Indirect Tax in India-4.9.12

7/31/2019 Indirect Tax in India-4.9.12

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KAEFER Group

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KAEFER Company Profile 2007 - 2008

More than good ideas.

Indirect Tax System in India


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Proposed Indirect Tax System in India

By Central Govt

*Excise Duty CENVAT System

*Service Tax CENVATSystem

(Input Credit available towards goods &Services

Indian Goods & Services Tax Act (CentralGST)

From 1st April, 2010

By State Govt

*VAT has replaced State Tax from 1st April2005, (Sales Tax, WCT, Lease Tax, TOT,

SC but not octroi)

State Goods & Services Tax Act (StateGST)

- Merger of all state taxes including octroi

- Service Tax Levy to the state.

(From 1st April, 2010)

*On the same goods or services Central Govt. would collect Central GST

& the states would collect state GST.


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Constitution of India (Empowers State Govt. to Levy, Collect & RetainSales Tax)

Movement of goods is deciding factor

State transactions of

purchases/sales

Interstate - Import/export

Transactions

* State * State

"A" "B"

State VAT Act & Rules * * CST Act, 1956 & Rules

State Sales Tax

Act

State Sales Tax

Act- Liability/Registration

- Scheme of Taxation

- VAT Credit- Works Contract

- Departmental

Processdings

- Penalty/Recovery

- Returns/Payments /

Forms

- Registration

- Interstate Sales- Interstate Transfers

- Rate of CST

- Penalty

- Declared Goods

- Forms - C, EI - EII, F, H, etc

CST ACT

State VAT Act State VAT Act

* Local Movement - State VAT Act

* Interstate Movement - CST Act


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What is a Indivisible Works Contract?

1. It is a works contract(WC) & Not a Normal Sale

2. The indivisible works contract :

Composite Turnkey Jobs (Labour & Material is involved)

Breaking of Price for supply(Material) & Labour may not be separate sale ofmaterials & Labour contract.

Whether the contractor/seller gets the order from the customer for definite goods or

for WC

3. The clauses in the agreement between the contractor and the contractee are the key

factors for determining whether the contract is of sale of goods or WC.

4. If the contract is divisible then, the supply of material is a sale contract and the labour

portion is WC. If in the labour portion, material is also used then VAT (WC) is applicable.

5. The concept of local & Inter-state WC . Local WC are covered under the Local VAT Act &

Inter-state WC are covered under the central sales tax act.


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Sale Vs. Works Contract (Concept) In a contract of sale, the main object is the transfer of property and delivery of the

possession of chattel as a chattel to the buyer, where it is not so, it is a contract of

works & labour (Hindustan Aeronatics Ltd. 55-STC 314-SC)

The Contract between a Photographer and his Customer is not a contract of sale

but is work of Art & Labour (B C Kame 39 STC 237 SC)

The test therefore is as whether in a particular case, it is a contract of sale (Chattel

as a chattel) or WC, neither the ownership of the material not the value of skill or

labour as compared with the value of the material is conclusive, although such

matter may be taken into consideration of the particular case.


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Sale Vs. Works Contract (Concept) Contd IF the thing to be delivered has any individual existence before the delivery as the

property of the party who is to deliver it, then it is a sale. If the main object of the

work undertaken is not the transfer of a chattel qua chattel, the contract is one for

work & labour (Hindustan Shipyard 119 STC 533 SC).

It is made clear that contract of building buses, ships are that of the sale even if they

are manufactured as per the specifications and under strict supervision of the buyer.

(Hindustan Shipyard 119 STC 533 SC)

The activity is a sale or WC depends upon the facts, the terms and conditions and

intention of the parties. (McKenzis Ltd. 165 ST C -58-SC)

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What is Deemed Sale?

1. The scenario before the 46th constitutional amendment (Before 2nd February,

1982)

The sales of goods covered under the sale of goods act were

only liable for sales tax.

The supreme court judgment of Gannon Dunkerely (9 STC 353)

The invisible WCs were not covered under the state sales tax

laws. The states were not empowered to levy sales tax on

indivisible WCs.

2. The 46th

Amendment to the constitution of India: Sub-article (29-4 reads as under

(b) a tax on the transfer of property in goods (whether a goods

or in some other form) involved in the execution of a works

contract.


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What is Deemed Sale? Contd.

The concept of deemed sale under the state VAT/CST Acts:

The sales tax/VAT/CST is applicable only on the value

of the goods and not on labour portion of the contract.

