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WCT: TAX ON SALE OF GOODS IN WORKS CONTRACTS CASES

B : Ke ha Da al Membe T ib nal, U. P. T ade Ta

Works contract involving transfer of property in goods is an indivisible contract. It is indivisible in the sense that value of goods to be incorporated in any form in the works and value of labour & services to be rendered in execution of the contract have not been subject matter of bargain separately. Single amount has been subject matter of bargain. In India, tax on sale of goods is levied under the Sales Tax Law (VAT Law) and tax on labour & services is levied under the Service Tax Law. Service tax is levied by the Central Government under the law enacted by the Parliament whereas sales tax is levied by different States under the VAT law of respective State. Clause 29-A of Article 366 defines transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract as sale of such goods by the person who makes such transger and a purchase of such goods by the person to whom property in such goods is transferred. The Central Sales Tax Act, 1956 and VAT laws of various States define term works contract in almost similar terms. VAT law of Uttar Pradesh defines the term works contract as under: (au) " o k con ac " includes any agreement for carrying out, for cash, deferred payment or other valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property. The Central Sales Tax Act, 1956 defines the term works contract as follows: " o k con ac ", means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property; In cases of works contracts, difficulty in computing tax on sale of goods arises due to following reasons: (i) (ii) Values (amounts receivable) of labour & services and of goods are not separately known; However, if we are able to segregate value of labour & services and value of goods, then difficulty arises in segregating values of various goods taxable at different rates of tax.
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b ai ed f (i) The (ii)

he a e bc ac

i ga h i f bc ac ce if i g ha :i egi e ed dea e de he Ac ; ha he di c i i a c f ed e i f he Ac . he e e a e f a c i ecei ed e i d a d ha aid

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f ac he e c

f a d e i ed be ed i c ch a d i i c ded i he a

f b i di g, b he ecei ab e f

(i) F he i c de a

f c a e (a) a d (e) f fi he e .

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he

a e

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(ii) Ac a c f a d e i ed be ed i c c i f b i di g, b he b i de c ea he a e f a d c ed a a e ified b he C ec f he e e a di acc da ce i h ced e aid d f de e i a i f he a e f a d f he a e f a d de he I dia S a Ac , 1899. (2) Whe e a a f b each f a he c ac i ha bee ded c ed b he c ac ee f he a f he c c di i f he c ac , ch a ha be dee ed a f a e ec f ch c ac . d a d ac

ac ic i e f

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Whe e acc ai ai ed b he c ac a d a f fi acc ed ch ab h f c ede ce if he dea e ha e f g d i hich a fe f e i ed i he ab e be , a a , ecei ab e, ha be ded c ed a d ab he ca e de c ibed e i ed i c ch ab a d e ice a d a f e ce age , gi e i c 3 agai he ecei ab e.

h e aa e he a e f ab a d e ice e ice , acc ai ai ed b he dea e a e ai ai ed acc , f he e f de e i i g e i g d ha a e ace, i ca e he ha h e e e e i g e e ce f g a ecei ed a d e ice a d a f fi acc ed he e a di 2 f he ab e gi e be , a f ded c i ad fi acc ed he e ha be c ed a he a e e i c 2 f he ab e, f he a ecei ed Table

Sl. no.

Description of

orks contracts

Rate

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Fab ica i a di a Fab ica i a d e ec a d e ec i Fab ica i a di a Fab ica i a di a S a di a a i f ee e , c d

2 3 a i f a a d achi e 10% i f c a i c di g fab ica i , 10% f i e , i e. a i f c a e a dh i 10% a i f e e a ( if ) a d e ca a 10% f ai c di i i g e i e i c di g dee 10% age a , h idifica i a a d
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678910111213141516-

deh idifie S a di a a i f ai c di i e a d ai c e 10% S a d fi i g f e ec ica g d , S a d i a a i f 10% e ec ica e i e i c di g a f e S a d fi i g f f i e a d fi e , a i i , i c di g 10% c ac f i e i dec a i C c i f ai a c ache a d ag de ca iage 10% ied b ai a C c i f b die f ehic e a d c c i f 10% ai e Fab ica i a di a a i f i g h e a d c a ib e ga e 30% Ci i i e c c i f b i di g, b idge, ad , da , 30% ba age , i a a d di e i , e age a d d ai age e I a a i f d , d f a e , i d , i d f a e a d 30% gi S a d fi i g f i e , ab , e a d hee 30% Sa i a fi i g f bi g, f d ai age e e age e 30% Whi e a hi g, ai i g, a d i hi g 40%

