Background: The works contracts are not normal sales.

In the normal sale there is a transfer of property in definite or ascertained goods. The goods remain same before and after the delivery of the goods. However, in works contracts it does not happen. The goods before the delivery and after the execution of works contracts are different, many times in different form also. For example, at the site of construction of a building, before the Construction (works contract) commences, the goods like cement, steel, sand etc. are lying but after the Construction a building (immovable goods) comes to an existence. This is the difference between the Normal sale and the deemed sale in the indivisible works contract. The activity is a sale or works contract depends upon the facts, the terms and conditions and the intention of the parties. In normal practice, we can identify many indivisible/composite works contracts namely construction of a Building, erection of Plant & Machinery, Processing jobs, Job works, Repair jobs, Electrical Fittings, Annual maintenance Contracts (AMCs). Installation of Elevators, Air Conditioners, Repairs of Vehicles, Re-trending of old tyres, Customized Printing Jobs, Electro Plating, electro-galvanizing, anodizing etc. We would discuss later , the levy of Sales Tax/VAT on such activities which are indivisible works contracts. Prior VAT Scenario After the Amendment in the Constitution: Under the State Sales Tax Laws, before the 46th Amendment to the Constitution of India, the Sales Tax was applicable only on the sales covered under the sale of goods Act (Normal sale). The indivisible works contracts were not covered under the State Sales tax Acts since works contracts were not normal sales. The Supreme Court confirmed this legal status in its land mark judgment in the case of Gammon & Dunkerely (9 STC 353). Due to this legal status, the states were denied the levy of Sales Tax on the indivisible works contracts. Such contractors were outside the clutches of sales tax laws. Prior VAT Scenario After the Amendment in the Constitution: After the said 46th Amendment to the Constitution, the States were empowered to levy Sales Tax / Works Contract Tax on such sales, called as Deemed sales involved in the execution of works contract. With the said amendment concept of `Deemed Sale was introduced. Important features of deemed sales are as under: (a) It is not a normal sale as defined under sale of goods act but a deemed sale of goods subject to sales tax by the States.

(b) In the `deemed sales the states can levy Sales tax only on `the transfer of property in goods. In other words, the states can levy Sales Tax / VAT only on the `Material Value of the works contract and not on the `labour portion of the works contract. (c) If in a contract there is no transfer of property in goods from the contractor to the contractee, then No sales tax is applicable on such contracts, called as Pure Labour Jobs. (d) Under the deemed Sale , an artificial break up of indivisible works contract has to be made to arrive at the `material value and the `labour value of the contract. Post VAT Scenario: All the VAT States have incorporated in their respective State VAT Acts, the provisions of `Works Contracts for levying the Sales Tax /VAT on the deemed sales involved in the execution of works contracts. There is no Works Contract Tax (WCT) now; it is a VAT on the Works Contract transactions (Deemed Sales). The Advantage to the Contractors is that under the VAT system, the Contractors like manufacturers can avail VAT set off / Credit of the VAT paid to the local vendors, which was not available in the Pre-VAT Regime. In all the State VAT provisions, there are three options available for the Contractors to levy VAT on deemed sales (Works Contracts) and VAT is leviable on the `Material Value of the Contract. The said three options (Uniform in all the VAT States) are as under, 1 Actual Labour Deduction (Legal Option) 2 Standard Labour Deduction (Legal Option) 3 Composition Tax (Non Legal or Alternative Option) Under the legal options 1 and 2, the State Governments can levy VAT only on the `Material Value of the Contract and not on the `Labour Portion of the Contract. States are empowered to levy tax on Material Value and not on Material Cost in the works contract Provisions for the Contractor, executing indivisible Works Contract under the State VAT Acts are mostly uniform across the states. Except the Rates of Composition Tax, the Rates of TDS deductions, Returns and Payment dates, most of the Major Provisions are Similar / Uniform under the State VAT Acts;

PROVISIONS relevant for Contractees: Sale as per Section 2 (ze) of the Haryana VAT Act, 2003:Sale means transfer of property in goods for cash or deferred payment or other valuable consideration except a mortgage, hypothetication, charge or pledge and includes:(i) ; (ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract ; (iii) ..; and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made. Works Contract as per Section 2 (zt) of the Haryana VAT Act, 2003: Works contract includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the assembling, construction, building, altering, manufacturing, processing, fabrication, installation, fitting out, improvement, repair or commissioning of any moveable or immovable property. Tax Deduction at Source In most of the State VAT Acts, the provisions of Tax deducted at source (TDS) are incorporated. The logic behind the TDS (WC) provisions is that the Contractors are not organized in many cases and they do not pay taxes on time , therefore in this provision the contractee / customer deducts the prescribed % of TDS from the Contract Price and pays the same before the prescribed dates, directly, to the respective State Government through the specified challan. The TDS is to be deducted by the specified customers only as notified by the State Governments. Generally, the dealers registered under the State VAT Acts, State and Central Governments, Corporations, Government Undertakings, Co-operative Societies only have to deduct the said TDS (WC) and not by all the Customers. The monetary limit of the turnover is prescribed between Contractor and Contractee for such deduction in the hands of the Customer in most of the VAT Acts. It is responsibility of the Contractee / Customer to deduct the prescribed % of TDS (As provided in the relevant VAT Act & Rules) and pay the same to the State Government before the prescribed date, otherwise interest / penalty is

leviable on such Contractees / Customers. However, as per the State VAT Act provisions, the Seller (Contractor) is liable to pay VAT, if No TDS is made by the Contractee/Customer. The State Governments have prescribed different VAT Forms under the provision of TDS (WC). In certain States, the Contractee has to obtain TANs (Tax deductible Account Number) and file Annual Returns of TDS under the TDS provisions. Section 24 of the Haryana VAT Act 2003: -