Alternatives are prescribed for arriving at the materialvalue of the contract.

3. The states are empowered to levy sales Tax/VAT/CST on such deemed sales

only after the 46th Amendment to the constitution of India.


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Divisible Works Contracts

State AContractor X

State AContractee Y

Supply Normal Sale

VAT 4%/12.5%

State AContractor X or X1

State AContractee Y

Erection & Commissioning

Labour Job(WC) (if material used, the

WC provisions are attracted, otherwise

pure labour job)

Two separate contracts, one for supply portion and other for labour work, two

separate companies, preferable.

No artificial break of sale price to avoid VAT (WC) on labour portion.

The clauses in the agreement and intentions of the two parties, important.


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Indivisible Works Contracts

State AContractor X

State AContractee Y

Deemed Sale (WC)

VAT (WC) is applicable on contract

value as per the three options availble

Only one indivisible WC

The clauses in the agreement and intentions of the two parties, important.

VAT (WC) applicable only on the material value of the contract determined by

the three methods (options) under State VAT Act.


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Activities Covered Under works Contracts1. Construction Jobs

2. Civil Work

3. Erection of Plant and Machinery

4. Processing conversion jobs

5. Repair Jobs6. Annual Maintenance Contracts

7. Customized Printing Jobs

8. Building of bodies on chassis

9. Electrical Fittings

10. Installation of lift/elevator in the building

11.Air Conditioning Installations

12.Painting Jobs

13.Repairs of Vehiicles

14.Re-treading of old tyres

15.Electro-plating, electro-galvanizing, anodizing and the like


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Indivisible Works Contracts Various Types

IndivisibleComposite

Works Contracts

ConstructionContracts

Erection of Plant& Machinery

EPC Contracts

Installation andCommissioning

of lifts/elevators Civil Works

Job Works

ProcessingConversion Jobs

Printing Jobs

Repair Jobs

Electro-plating,electrogalvanizing,

anodizing andlike

Customizedprinting jobs

Pure LabourJobs

Pure labour jobswhere no ownmaterial is usedby thecontractors(consumables,chemicals which

evaporate duringthe process areallowed.

Art Works

Works of Art &Labour (ArtWork)

Photography

Paintings by theartist

VAT Applicable VAT Applicable

No VAT

Applicable

No VAT

Applicable


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Basic Concepts of Levy of VAT/CST on works contracts (DeemedSale)

1. No VAT/CST is applicable on pure labour jobs where no material of his own is

used/added by the job worker(vendor).

2. VAT/CST is applicable on material value (Deemed Sale) of the WC.

3. To arrive at the material value in the contract, three methods are adopted under the

state VAT Acts namely:

Actual Non-material Deduction Method

Standard Deduction Method

Composition Tax Method (Non Legal Method)

4. VAT Setoff/Credit is available under the State VAT Acts to both the Contractors and

contractees except for the negative list items purchased.5. For divisible contract, supply of material is a normal sale contract and the labour

contract is subject to VAT(WC) provisions, only if the own material is used by the

contractor.

6. If the contractor dispatches his own materials from one state to another, directly to the

customer under the indivisible WC, then it is a deemed inter-state sale of material

subject to levy of CST by the state of dispatch.


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Maharashtra VAT Act, 2002 (MVAT Act) WC Provisions

1. Definition of Sale under Section 2(24) explanation (ii):

The transfer of property in goods (whether as goods or in some other form) involved

in the execution of - #(WC namely an agreement for carrying out for cash, deferred

payment or other valuable consideration, the building, construction, manufacture,

processing fabrication, erection, installation, fitting out, improvement, repairs or

commissioning of any movable or immovable property).# The Amendment from 20th June, 2006

2. For the WC carried out inside the state of Maharashtra only.

3. Applicable provisions under MVAT Act & Rules:

Rule 58 Actual Labour Deductions Option, Rule 58 Proviso Standard LabourDeduction Option.