E planation: F he e f hi e, he e e i d f e ec i f a c ac i ead e e e a a e i d e e a a e e ea , he agg ega e, f a a f ded c i a d ab a d e ice ; a d a f fi acc ed he e , ha e ceed he e ce age f he g a ecei ab e i e ec f e ec i f ch c ac . E planation: F (a) a (b) (c) he e e he e c he e he a c ac ecei ed (4) F ha (a) a (b) a
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he

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f hi f a ac c

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e i d f e ec e ea ; a f a ac ;

diffe e

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ac i a a ded

a d ab a d e ice a d bc ac ge he , ecei ab e i e ec f e ec

a d he a f ha e ceed he i f each ca eg c a

fi acc ed he e c ai ed b e ce age f he g a f ch c ac . e f hi ac , a fee a e, i a i i g a he f f i g a e he ac e a ; de age

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a f d b i i he eb ade c ea ha , f he f ae f g d i ed i he e ec i f a be ded c ed f he g a ecei ab e. a a ed hich ha be ded c ed i bee he a e he c f a ded c ed b

ac ee f

he c

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penalty or a fine or in any other name for breach of any conditions of the contract or otherwise; (c) any amount which has been deducted by the contractee from the contractor as compensation. Before going to next step of determining turnover of individual goods, I would also like to clarify that amount, arrived at after deducting amount receivable towards labour and services and profit thereon, is the gross turnover of goods in which properly has been transferred in any form and does not include turnover of goods which other wise have been used or consumed in the execution of the contract. For example turnover of fuel used/consumed, lubricants; water, electricity etc. is not included in the turnover arrived at. Value of such goods is part of labour & services. In a works contract, tax is leviable on transfer of property in goods (whether as goods or in some other form) involved in the execution of the works contract. Transfer of property in goods takes place at the time when goods are incorporated in the works. In this article, for convenience, goods, those may involved in the execution of a works contract and in which transfer of property might take place, are being referred to as the goods to be incorporated in the works. Meanings of other similar expressions are to be construed accordingly. Now for computing tax on turnover of goods, we see if total turnover of goods is taxable at the same rate of tax then there is no difficulty in computing tax. We can find out amount of tax by using the formula Tax amount =Turnover of sale of goods rate percent of tax /100

But where total turnover of goods consists of goods taxable at different tax rates then we have to find out turnover of goods for each tax rate slab separately. For example, a contract of building construction may involve bricks, cement, sand, marble, iron steel, badarpur, wood, colour, paint and hardware. In Uttar Pradesh, sale of iron-steel is taxable @4%, sale of bricks, hardware and sand is taxable @5%, sale of paints, colours, marble and timber (wood) is taxable @13.5% and sale of cement is taxable @15.5%. Therefore, for the purpose of computing tax on all goods, we will need separate values (turnover) of goods taxable at same rate of tax, i.e. (i) (ii) Turnover of goods taxable @4%; Turnover of goods taxable @5%;

(iii) Turnover of goods taxable @13.5%; (iv) Turnover of goods taxable @15.5%; We see that no provision has been made for the purpose of determining such turnover of goods for each tax rate slab. (I do not know, if some State has provided such mechanism). In such circumstances, we are left with only remedy that we should segregate the total turnover in the ratio of their purchase prices assuming that purchase values of same goods earn equal percent of profit or loss. For this purpose we should know the purchase values of goods in which property has been transferred and the rate of tax applicable to sale of such goods. We must not forget that we have to find out purchase values of those goods in which property is transferred during the relevant tax period. Goods incorporated in the works during a particular period may be the goods purchased during the same tax period as well as goods purchased in some earlier tax period. Purchase values of only those goods are to be considered which have been incorporated in the works for
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which payment has become due irrespective of date of purchase of such goods. Now for goods of each tax rate, we will compute ratio of gross turnover to their purchase value. For this purpose we will add purchase values of all goods taxable at different tax rate slabs separately and work out value addition factor as under:Value addition factor = Gross turnover of sale of all goods / Gross purchase value of all goods

Now for each tax rate slab, we will compute WCT as under:(1) (2) (3) (4)

WCT for goods atracting tax rate slab of 4% =(purchase value of such goods 100 WCT for goods atracting tax rate slab of 5% =(purchase value of such goods 100 WCT for goods atracting tax rate slab of 13.5% =(purchase value of such goods 13.5 / 100 WCT for goods atracting tax rate slab of 15.5% =(purchase value of such goods 15.5 / 100

value addition factor) value addition factor)

4 / 5 /

value addition factor) value addition factor)

