Saturday, January 16, 2010

TN Works Contract Tax

Actual Labour Deduction Option
A-1 Option (Levy of VAT on Works Contracts in the hands of the Contractor)
Under the legal option A-1, the VAT is payable on the `Material Value’ of the Contract. The Contractor determines the Material Price after adding Material Cost and Margin to such cost .
The 4% or 12.5% VAT would be applicable on such Material Value /Price, depending upon the classification of such materials (Steel 4%, others 12.5% VAT) in which the property passes to the contractee . In this option A-1, the Contractor can avail full VAT set off / credit of the VAT paid to the local vendors provided he obtains corresponding `Tax Invoices’ from his local vendors. However, in this option the Contractor has to maintain proper books of accounts and the other records to identify the material value of the Contract.
A-1 option is the Best option available since the Contractor levies VAT only on the `Actual Material Value’ of the contract, even though it is litigation prone option.

Option A-2 (Standard Labour Deduction)
(Legal) (levy of VAT in the hands of the Contractor)
Under the legal option A-2, the VAT is payable on the `Material Value’ of the Contract. The Material value is calculated after deducting the `Labour Portion’ from the total contract value / Price.
However, in this option a table is available in the State VAT Act / Rules which shows `Standard Labour portion’ attributed to the various works contracts. The Contractor has to deduct such `Standard Labour portion’ shown in such tables from the total Contract price to arrive at the `Material value’. The Contractor would charge 12.5% VAT, on such material value. Each State has provided the said `Standard Labour’ table , under this option.
In Tamil Nadu- % of Standard deduction towards labour charges from gross bill value are as follows:- Electrical & Structural Contracts-15%, Sanitary Contracts-25%, Dyeing & Clock repairs Contract-50%, All Other Contract-30%
The advantage in this option compare to the A-1 option is that it is litigation free. The Sales Tax Departments would allow the said ` labour portion deductions’ as the same are provided in the VAT Rules itself. Also no identification record has to be maintained by the contractor for the materials used in the contracts. However, the Contractor has to consider both the options A-1 and A2 in the case where the Contractee/ Customer does not get the VAT set off / credit and then selecting the cheaper option.
Like in A-1 option, in A-2 option also, the Contractor gets full credit / set off on the VAT paid on the inputs and the Contractee also gets full set off of the VAT paid provided the said purchases are not in the Negative list of VAT set off / credit.

Option-B -- Composition Tax (Alternative / Non legal option)
( Levy of VAT in the hands of the Contractor )
Option B is the “Composition Tax” option. This is a non legal alternative option, simplier option for those Contractors who cannot maintain the proper Accounts, Record of the material and other portion in their contracts. The contractee / customer prefers this option as small amount of Composition Tax 2% / 4% is payable to the Contractor instead of 12.5% VAT payable in legal options. A-1 and A-2 . However , VAT credit/set off is not be available to them in this option Under the “Composition” option, the Contractor has to pay Composition Tax (VAT) on the total Contract value / price, No deduction of labour is available in this option. Similarly, No VAT set off / Credit is available on the purchases of inputs to the Contractors and the same is not available to the Contractees also. The Rates of Composition Tax differ from state to state. Generally it is 2% (for civil contracts) @ 4% for other Contracts.

In Short, in all the States only the said 3 options (A-1, A-2 and B) are available in the hands of the Contractors for levy of VAT on the local works contract transactions in the VAT system. If no VAT set off/Credit is available to the Contractee / Customer, then the Composition Tax option is the Cheapest since the Rate of Composition Tax is lower than 12.5% VAT. Therefore , if the Contractee / Customer can not avail the VAT set off / Credit in all the three options , then , the VAT / Composition Tax paid to the contractor is the cost to such Contractee /Customer, hence in such cases the Contractor and Contractee should select the Best option available after considering the Actual Figures in all the three options.
The States have provided separate sections / Rules under the respective State VAT Acts for the works contracts transactions which include said three options of levy of VAT , TDS , VAT Credits and Negative lists .

Service Tax is charged @ the rate of 10.3% on 33% of the Gross Bill in option A-2 & Composition Scheme, but service tax input credit cannot be takeb/set off. Whereas under option one, goods supply bill & labour bill are raised separately, hence service tax in payable on the entire labour bill amt.Further service tax input credit can also be taken/set off

TDS would be deducted by the customer @ the rate of 1.03% or 2.06% as applicable. Assesable Value for the purpose of option A2 & composition scheme is the entire bill value including VAT & Service Tax, provided the single bill value exceeds Rs.20000/- or Rs.50000/- in aggregate for the entire year. Whereas in option A1 since the labour bill is raised separately, TDS is to be deducted on the labour charges amt only inclusive of service tax subject to applicablity of TDS i.e conditions of Rs.20000/- or Rs.50000/- & other conditions


Post a Comment