Section 42 Composition (WC) Tax

Section 31 & Rule 40 TDS (WC) Provisions

Rule 52 Setoff, Rule 53 Reductions of Setoff, Rule 54 Negative List (No

VAT Setoff)


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Works Contract Taxation Under State VAT ActContractor [Maharashtra]

When Contractor Bills to the contractee for the Works Contract Carried out by him in the state

Option A (Legal) Option B Composition

A1 [VAT Paid on Inputs Rs. 2.50

Contract Price Rs. 100.00

(-) Actual Non-Material

ValueRs. 80.00

Material Value Rs. 20.00

@ 12.5% VAT on Rs. 20.00 Rs. 2.50

Tax Invoice Rs. 100.00

Vat @ 12.5% on Rs. 20.00 Rs. 2.50

Rs. 102.50

VAT Payable (2.50 - 2.00) Rs. 0.50

2% TDS Deduction by Contractee

A2 [VAT Paid on Inputs Rs. 2.50


Standard Deduction (Non-

Material)Rs. 25.00


@ 12.5% VAT on Rs. 75.00 Rs. 9.38


Vat @ 12.5% on Rs. 75.00 Rs. 9.38

Rs. 109.38

VAT Payable (Rs. 9.38 - 2.00) Rs. 7.38


VAT Paid on Inputs Rs. 2.00 (Credit 64%) Rs.

1.28


@8% Composition Tax on Rs.

100.00Rs. 8.00

Rs. 108.00

Invoice


@8% Composition Tax Rs. 8.00

@5% Composition Tax(20-06-06) Rs. 108.00

VAT Payable (Rs. 8.00 - 1.28) Rs. 6.72



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Works Contract Taxation Under State VAT Act Contd..

1. Setoff will be available to contractor on VAT paid on local purchases. Partial

setoff(64%) for composition scheme only in Maharashtra. For 5% Composition

Tax (Construction Contracts), setoff available is in excess over 4% of inputs

VAT paid.

2. Composition option may continue to be available under VAT act (Separate

rates in states). No Credit available for composition contractor in the state other

than Maharashtra.

3. If contractee (customer) purchases goods for erection of immovable property,

no setoff is available to him.

4. Ongoing Contracts Tax liability would not exceed under VAT which was

determined as per earlier law.


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Illustrations Option A1, A2& B

Option "A1"

(Actual Non-Material Deduction)

Material Purchase(All Local) Rs. 30.00

ED 16.32% Rs. 4.90

12.5% VAT on Rs. 34.90 Rs. 4.36

Less: 12.5% VAT Setoff Rs. 4.36

Less: CENVAT Credit Rs. 4.90

Material Cost Rs. 30.00

20% margin on Material Cost Rs. 6.00


Labour (Profit) Rs. 64.00

Contact/Sale Price Rs. 100.00

Add: ED 16.32% of Rs. 36.00 Rs. 5.87

Add: ED 16.72% of Rs. 64.00 Rs. 10.45

Add: 12.5% VAT on Rs. 41.87

[36 + 5.87 (ED)]Rs. 5.23


Less: VAT Setoff Rs. 5.23

Cost to the contractee Rs. 100.00

Cost to the contractee

without VAT SetoffRs. 105.23

VAT Payable = (O) - (I) = Rs.

5.23 - Rs. 4.36

Rs. 0.87

Option "A2"

(Standard Deduction)


ED 16.32% Rs. 4.90

12.5% VAT on Rs. 34.90 Rs. 4.36

Less: 12.5% VAT Setoff Rs. 4.36





Add: ED 16.32% Rs. 16.32

Add: 12.5% VAT on 80% of Rs.116.32 i.e. on Rs. 93.06 Rs. 11.63


Less: VAT Setoff Rs. 11.63


Cost to the contractee if No VAT

SetoffRs. 111.63

VAT Payable = (O) - (I) = Rs. 11.63

- Rs. 4.36

Rs. 7.27

Option "B"

(Composition Tax)


ED 16.32% Rs. 4.90

12.5% VAT on Rs. 34.90 Rs. 4.36

Less: VAT Credit (64% of 4.36) Rs. 2.79





Add: ED 16.32% Rs. 16.58

8% Composition Tax Rs. 9.45


Less: VAT Setoff(Full) Rs. 9.45


Cost to the contractee if No VAT

SetoffRs. 111.02

VAT Payable = (O) - (I) = Rs. 9.45 - Rs.

2.79

Rs. 6.66


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Tax Deducted at Source on Works Contract (MVAT Act)1. In all the three options, the contractee/customer has to mandatorily deduct 2% TDS [2%

of net price excluding VAT (WC) & Service Tax amounts) and pay the same to the

government Treasury within the prescribed period.

