between one part-owner
and another
5. State of Madras Vs Gannon Dunkerley & Co. AIR (1958)
S.C. 560
• In a decision related to works Contract -, the Court held
that expression “sale of goods” used in the entry 54 of
State list of Seventh Schedule has the same meaning as
in the Sale of Goods Act, 1930
• Definition of sale under Sale of Goods Act, 1930 covers
cases where the goods are sold to the purchaser. It does
not covers the cases where the goods are not sold as
chattel
• In above decisions it was held that in case of indivisible
works contract, it is not possible to levy sales tax on the
transfer of property in the goods involved in the execution
of such contract as it has been held that there is no sale of
material as such and the property in them does not pass
as such
6. Works Contract –Types of works contracts
Works Contract
Divisible works Indivisible works
contract contract
• Divisible contract i.e. where the elements of sale of goods and labor
are clearly segregated
• Indivisible contracts, where the parties agree for lump-sum
consideration for the entire contract. The sale consideration of the
materials used in the contract and remuneration for labor is not
separately identifiable
7. Deduction from contractual transfer price for
determination of tax payable under section 18.
(1)A dealer who is liable to pay tax under section 14, may, for the purpose of
Determining his taxable contractual transfer price on which tax is payable under
subsection (1) of section 18 during any period, deduct under clause (d) of
sub-section (2) of that section, from contractual transfer price received or
receivable, the following:-
(a) labour charges for execution of works contract;
(b) charges for planning, designing and architects fees;
(c) charges for obtaining on hire or otherwise machinery and tools used for the
execution of the works contract;
(d) cost of consumables such as water, electricity, fuel etc. used in the execution
of works contract, the property in which is not transferred in the course of
execution of the works contract;
(e) cost of establishment of the contractor to the extent it is relatable to supply
of labour and services; and
(f) other similar expenses relatable to supply of labour and services; and
(g) profit earned by the contractor to the extent it is relatable to supply of labour
and services subject to furnishing of profit and loss account of the works site.
8. (2) In the cases where the amounts referred to in clause (a) to clause (g) of
sub-rule (1) are not ascertainable from the accounts of a dealer, or if a dealer
does not maintain proper accounts, the taxable contractual transfer price may,
at the option of such dealer, be determined after deducting the amount,
calculated at the percentages specified in column (3) of the following table for
different types of contracts, and the application of different rates of tax on such
percentages as mentioned in column (4) of the table, of the taxable contractual
transfer price, so determined :-
Percentage of Percentage of total
Serial Type of contract. deduction from value of contract
No. the contractual taxable
transfer price. @
(1) (2) (3) (4)
4% 13.5%
1. Fabrication and installation of 25 25 50
plant and machinery
2. Fabrication and installation of 15 25 60
cranes and hoists.
9. Fabrication and erection of structural works
3. of iron and steel including Fabrication, supply 15 45 40
and erection of iron trusses, purloins and the
like.
4. Fabrication and installation of elevators (lifts) 15 20 65
and escalators.
5. Fabrication and installation of rolling shutters 15 45 40
and collapsible gates.
6. Civil works like construction of buildings, 25 20 55
bridges, roads, dams, barrages, canals and
diversions.
7. Installation of doors, door frames, windows, 20 10 70
frames and grills.
8. Supply and fixing of tiles, slabs, stones and 20 Nil 80
sheets.
9. Supply and installation of air conditioners and 15 5 80
air coolers.
10. Supply and installation of air conditioning 15 5 80
equipment including deep freezers, cold
Storage plants, humidification plants and de-
humidors.
10. Supply and fitting of electrical goods, supply and
11. installation of electrical equipments including 15 5 80
transformers.
12. Supply and fixing of furniture and fixtures,
Partitions Including contracts for interior 20 5 75
decorators and false ceiling.
13. Construction of railway coaches and wagons. 20 50 30
14. Construction or mounting of bodies of motor 20 30 50
Vehicle and construction of trailers.
15. Sanitary fitting for plumbing drainage or 25 15 60
sewerage.
16. Laying underground surface pipeline, cables and 30 10 60
conduits.
17. Dying and printing of textiles. 30 Nil 70
18. Supply and erection of weighing machines and 15 30 55
weigh bridges.
19. Painting, polishing and white washing. 30 Nil 70
20. All other contracts not specified from serial No. 1 20 15 65
to 19
11. Case - 1
During the financial year 2012-2013 a contractor has been
assigned works contract relating to construction of an office
building for Rs. 20 Lakhs by an awarder in order to execute
works contract.
