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Basics of VAT & WCT on Works Contracts in Gujarat

by on March 12, 2013

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 – https://aviratshiksha.wordpress.com/2012/09/14/wct-tds-in-gujarat-all-you-need-to-know/

CA. Gautam Joshi

From → VAT

33 Comments
  1. Ashok Karva permalink

    In case of works contract with Municipal corporation, the contractor is from outside of Gujrat and does not have Gujarat VAT registration, and procures the material from outside Gujrat, or branch transfer from the contractors home state, how the works contract tax liability will be calculated in composite scheme, whether he is required to get registration in Gujrat state

    • Hi Ashok,

      Gujarat VAT department provides facility of non-resident WCT registration. Based on this you can select composite scheme of WCT.

      Best Wishes.

  2. Jagan permalink

    Hi,

    Pls clarify below queries on works contract in gujarat

    1. VAT calculation on works contract under composition & computation method in gujarat
    2. If we opt compostion method, what is the VAT rate? ; eligible of C form? ; Entry tax rate?
    3. If we opt computation method, what is the VAT rate? ; eligible of C form? ; Entry tax rate?

    Kindly give your valuable reply.

    Thanks & Regards,
    Jagan

    • Hi Jagan,

      The article does provide all rates and procedure. Lemme know what else you need to know?

      Best Wishes.

      • Jagan permalink

        1.Under composition method, actual tax rate on works contract for mechanical job. Can i avail C form for other state purchase and Is there any entry tax for other state purchase.
        2.Under computation or valuation method, how do i calculate tax on turnover? and what are the rates & where i get the list of items as per the GVAT schedules?

        Regards,
        Jagan

      • Hi Jagan,

        1. Composition Tax is between 0.5/2% as per GHN 106 VAT-2006/S.14A (5). You need to provide more details on nature of contract to exactly decide the rate.

        C Form benefit not available under this method. You cann’t use other state purchases for completion of composition tax contract. Else, benefit of composition not available.

        2. You can find normal rates on Gujarat commercial tax website with list of items covered. The computation needs to be done on item-wise sales with respective rates. Let us know if you want us to email you GVAT Act, 2005 with schedules of rates.

        Best Wishes.

  3. Jagan permalink

    The nature of contract is pipeline work for tankage project. How do arrive the tax on works contract value under computation method. Can i obtain C form under this method?
    Kindly explain.
    Thanks,
    Jagan

    • Hi Jagan,

      WCT Rate is 0.6% for any pipeline work.

      You can obtain C form under normal method and get the benefit of it.

      Looking to the thread of questions especially for tax calculation under normal method, we strongly recommend a one-to-one conversation with our technical experts.

      Best Wishes.

  4. Jagan permalink

    Thank you. Pls share me your technical expert’s email ID to know & learn more about on WCT.

    Best Wishes,
    Jagan

  5. PRAKASH permalink

    We are a govt licensed electrical contractor executing works contract with Railways Construction/ Traction & distribution of power dept. Mainly our works related with Railway track hence I want to know about the type of works contract & rate of tax. This contracts are including labour service. Hence please confirm

    • Hi Prakash,

      The electrical works for Railways fall under “other works contract” and will be liable for 2% of composition rate.

      Let us know if we can help you with registration anyhow.

      Best Wishes.

  6. Chintan Sheth permalink

    WCT of 0.6% is calculated on basic contract value or we have add service tax and then calculate the WCT of 0.6%

    • Hi Chintan,

      No tax on tax. Calculate service tax on contract value before VAT.

      Best Wishes.

      • Chintan permalink

        Thank You SIR

        VAT should be calculate on contract value or after adding service tax to it.

  7. bhavin permalink

    sir,
    i am steel and iron febrication work i am work contract appllicable how to tax of works contract

    • Hi Bhavin,

      You have two options ie to take 5%/15% rates as per the GVAT schedules and take abatement of any services provided along with or to follow Composition method to take rates of 0.5/2%.

      Best Wishes.

