Works-contract TDS at flat rate held invalid where it ignored exclusions from taxable turnover and exceeded taxing power.

A provision requiring tax deduction at source from works-contract payments at a flat rate of 12.5% was invalid because it operated on gross amounts without excluding components outside the State's taxing power, including non-taxable sales and labour or service elements. Taxable turnover under the scheme had to be computed only after such exclusions, and a uniform deduction mechanism that ignored that distinction could exceed the charging provision and conflict with the Act and Rules. The provision was held ultra vires to that extent, and the consequential notice was quashed.

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Issues: Whether the provision requiring deduction of tax at source from works-contract payments at a flat rate of 12.5% irrespective of taxable turnover was within legislative competence and valid.

Analysis: The scheme of the tax enactment treated transfer of property in goods involved in execution of a works contract as a taxable sale, but only to the extent permitted by the constitutional limitations governing sales tax, including exclusions for inter-State sales, outside sales, import or export sales, declared goods, exempt goods, and labour and service components. Taxable turnover was therefore required to be computed after excluding non-taxable components. The impugned provision, however, mandated deduction at a uniform flat rate on the gross amount payable under the works contract, without a mechanism to exclude amounts not exigible to tax. Such a provision could operate upon amounts beyond the State's taxing power and beyond the charging provision, and could also conflict with the prescribed tax rates and deductions under the Act and Rules.

Conclusion: The provision was held ultra vires and invalid to the extent it permitted deduction at a flat rate of 12.5% irrespective of taxable turnover, and the consequential notice was also quashed.

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