2. In case the contractor is not Registered Dealer under MVAT Act, then 4% TDS to be

deducted and paid by the contractee/customer.3. Those contractee which are notified, only would deduct TDS like:

R. D. under MVAT Act

Governments State or Central

Co-operative Housing Societies

4. The contractee would:

Issue TDS Certificate to the contractor

Would maintain register in form

Obtain TAN form Sales Tax deptt. (Provision is deleted)

5. In most of the states TDS provisions are incorporated in the state VAT laws.


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Negative List MVAT Rules (Rule 54) (WC)

1. Purchases effected by way of WC where the contract results in immovable property

[Rule 54(g)].

2. Purchases of building material which are not resold but are used in the activity of

construction.

3. Purchases of office equipment, furniture & fixtures, if such goods purchased are treated

by the claimant dealer as Capital Assets [Rule 54(I) Setoff in excess over 4% from 8th

September, 2006]

4. Any purchase of consumables or of goods treated as capital assets by the claimant

dealer where the dealer is principally engaged in doing job work or labour work and is

not engaged in the business of manufacturing of goods for sale by him and incidental to

the business of job work or labour work any waste or scrap goods are obtained or sold.

[Rule 54(d)]


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VAT Transactions between Main and Sub Contractor

Sub

Contractor

State A

Main

Contractor

State A

Customer

State A

Works Contract

VAT Under legal &

Composition Options

VAT Form

(Sub-Contract)

Exchange of VAT Forms

between MC and SC)

VAT Calculations

Sub Contract Value Rs. 60.00

30% Standard Deduction Rs. 18.00


@12.5% VAT on Rs. 42.00 Rs. 5.25

Invoice Rs. 60.00

@12.5% VAT on Rs. 42.00 Rs. 5.25

Total Rs. 65.25

VAT Calculations

Total Contract Value Rs. 100.00

(-)Sub Contract Value Rs. 60.00

Rs. 40.00

30% Standard Deduction Rs. 12.00


@ 12.5% VAT on Rs. 28.00 Rs. 3.50


+ @12.5% VAT on Rs. 70.00 Rs. 8.75

Total Rs. 108.75

1. If customer buys buildingmaterial (Steel, Cement) inconstruction contract, no VATCredit is available to thecustomer.

2. TDS is deductible againstadvance payments received

towards contract value

Full credit is available of the VAT paid on the input by theMain/Sub Contractor under legal option


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VAT Transactions between Main and Sub Contractor Contd

1. No TDS by the Main Contractor from the sub-contractors Invoice

2. Exchange of VAT Forms between Main (VAT Form 406) & Sub-contractor

(VAT Form 407) for the payment of VAT.

3. 8% composition on Rs. 60 at the hands of sub-contractor and on Rs. 40 at the

hands of main contractor.

64% of VAT credit is available under composite scheme.


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VAT Local Works ContractsThe taxation of construction contractor in Maharashtra.

V1

(State B)

V2

(State A)

State AContractor

3% CST

C Form

(No Setoff) State AContractee

(Customer)Legal Option Composition

Rs. 100.00

(-) Rs. 30.00

Rs. 70.00

4% & 12.5%

VAT(B)

5% on

contract Value

(B)

(Construction)

No Credit available to customer, being

erection of immovable property

Full VAT Credit is available under legal

option & in excess over 4% under

composition Option, VAT = (B) (A)

Please refer to the notification dated 30thNov06 on Construction

Contracts from 20thJune06

Works Contract VAT (B)

4% or 12.5%

VAT (A)


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Works ContractsFree Issues by the CustomerA Gross Price (including value of free issues) charged by the customer

State "A"

Vendor

Price Rs. 60.00

VAT @ 12.5% Rs. 7.50

Rs. 67.50

State "A"

Customer

Cost Rs. 67.50

State "A"

Contractor

Price Rs. 100.00

VAT @ 12.5% Rs. 12.50

Sale Price Rs. 112.50

Customer

VAT Cost Rs. 7.50

Rs. 12.50

A Rs. 112.50

OPTION A

State "A"

Vendor

Price Rs. 60.00

VAT @ 12.5% Rs. 7.50

Rs. 67.50

State "A"

Customer

Cost Rs. 67.50

State "A"

Contractor

Price Net Off Free Material


Vat 12.50% Rs. 5.00Sale Price Rs. 45.00

Customer

Total Cost Rs. 7.50

Rs. 5.00

B Rs. 12.50

OPTION B

Free

Issue

Free

0%

VAT

Sale

Free

Issue

Free

0%

VAT

Sale

State "A"

Vendor

Price Rs. 60.00

VAT @ 12.5% Rs. 7.50

Rs. 67.50

State "A"

Customer

Cost Rs. 60.00

State "A"