Total WCT will be aggregate of amounts as computed above. For a particular tax period, amount receivable, in respect of the contract executed, is the amount for which normally running bill is raised. Where more than one bills have been raised for the works contract executed during a tax period then sum of amounts will be taken as amount receivable. The moment at which transfer of property takes place, the Honble Supreme Court has held that in a works contract transfer of property in goods takes place at the time of incorporation of goods in the works. We know that as soon as sale gets completed the payment becomes due. Where sale is subject to approval, the sale will be complete only after the purchaser gives its approval. On completed sale, the selling dealer is required to pay tax, irrespective of payment mode or date. Now we take an example of construction of buildings. Let us assume that during a particular month, the contractor is entitled to receive Rs. 1,50,00,000.00 in respect of works contract executed during such month. Purchase values of goods in which property has been transferred are as follows:Sl. No. 1. 2. 3. 4. 5. 6. 7.
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Name of goods Bricks C ement Timber (wood) Marble Sand Iron-steel Badarpur

Purchase value of goods 50,00,000.00 15,00,000.00 3,00,000.00 5,00,000.00 1,00,000.00 15,00,000.00 1,00,000.00

Ta

rate percent 5 15.5 13.5 13.5 5 4 13.5

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To al p

cha e

al e of good inco po a ed in he

o k = 90,00,000.00

Now, if perecentage value of labour & services and profit on them is 30 percent of amount receivable (say); Then percentage of value of goods and profit thereon=100- 30 i.e. 70 percent of amount receivable (let us call it goods value percent)
Therefore, total amount receivable for goods incorporated in the works= amount receivable xgoods value percent / 100

Which gives total receivable value of goods = 1,05,00,000.00 Now for each tax rate slab, we will compute value of all goods as under: (1) (2) (3) (4) Purchase value of goods for tax rate slab of 4% Purchase value of goods for tax rate slab of 5% = = 15,00,000.00 51,00,000.00 9,00,000.00 15,00,000.00 90,00,000.00
cha e al e of all good inco po a ed

Purchase value of goods for tax rate slab of 13.5% = Purchase value of goods for tax rate slab of 15.5% = cha e al e of good inco po a ed in he o k =
Val e addi ion fac o = o al ecei able al e of good / o al p

To al p

Which gives us, Value addition factor=1,05,00,000 /90,00,000 Or Value addition factor=7/6 Now turnover of sale of goods for (i) all goods taxable @4% (ii) all goods taxable @5% (iii) all goods taxable @13.5% (iv) all goods taxable @15.5% = (purchase value of all goods taxable @4%) x value addition factor =15,00,000 x 7/6 =51,00,000 x 7/6 =9,00,000 x 7 / 6 =15,00,000 x 7 / 6
Now we can compute tax using formula: amo n of a =

=17,50,000.00 =59,50,000.00 =10,50,000.00 =17,50,000.00

no e of ale a e of a /100

= (purchase value of all goods taxable @5%) x value addition factor = (purchase value of all goods taxable @13.5%) x value addition factor = (purchase value of all goods taxable @15.5%) x value addition factor

(i) Tax for goods taxtable @4% (ii) Tax for goods taxtable @5% (iii) Tax for goods taxtable @13.5% (iv) Tax for goods taxtable @15.5%
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=17,50,000 x 4/100 =59,50,000 x 5/100

=70,000.00 =2,97,500.00

=10,50,000 x 13.5 / 100 =1,41,750.00 =17,50,000 x 15.5 / 100 =2,71,250.00

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Total Tax or WCT =70,000.00 + 2,97,500.00 + 1,41,750.00 + 2,71,250.00 =7,80,500.00

Where benefit of inter-state sales, sales outside the State or sales in the course of import of goods into the territor of India is to be claimed

Where WCT payable under the State VAT Law is to be computed, exemption on sales falling under sections 3, 4 & 5 of the Central Sales Tax Act, 1956 is available. These are sales which take place1. in the course of inter-state trade or commerce; 2. outside the State; and 3. in the course of import of the goods into the territory of India. In such a case, for the purpose of computing value addition factor, we will include purchase values of such goods including all expenses in tax rate slab wise gross purchases. But for the purpose of computing taxable turnover of sale of goods, we will not include purchase values of goods falling under section 3, 4 and 5 of the Central Sales Tax Act, 1956. Thus we see that for computing WCT, we need
(1) Total amount receivable for the works executed during the tax period; (2) Percentage of labour & service and profit thereon. (3) Tax rate slab-wise purchase values of all goods in which transfer of property has taken place during the tax period. (4) Tax rate slab-wise purchase values of goods in which property has been transferred as a result of inter-state sale, sale outside the State and sale in the course of the import of goods (section 3 & section 5 of the CST Act) where exemption on such sales is to be claimed. Computation of purchase values of goods

For all computations, purchase value should include freight and other expenses incurred including taxes and levies paid or payable in bringing goods to work site. Where purchase value is not available, fair purchase price in the local market may be taken.
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