Basics of VAT & WCT on Works Contracts in Gujarat
There are many technical articles, presentations and blogs on works contracts executed in Gujarat and chargeable to GVAT available on internet. However, for basic understanding of concepts like VAT on Works Contracts and TDS requirements thereon here is an article.
What are Works Contracts?
Works Contracts are not normal sales for VAT purposes. Under Works Contracts, the basic aim of the parties involved is not to sale goods but to carry out certain work at lump sum price. Therefore, most of the EPC contracts, turnkey contracts are works contracts.
The involvement of goods may be incidental still important for execution of works contract and therefore chargeable under GVAT.
What are examples of Works Contracts?
For example, construction of building, damns, tunnels, plants, factories etc. are clear examples of works contracts. In certain cases, when incidental goods are sold along with services they become works contract as well if lump sum price is charged e.g. interior decorator services, maintenance of road or pipe fittings services etc.
Is registration required under Gujarat VAT (GVAT)?
Yes. The normal registration provisions apply. Therefore, for a regular dealer/contractor, if the total turnover (Sales or Purchase) is more than Rs.5,00,000 & turnover of taxable goods is exceeding Rs.10,000 then he is liable to take registration under GVAT.
How is value decided for taxability?
There are special Works Contract valuation rules under GVAT because the price charged by contractors are lump sum involving value of services. Value of services under works contracts can not be charged under VAT because they are subject to Service Tax. Therefore, the price valuation rules are introduced to avoid double taxation. There are 3 methods:
(i) Actual Labour (Service value) Deduction
(ii) Standard (Presumptive – as decided by Gujarat Government) Labour Deduction
(iii) Composition (Where GVAT rate itself is reduced i.e. from 5/15% to 0.5/2%)
What are the rates of Works Contract?
If valuation method 1 & 2 above are followed then normal GVAT rates are followed i.e. 5%/15% as per the GVAT schedules. If Composition method is followed then rates will be 0.5/2%.
How is composition method easy to follow?
The composition method is easy to follow because -
A. No requirement of tax invoices
B. Tax is reduced to 0.5/2%
C. Calculation of value is too easy. Simply take all the contract value.
D. No need to charge the tax separately. In fact, it is made compulsory to be inclusive.
E. Simplified returns and statements than normal taxation.
F. The composition is works contract wise and not tax payer wise. So at a time, tax payer can decide which works contracts to be taken in composition and which are to be separated for normal taxation.
G. It is an optional scheme but once chosen is irrevocable.
What is the disadvantage of composition scheme?
- The dealer opting for composition scheme is not allowed to purchase CST goods and use in the works contract for which composition scheme is selected. If at all, CST goods are required for the execution of works contract, then it shall be used through free supply from contractor.
- No branch transfer or import of goods is allowed.
- No input tax credit (ITC) is allowed. (because the GVAT rate itself is reduced)
What is WCT TDS?
The state government empowers the contractors (who awards the contract) to deduct TDS on such works contracts while making payment to sub-contractors. In Gujarat, WCT TDS is governed by the Gujarat VAT Act 2009 u/s 59B and related rules i.e. Rule 65 & 65A.
What is WCT Registration?
A deductor shall have to apply online for Tax Deduction Account Number (TDN) in the Form-706 within 30 days which will generate the TDN Certificate (Form-707) showing TDN on the face but physical documents has to be submitted within 7 days to the Commissioner as per the guidelines given. TDN is to be quoted in the documents, statements and returns as may be prescribed.
What are the TDS Rates?
The TDS rates are specified in the Notification (GHN-14) VAT-2008-S dated 01-04-2008. The rate varies from 0.5% to 2% depending on the nature of contract.
For more info on WCT TDS please read our detailed article on article at - http://aviratshiksha.wordpress.com/2012/09/14/wct-tds-in-gujarat-all-you-need-to-know/
CA. Gautam Joshi