Contractor

Price Rs. 60.00

VAT @ 12.5% Rs. 40.00


Customer

VAT Cost Rs. 12.50

C Rs. 12.50

OPTION C

Sale

VAT

7.5%-7.5%=0%

100

+

12.5%VAT

Sale

Cost

to

Cost


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Summary MVAT (WC) Provisions1. For any WC carried out by the contractor/seller, three options are available to levy

VAT/Composition Tax namely:

Actual Non-material Value Deduction

Standard Non-Material Value Deduction

Composition Tax(Non-Legal)

2. In all the options VAT Setoff/Credit is available to both the contractor (seller) and the

contractee(buyer). For Composition Tax option, the contractor gets 64% in excess over 4%

credit of the total VAT paid.

3. No VAT credit/setoff available on purchase of negative items.

4. 2% TDS Deduction of net sale price (excluding VAT & Service Tax) charged by thecontractor and payment of same to the government within the prescribed period by the

contractee (if the contractor is unregistered dealer, the TDS deduction is 4%)

5. VAT forms are provided for the transactions between main and sub-contractors.

6. Specific provisions for WC in MVAT Act and rules.


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VAT and Service Tax

1. While rendering Taxable Service, if there is a deemed sale of goods/materials

also, then both Service Tax and VAT(WC) is applicable.

2. The supreme court & the High Courts have confirmed that both Service Tax

and Sales Tax (VAT) is payable by the service provider, if the goods are alsoused in such service contracts.

e.g. Construction contracts, Annual Maintenance Contracts.

3. If in the taxable service Value, if the value of actual material sold can be

determined, then VAT(WC) would be payable on the material value and service

tax on the balance value.

4. If the value of materials used in the taxable service is on the presumptive basisthen on total contract value VAT (WC) would be calculated by 2 options

available under the MVAT Act (Standard Deduction & Composition) and service

tax would be calculated as per the service Tax Law (Abatement Method).

5. The credit of both VAT(WC) and service tax paid is available subject to certain

conditions to the service recipent.


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Annual Maintenance Contract (AMC)

Illustration Working of VAT (WC) & Service Tax Payable

AMC (Predominant Service Contract but parts also would be replaced)

VAT (Works Contract) SERVICE TAX

A1

(Actual Non-Material

Deduction)

A2

(Standard

Deduction)

B

(Composition Tax)

S1

(Actual Material Deduction)

S2

(Abatement Method)

Contract ValueRs.

100.00

Contract

Value

Rs.

100.00

Contract

Value

Rs.

100.00 Contract Value Rs. 100.00 Contract Value Rs. 100.00

Non MaterialRs.

80.00

Std.

Deduction

Rs.

40.00 Material Sold Rs. 20.00 Abatement Rs. 67.00

MaterialRs.

20.00 Material

Rs.

60.00 Material

Rs.

100.00 Material Rs. 80.00 Material Rs. 33.00

VAT @ 12.5% Rs. 2.50VAT @

12.5% Rs. 7.50

8% Comp.

Tax Rs. 8.00

Service Tax

@12.36% Rs. 9.89

Service Tax

@12.36% Rs. 4.12

Fully VAT Credit available to service provider in A1 & A2 options but only

64% VAT credit in option B

CENVAT Credit is not available to service provider in S1

option & in Option S2

The customer can get VAT Credit if the goods are not in the negative list.

The customer can get service tax credit under CENVAT

Credit rules


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Annual Maintenance Contract (AMC)

Illustration Working of VAT (WC) & Service Tax Payable Contd

Invoice Note:

Contract Value Rs. 100.00If the actual material value is available, then VAT

(WC) would be calculated on that value and on

balance value Service Tax would be calculated,

otherwise separate workings as per VAT (WC) and

Service Tax Provisions

VAT (A1 Option) Rs. 2.50

Service Tax (S1

Option)Rs. 9.89

Total Rs. 112.39


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Works Contracts Certain Specific Issues1. The supreme court judgment in the case of K. Raheja development

corporation (141 STC, 298):

The Ratio of the judgment

Maharashtra Amendment to the Definition of works contract from 20th

June, 2006 Maharashtra trade circular No. 12 T of 2007 dated 07-02-2007

Amendment to Delhi rules from 7th Sept06 to provide for deduction of

LandCost from the contract price.

