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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

16 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.

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