  8. parasotam permalink

    If the contract value is for Rs 100000/- inclusive of WCT

    • Hi Parasottam,

      (i) “specified sale price” means the amount of valuable consideration paid or payable for the workscontract after deducting the amount of labour charges for execution of suchworks contract and the value of the goods purchased in the course of interState trade or commerce or in the course of import of goods into territory ofIndia for use in such works contract.

      Above is a definition given in GVAT Act and it doesn’t include VAT as part of contract value to count Rs. 1 crore. Hence, in case contract is including WCT has no meaning if amount is not more than specified amount in law. There shall be no such complications on contracts and shall be amended to avoid litigation.

      Best Wishes.

  9. Kd tomar permalink

    Hi i am a railway S&T contractor i want purchage a electrical gate for railway crossing.. For that i required form C and for C form i will pay 2% to Gujrat VAT department After that will i deposite more tex of Gj VAT dept. If yes then clarify how much 3% or more.

    • Hi Singh,

      After deposit of C form, reduced rate is applicable and if not applied for C form respective rate of items are applicable depending on nature of items and as per GVAT tariff schedules.

      Best Wishes.

  10. Jay permalink

    Sir,
    I have registration under works contract and I am in road work. For some of my work I required to purchase material which is from other state. Am I eligible to purchase material outside the state and can i get benefit of C Form. and if not what are the penalties for the OGS purchase?

    • Hi Jay,

      WCT compounding rates are available only if there are no CST purchases involved in trading. If they are involved and compounding rate of tax has been applied then tax payer needs to pay difference of normal rates of tax and compounding rates along with interest and penalty. Additionally permission to apply compounding rates might be withdrawn going forward.

      Best Wishes.

  11. parth patel permalink

    sir,
    thank you for such helpful information i would like to ask that if my contractor deduct WTC form my payment should i needed to pay more tax for the said contract

    • Hi Parth,

      Yes, you need to pay VAT on ouput but only net if any. That means you are allowed to take credit of WCT deducted by main contractor and remaining liability needs to be paid by you.

      Best Wishes.

  12. kiran solanki permalink

    we hve parnership firm n sublate water drainege, pipline project from main party as a subcontractor so, what is percentage of TDS deduct from our sales bill by main contractee

  13. GIRISH permalink

    hi sir,
    kindly let me know calculation vat on work contract when have slected gross method and our rate of deduction is 20%how to arrive taxable value when it invlolve also subcontrct of some value?
    THANKS IN ADVANCE

    • Hi

      I am not able understand the term Gross Value, it is not defined by you in your query, please explain or call me on 94272 77837.

      • GIRISH permalink

        sir gross value term means specific sale price. we have not opted lumsum method we follow gross method. kindly guide me sir how to compute tax liablity.how to arrive value on which tax rate is apply.

  14. Rakesh verma permalink

    Dear sir We are in Printer related Contract business like ( per copy contract with comprehensive ) and we byfergate to part of tax 30% and 70%,30% of the material cost and 70% of Service cost,

    But one company taled me that you are in different tax slab submit bill 80% Vat value and 70% Service value.

    kinldy guide me how is possible to that mathod.

    Please Reply me as early as possible

    Regards

    Rakesh Verma..

    • Sorry for delay in response. Sr. No. 17. Printing contracts. Thirty per cent. and Sr. No. 18. Any other works contract. Twenty per cent. I think you can call them under Sr. No. 17 and it is fine for Gujarat VAT. W.r.t. Service Tax, your client is right, you shall charge on 70% value.

      You may contact me on 9427277837

  15. ram permalink

    whether VAT is applicable on service tax amount on work contract. if not, kindly give supporting for that

    • Hi Ram,

      Tax on tax is not applicable as per general convention.

      VAT on servive tax is not applicable because as per GVAT definition of sales will exclude all taxes. VAT is hence payable on sales value net of such taxes.

      Please check relevant state laws too on the same line if you are dealing in other states than Gujarat.

      Best Wishes.

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