2. Service Contracts AMC Contracts in the states by the company/contractor

VAT & CST Registration in the State where work is carried out by the main

contractor and the sub contractor?3. Replacement of warranty Parts under the warranty period

Replaced by the dealers/distributors from their own stock

or

Directly replaced by the manufacturer

4. Sale in Transit (E-1 Sales) under indivisible works contract Allowable only if

proper documentation/transaction is made by the contractor.


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Software Companies & VAT1. Software Packages are intangible goods subject to VAT under the VAT laws.

2. As per the recent judgement of TCS (137 STC 620 SC), the supreme court

observed that:

In the case of software, both canned and un-canned, all these are

possible. Intellect property when it is put on a media becomes goods

Software may be intellectual property but the property contained in a

medium is bought and sold, it is an article of value and such software can

be described as goods subject to sales tax.

It was not dealing with unbranded/customized software and no opinion

there on was being expressed because in case of unbranded software

other questions like situs of contract of sale and / or whether the contract

was a service contract may arise.


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Software Companies & VAT Contd3. The state governments started levying VAT on the unbranded/customized

softwares after the said judgment of TCS of the supreme Court.

Recently the commissioner of sales tax, government of Maharashtra has

passed DDQ order wherein it has been decided that the sales tax (Now VAT)

is applicable on unbranded/customized software in the case of MASTEK Ltd.,

As certain clauses in the agreement with the client were confirming that it

was a sale of software product.

No VAT credit is available on softwares goods being included in the negative

list, in Maharashtra.


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Agreement of WC Proper Clauses of VAT/CST1. Whether the contract is a sale contract or WC is dependable on the facts of the

transactions, terms and conditions and the intention of the two parties. All such clauses

in the agreements should be incorporated to avoid litigations.

2. In cases of individual WC, following clauses should be incorporated:

The contractor and contractee intend to treat the whole contract as indivisible WC,

all the time.

The transfer of property of the contractors goods to the contractee shall take place

as soon as the said goods are used in the execution of the contract.

VAT, is applicable, under the provision of VAT Act, shall be leviable only on the

value of goods used in the execution of said contract.

The Contractee shall remain the owner of the material supplied him to thecontractor for use in the execution of WC, all the time. There shall not be

transfer/sale of such goods to the contractor at any time.

No VAT is applicable on the said contract being a pure labour job as no material of

his own used by the job worker Processor.


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Agreement of WC Proper Clauses of VAT/CST Contd...

3. It is advisable, if the best option under the MVAT Act is decided before entering into the

agreement by the contractor and the contractee, the same should be incorporated in the

clauses of the agreement.


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Works Contracts Important Judgment1. Sarvodaya Printers

(114 STC 242-SC)Customized Printing Jobs are WC

2. Rainbow Colour Labs Ltd.

(118 STC 9 SC)The state cannot tax, if marginal material is used for producing work of art

3. ACC Ltd.

(140 STC 22-SC) Smaller transfer of properties in goods subject to tax in works contract

4. Kone Elevators (I) Ltd. It is a sale and not WC (CKD Packs)

5. Matoshree Textiles Textile Dying is WC (in other form)

6. Hindustan Shipyard Ltd.

(119 STC 533-SC)Sale of Vessel Not a WC

7. Builders Association of India

(73 STC 370-SC)

Tax on material value of the contract

46th Amendment brings Fictional Break up of contract value

8. Gannon & Dunkerley & Co.

(1993) (88 STC 204 SC)Deductions available from total contract value

9. Everest Copiers

(103 STC 36 SC)Photocopying is not a sale but contract of work and labour

10. Modi Xerox

(114 STC 424 Karnataka)

In AMC, Contract of maintenance of Xerox machine there is implied sale

of parts(WC)


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Work Contracts Provisions State wise Comparison

1. Actual Non-Material

Deduction Method

Uniform an all the VAT States

2. Standard Deduction Method Mostly uniform in the states. In certain states

Contractee does not get the VAT Credit.

3. Composition Tax Method Available in most of the states. Generally, the rate

is 4% (Except in Maharashtra - 8%). In no state

contractor and contractee avail the VAT Credit

except in Maharashtra

4. Purchases from other states Composition is available. 12.5% VAT is payable

in few states.

5. TDS Provisions Available in most the states but TDS percentages

differ.