Against supplies and charges for labour and services. The
contractor maintains proper books of accounts, which show
following particulars:
Total receipts from the awarder Rs.20,00,000
G.T.O. Rs.20,00,000
Eligible deductions of charges
towards labour and services Rs. 5,00,000
T.T.O. Rs.15,00,000
Division of T.T.O.
Supply of 4% taxable goods Rs. 2,63,000
Supply of 13.5% taxable goods Rs.12,37,000
12. The contractor makes following purchases :
4% taxable items 13.5 % taxable items
VAT paid
VAT paid
Goods Amount (Input
Goods Amount (Input tax)
(Rs.)
(Rs.) tax) (Rs.) (Rs.)
Grit 50,000 6,750
Sand 80,000 10,800
Bricks 50,000 2,000
Masonr 1,45,000 19,575
y stone
Iron & 1,50,000 6,000 Kota 1,40,000 18,900
Steel flooring
stone
Total 2,00,000 8,000
Cement 3,75,000 50,625
Timber 75,000 10,125
Sanitar 25,000 3,375
y goods
Electric 25,000 3,375
goods
Paints 25,000 3,375
Total 9,40,000 1,26,900
13. Now to calculate net VAT payable first find out input tax, output tax and
input tax credit, which comes as under:
Input Tax
Tax paid on purchases of 4% taxable goods Rs. 8,000
Tax paid on purchases of 13.5% taxable goods Rs. 1,26,900
Input Tax Credit Rs.(8,000 +1,26,900) Rs. 1,34,900
Output Tax
Tax on supply of 4% taxable goods Rs.2,63,000 Rs. 10,520
Tax on supply of 13.5% taxable goods Rs.12,37,000 Rs. 1,66,995
Tax liability Rs. 1,77,515
Net VAT Payable = (Tax liability – Input tax credit)
= 1,77,515– 1,34,900 = Rs 42,615
14. In Brief
TOTAL CONTRACT VALUE
RS 200 Crores
Less : DEDUCTION U/S 18
RS 50 Crores
CONTRACTUAL TRANSFER PRICE
RS 150 Crores
(RS 50 Cores @ 4%) (RS 100 Cores @ 13.5%)
RS 2 Crores RS 13.5 Crores
TOTAL OUTPUT TAX
RS 15.5 Crores
TOTAL INPUT TAX
RS 10.5 Crores
TAX PAYABLE
RS 5 Crores
15. Case - 2
During the financial year 2012-2013 a contractor has been assigned
works contract relating to construction of a civil office building for
Rs. 100 Crores by an awarder in order to execute works contract.
Against supplies and charges for labour and services. The contractor
does not maintains proper books of accounts.
Following information are provided :
Total receipts from the awarder Rs.100 Crores
G.T.O. Rs.100 Crores
Total Input Value Rs.5.225 Crores
Serial No. Type of contract. Percentage of Percentage of total
deduction value of contract
from the CTP taxable
@
(1) (2) (3) (4)
4% 13.5%
6. Civil works like
construction of
buildings, bridges, 25 20 55
roads, dams,
barrages, canals
and diversions.
16. In Brief
TOTAL CONTRACT VALUE
RS 100 Crores
Less : DEDUCTION U/S 18
RS 25 Crores
CONTRACTUAL TRANSFER PRICE
RS 75 Crores
(RS 20 Cores @ 4%) (RS 55 Cores @ 13.5%)
RS 80 Lakhs RS 7.425 Crores
TOTAL OUTPUT TAX
RS 8.225 Crores
TOTAL INPUT TAX
RS 5.225 Crores
TAX PAYABLE
RS 3 Crores
17. Composition Scheme
Any registered dealer, who is liable to pay tax for execution of “ Works
Contract ”, may, at his option, pay tax at a compounded rate of two
per centum of the aggregate of the amount received or receivable by
such dealer for each month of the year in lieu of the amount of tax
payable as per 12.4.
Entitlement
The dealer engaged in execution of works contract, shall be entitled to
the composition scheme, provided he is not engaged in the following :-
• Making sale as referred to in sub-clause (ii) of clause (g) of section 2 of
the CST Act ; or
b) Making sale in the course of import of the goods into, or export of the
goods out of, the territory of India; or
c) Transferring goods otherwise than by way of sale for execution of
works contract outside the State.
No Tax Invoice : Provided that the dealer opting for
“Composition Scheme” shall not be entitled to issue tax invoice.