1)

The State Government may, having regard to the effective recovery of tax, require in respect of contractors or any other class or classes of dealers that any person making payment of any valuable consideration to them for the execution of a works contract in the State involving transfer of property in goods, whether as goods or in some other form or for sale of goods in the State, as the case may be, shall, at the time of making payment, whether by cash, adjustment, credit to the account, recovery of dues or in any other manner, deduct tax in advance there from which shall be calculated by multiplying the amount paid in any manner with such rate not exceeding ten per cent, as the State Government may, by notification in the Official Gazette, specify and different rates may be specified for different works contracts or class or classes of dealers. Time Limit for preservation of records: and that such person shall keep record, of the payments made and, of the tax deducted in advance there from, for a period of five years from the close of the year when the payments were made and shall produce such record before the prescribed authority when so required for carrying out the purposes of this Act. Exemption: The provisions of sub-section (1) shall not apply where the amount or the aggregate of the amounts paid or likely to be paid during a year by any person to a dealer does not or is not likely to exceed one lakh rupees or such other amount as may be prescribed. Penalty for Non Deduction:If any person fails to deduct the whole or any part of the tax as required by or under the provisions of sub-section (1), or fails to pay the whole or any part of the tax as required by or under sub-section (3), then, the authority referred to in sub-section (3) may, at any time within five years of the close of the year when he failed to do so, by order in writing, direct him, after giving him a reasonable opportunity of being heard, to pay, by way of penalty, a sum equal to the amount of tax which he failed to deduct or pay as aforesaid.

2)

6)

Rule 33 of the Haryana VAT Rules 2003: -

(1)
-

Every Government agency, public sector undertaking or corporation procuring food grains in the State at the minimum support price (with or without bonus) fixed from time to time for such grains or any person authorised by such agency, undertaking or corporation in this behalf and acting as such, shall, at the time f making payment, whether by cash, adjustment, credit to the account, recovery of dues or in any other manner to the commission agent as valuable consideration for selling the grains, deduct tax in advance from such payment calculated by multiplying the amount paid in any manner with four per cent or such other rate, as notified under sub-section (1) of section 24. (2) Every contractee shall, at the time of making payment, whether by cash, adjustment, credit to the account, recovery of dues or in any other manner, deduct from the payment made to the contractor for execution of a works contract in the State involving transfer of property in goods, whether as goods or in some other form, tax in advance calculated by multiplying the amount paid in any manner with four per cent or such other rate, as notified under sub-section (1) of section 24. Explanation. For the purpose of the foregoing sub-rules, the valuable consideration shall not include the amount of tax, if any, forming part of the consideration. Exemption: (3) The provisions of sub-rules (1) and (2) shall not apply where the amount or the aggregate of the amounts paid or likely to be paid during a year to the supplier of grains or the contractor, as the case may be, does not or is not likely to exceed one lakh rupees. (4) The provisions of sub-rule (2) shall not apply where both the contractee and the contractor are dealers registered under the Act and the contract relates to manufacture or processing of goods for sale. (5) Time Limit for Deposit and Challan: The amount, which any person is required to deduct in a month under the foregoing sub-rules, shall be paid by him within fifteen days of the close of the month into the appropriate Government

Treasury in challan in Form VAT-C1 separately for each payee in the manner laid down in rule 35. Copies of Challan and TDS Certificate: The person making the payment shall affix the original copy of the challan with the return filed by him and shall furnish the fifth copy to the payee concerned as a certificate of tax deduction and payment, who shall affix it with his return. Grouping number of payees in a single Challan: Provided that the Commissioner may by order in writing permit such person to pay by grouping a number of payees in a single challan or challans subject to each such challan showing the name of each payee and the amount deposited in respect of him separately: Provided further that such person shall provide to each payee whose name appears in the challan a self-authenticated copy of the challan: Manner of Payment of Tax Rule 35 Deposit Challan VAT C- 1 in quintuplicate. An acknowledgement is granted to the depositor by returning to him the original challan and the fifth copy of the challan. The other three copies of the challan having been retained by the Bank will be forwarded to the Treasury officer with the daily account. The Treasury officer will forward the duplicate copy to the officer incharge of the district concerned retain the triplicate copy in his office He will send the fourth copy to the Audit Office. Submission of Return: Rule 16 Contractees who are liable to deduct tax in advance under sub-rule (2) of rule 33 shall furnish to the appropriate assessing authority on or before the last day of the month following the end of the Quarter a return in VATR4A