6. Plant and Machinery Definitions differ, in states.


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C


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VAT & Inter-State Works ContractState B

State "B"

Customer

STATE "A"

Contractor (XYZ)

(Manufacturer of Machinery

used in the works Contract

Material Supply - Rs. 80.00

2% CST Against C/D Forms

State "B"Contractor XYZ

State Works Contract VAT

(If no material, pure labour job, NO

VAT)

Erection & Commissioning - Service Tax / E. Cess = 12.36%

Total Contract = Rs. 80 (material) + Rs. 20 (Labour)

1. If the contractor is under legal option in state B then VAT payable only on material value of

the local purchases (All deductions to arrive at material value are available)

2. If the contractor opts for composition scheme in State B, then on total contract value

Composition Tax (VAT) is payable.

3. Inter state works contract when contractor is in one state and contractee is in other state and

goods move from one state to other under indivisible works contract.


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Works Contract Job WorkWhere job-worker is inside and outside the state & uses some of his own material

in the contract:

Manufacturer

State "A"

Material (No CST) Job Worker

State "B"2% CST Against "C" Form

Material (No VAT) Job Worker

State "A"VAT (WC) or Composition

(Credit Available to Manufacturer)


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C


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TAX Structure under the CST ACT Effective from 1st

April07

1. The local VAT rate (schedule) and the CST Rate, if not supported by C Form is

equal to local schedule rate of the sellers state (e.g. local rate 12.5% - CST

rate without C form would be 12.5%)

VAT Schedule Rate Applicablein the Sellers State

CST Rate withC Forms

CST Ratewithout C

FormRemarks

0.0%

1.0%

4.0% (Declared Goods included)

12.5%

0.0%

1.0%

3.0%

3.0%

0.0%

1.0%

4.0%

12.5%

C Form not

required for 0%

and 1% schedule

VAT rate goods

CST Rate applicable to the

interstate Sales covered under

Section 8(5) of the CST Act(issued by the selling state) if

CST rate is 0%, 1%, 2%

0%

1%2%

0.0%

1.0%

4.0%

12.5%


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TAX Structure under the CST ACT Effective from 1st

April07 Contd.

2. For interstate sales of goods covered under section 8(5) notifications, C Forms

are required otherwise full CST rate, equal to the VAT (Schedule) rate of the

selling state.

3. D Form (Govt. Sales) is abolished from 1-4-2007


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Inter-state Sales Sale in Transit [Section 3(b)

Sale is effected by transfer of documents of title to the goods during the

movement from one state to another

State "A"SELLER

Inter State Sale(2% CST)

State "B"BUYER 1

Inter State Sale(2% CST)

BUYER 2"C" Form "C" Form

"E-1" Form

- 2nd Seller

- Endorses L/R in Favour of

Buyer 2

- Takes the delivery of the

goods- Total Tax burden

2% CST + 0% CST = 2%

(Otherwise - 2% CST + VAT)

1st Seller


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Inter-state Sales Sale in Transit [Section 3(b) Contd

KEY FACTORS:

1. No delivery by the Buyer 1, endorsement on L/R in favour of Buyer 2 by the

Buyer 1

2. Buyer 2 takes the delivery (Interstate Sale Completes)

3. For exemption to buyer 1 E-1 Form from first Seller and C form from

Buyer 2.


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High Seas SalesCover under Section 5(2) of the CST ACT

"A"

Foreign Supplier

Import"B"

ABC & Co.

High Seas Sales"C"

Ultimate CustomerNo Sales Tax 0% VAT/CST

ImporterIn India In India

- Endorsement on B/L in favour of

customer

- Invoice on 'C' with 0% VAT/CST

as sale covered under section 5(2)

of CST Act

- Proper Documentation

- Payment of Custom Duty (after

B/L endorsement date)

- Clearance from the custom

station

- Proper Documentation

Issues:

Bulk Consignments

Endorsement on bill of lading

Bonded Warehouse.


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Union Budget[2007-08] Proposed Changes in CST ACT from 1st

April07

VAT (B-A)VAT (B) State 'B'

Customer

Outside State

Vendor V1

Sales of Goods

State 'A'

ABC Mfg.

