Works Contract Under Service Tax and Haryana VAT

[Vinay Sharma]

Dear Sir,

1-If a contract is treated as 'Works contract' under service tax should it be treated as 'Works contract' under Haryana VAT Act also.

2- In case of Works contract, In Haryana, the Contractee is required to deduct 4% TDS. Can the contractee, while deducting TDS may take the advantage of abatements provided under Rule 25 of Haryana Value Added Tax Rules 2003.

3- Practically most of the works contractors like Painters, Pest Controllers, Water proofing work, are not registered in Service Tax and/or HVAT. In such cases, while discharging own liabililty of Service Tax and VAT what precautions should be taken by the Contractee.

With Thanks and best regards

[YAGAY andSUN]

Dear Bhuwan,

1. Yes, it may be construed as Works Contract under HVAT Act. Works Contract is defined under Section 2 (ZT) of the HVAT Act, 2003:- (zt) “works contract” includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the assembling, construction, building, altering, manufacturing, processing, fabrication, installation, fitting out, improvement, repair or commissioning of any moveable or immovable property;.
2. Vide Notification No. SO 67/H.A. 6/2003/S, 24/2014 dated 20th June 2014, VAT rate on TDS has been increased from 4% to 5%. You cannot take benefit of deduction under Rule 25 of the HVAT Rules.
3. Under service tax you have to deposit your portion of tax and File the return. Under HVAT while deducting the TDS you would have to issue TDS Certificate and file the return accordingly.

This is for you kind information.

Regard

YAGAY and SUN

(Management and Indirect Tax Consultants)

[Vinay Sharma]

Dear Pradeep ji,

Thanks for your reply. With respect to your reply at point no. 2, In Works contract bills, generally the Works Contract Tax is borne by Contractee. Though it is called TDS. When contractee pays 5% Works Contract and the contractor gets abatement as per rule 25 then it means he gets a refund of tax from Department at the time of assessment which is equal to amount of abatement as TDS is deposited by Contractee at full rate i.e.5%. Is it correct, if yes, is not unjust enrichment of the contractor.

Regards

[YAGAY andSUN]

Dear Bhuwan,

Please go through the appended exhibit in this regard.

	Contractor A is working under abatement scheme
	Particulars		Amount in INR	Total Tax Involed in INR
	Total Contract Value	1	500,000.00	45,000.00
	Abatement availed as presecribed (say 20% of the CV)	2	100,000.00
	Net Taxable value on which contractor will levy tax	3	400,000.00
	Works Contract rate (says 5.00%) levied by contractor	5	20,000.00
	Gross amount of Bill/Invoice/Challan	6	520,000.00
	Since the contract value is more than of the prescribed limit, Contractee is liable to deduct the tax i.e. 5% on the Total Contract Value	7	25,000.00
Scenarios	Now there is two aspects to this exhibit		Actual Tax assessed	Demand/Refund
1	If at the time of assessment it is concluded that the goods involved in execution of WCT comes under the category residuary schedule and leviable to tax @ 12.50% then demand will be raised on contractor		50,000.00	5,000.00
2	If at the time of assessment it is concluded that the goods involved in execution of WCT comes under the category normal schedule and leviable to tax @ 5% then refund will be provided to contractor		20,000.00	(25,000.00)

Therefore, in our opinion, Unjust enrichment would not be applicable.

We also seek professional relationship with your organization in the field of Indirect Taxation.

Please revert, in case you need our professional services.

Regards

YAGAY and SUN

(Management and Indirect Tax Consultants)

AI Summary

Works contract classification: treated as works contract for VAT with mandatory TDS deduction not reducible by abatement rules. Under the Haryana VAT Act a contract treated as a works contract for service tax may also be a works contract for VAT. The contractee must deduct and remit the prescribed TDS on the total contract value, issue a TDS certificate, and cannot apply HVAT Rule 25 abatements when withholding. The contractee must separately deposit applicable service tax and file returns; any abatement claimed by the contractor and resulting refund or demand will be addressed through assessment and does not render the initial statutory deduction an unjust enrichment.