Works-contract taxation must exclude labour and non-taxable elements; compounded levy on the whole contract amount is constitutionally impermissible.

Works-contract taxation under the Kerala General Sales Tax Act is examined by reference to article 366(29-A)(b), under which the State may tax only the value of goods involved in execution of the contract and must exclude labour, service and other non-taxable components. The normal levy under section 5(1)(iv), including the deduction and turnover-determination provisions, is described as consistent with that constitutional scheme. By contrast, the compounded levy provisions and connected collection rules are described as operating on the whole contract amount without preserving required exclusions for inter-State, outside-State, import or export transactions and labour charges, making that structure constitutionally impermissible to that extent.

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Issues: (i) Whether the provisions governing levy on works contracts under section 5(1)(iv) of the Kerala General Sales Tax Act, 1963, together with the related deductions and exemptions, were valid; (ii) Whether the compounded levy scheme under section 7(7), section 7(7A), section 7(7B), section 7(8), section 7(10), section 7(11), section 7(12) and the connected rules, which required deduction from the whole amount of the contract, was constitutionally valid.

Issue (i): Whether the provisions governing levy on works contracts under section 5(1)(iv) of the Kerala General Sales Tax Act, 1963, together with the related deductions and exemptions, were valid.

Analysis: Tax on transfer of property in goods involved in works contracts is permissible only to the extent authorised by article 366(29-A)(b) of the Constitution of India and must be read consistently with the scheme of the Central Sales Tax Act, 1956. The measure of tax is the value of the goods involved in the execution of the works contract, not the entire contract price, and the labour and service elements must be excluded. The provisos and the turnover-determination rules provided for permissible deductions and exclusions, and those provisions conformed to the constitutional and statutory framework.

Conclusion: Section 5(1)(iv) of the Kerala General Sales Tax Act, 1963, was upheld as valid, including the related provisos and turnover-deduction mechanism.

Issue (ii): Whether the compounded levy scheme under section 7(7), section 7(7A), section 7(7B), section 7(8), section 7(10), section 7(11), section 7(12) and the connected rules, which required deduction from the whole amount of the contract, was constitutionally valid.

Analysis: A levy on the whole amount of a works contract, without excluding non-taxable components such as inter-State transactions, outside-State sales, import or export sales, and labour and service charges, exceeded the permissible field under article 366(29-A)(b). The compounded scheme operated on the entire contract amount and did not preserve the exclusions required by the constitutional and sales tax framework. The connected deduction-at-source and recovery provisions were inseparable from that invalid levy structure.

Conclusion: Section 7(7), section 7(7A), section 7(7B), section 7(8), section 7(10), section 7(11), section 7(12) and the connected rules were held invalid to the extent they imposed tax on the whole amount of the contract.

Final Conclusion: The challenge succeeded only in part: the normal levy provision for works contracts was sustained, but the compounded levy and related deduction-at-source mechanism were struck down insofar as they imposed tax on the whole contract amount without the constitutionally required exclusions.

Ratio Decidendi: In a works-contract levy, the State may tax only the value of the goods involved in the execution of the contract, after excluding labour and other non-taxable components, and it cannot, under the guise of compounding or collection machinery, impose tax on the entire contract amount in a manner that captures transactions beyond its taxing competence.

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