Stock TransfersState 'B'

Depot Branch3% CST - 1/4/07 0% CST VAT (A) State 'B'

Dealer4% CST Form 'F'

Form 'C'

3% CST - 1/4/07

4% CST State 'B'

DealerVAT State 'B'

CustomerForm 'C'

State "A"

Vendor V2

4% VAT - 1% Savings on interstate

purchase from 1stApril07Raw Materials VAT (A)State 'A'

Dealer12.5% VAT VAT (B) State 'A'

Customer

- 1% Reduction in selling

prices from 1stApril07Raw Materials

- C/D Forms to continueTax Paid (-) Burden (=) Setoff VAT (B-A)Vat 4% 3% 4%or 0% VAT 0% or 4% 3%

Vat

12.5% 3% 4%or 0%

VAT 8.5% 9.5% or

12.5%


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Union Budget[2007-08] Proposed Changes in CST ACT from 1st

April07

Purchase Sales

1. Reduction in rate of CST from 4% to

3% from 1stApril07

1. Interstate Sales of goods would be

subject to 3% CST from 1stApril07

2. The said rate 3% CST would besubject to issuance of C/D Forms,

otherwise full CST

2. The 3% CST rate would be subject tocollection of C/D Forms, otherwise full

CST10% or 12.5% would be payable.

3. For local purchases VAT setoff would

be reduced by 3% from 1st April07

(Reduction in VAT Cost/ Burden)

3. The notifications u/s 8(5) of the CST

ACT, for reduction of rate of CST to 0%,

1%, 2% would continue subject to C/D

Forms.

4. VAT Cost % = Rate of CST X

Transfer Ratio

= 3% X 50% = 1.5% (Earlier 2%)


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How to address Query on Works ContractWhether Sale or WC, If WC

Whether Local or Inter-State WC

Which are the options available to the contractor:

A1 - Actual Non Material Deduction Method

A2 - Standard Deduction Method

B - Composition Tax Option

To Decide best option

Whether VAT Credit is available to the contractor or contractee?

(to refer VAT Negative List)

Whether TDS is Applicable? If Yes then to deduct

Cost to Customer


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VAT (Works Contract) Important Points1. Pure Labour Jobs Consumption of lubricants, Oils, Gases, chemicals, water is allowed.

No VAT [Works Contract(WC)] is applicable as there is no transfer of property in these

goods to the customer.

2. TDS (WC) TDS to be deducted from the Total Value of the contract excluding

VAT/Service Tax if charged on the invoice. No TDS deduction on the interstate works contract invoices where CST is charged.

3. Contractor & contractee should decide in advance on the selection of the best option for

levy of VAT(WC), before planning the order.

4. Do not try to break the contract Value/Price Artificially, for making indivisible contract since

after introduction of the VAT system, the VAT burden in both type of contracts is mostly

equal. In fact, more options are available in indivisible works contract.

5. Inter-state WC with CST is possible but the state govt. (where the contract is carried out)

may like to consider it as local WC subject to state tax.

6. Interstate works contract CST is applicable only on the material/goods value of thecontract.


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Works Contract Summary of Important Points1. WC are taxed under state VAT acts, there are no separate WC Acts.

2. For local WC transactions State VAT (WC) is applicable and for inter-state WC

transactions CST is applicable as covered under the CST Act, 1956.

3. No VAT/CST is applicable on pure labour jobs (no material of the job worker/ processor isinvolved)

4. Under state VAT acts, VAT is applicable only on the material value of the contract

(Determined by 3 options) under CST Act also, CST is applicable on material value of the

inter-state WC.

5. In the service contracts (AMCs, constructions, etc.) both VAT & Service Tax is applicable.

If the actual material value is not available then it would be calculated by presumption

methods, separately under VAT (WC) and services Tax Laws.

6. Clauses in the agreements of WC are essential to avoid litigation

7. VAT setoff/credits are available for both the contractor and the contractee, subject tocertain conditions.


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Demand Areas of VAT/CST

1. Improper legal status of transactions.

2. Improper levy/collection of sales tax/VAT & CST.

3. Non-inclusion of sales tax clauses in the agreements contracts purchaseorders.

4. Improper internal system of:

Information

Documentation

Forms collection

Computer coding calculation of setoff

Record maintenance

5. Improper handling of Site Documentation. No VAT registration at site

locations.


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Sales Tax/VAT - PerformanceStatutory Compliance Demand Areas

1. Returns 1. Non-Collection of CST Forms on Quarterly basis.

Correct, Complete and self consistent [C, EI, EII, F, H, etc)

2. Revised Returns 2. Non Filing of correct and complete returns Late

Payments

3. Payments Before Due Dates 3. No Proper records.

4. SETOFF Working 4. No proper computation of Setoff

Full, Partial and No Credit

5. Works Contract

TAN, TDS Payments Quarterly/Annual Returns

6. Maintenance of Record

Purchase and sales registers, Tax Invoices etc

7. Refund Claims

8. C A Audit


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Thank You

Indirect Tax in India-4.9.12

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