Tax efficient works contracts

[Devendra Agarwal]

Would VAT be applicable on construction contracts awarded to a contractor for labour and also procurement, storage, handling and usage as per standard quantity of material to be used for a building contract (materail to be invoiced directly to owner by the respective vendors from which material procured and paid directly)?

[YAGAY andSUN]

Sr. No.	Particulars	Rate of Tax
1	A works Contractor, who does not buy/ receive goods from outside the State.	4% of the total consideration for executing a works contract.
2	A works contractor who buys or receives goods from outside the State of Karnataka, which are transferred in the course of execution of such a contract.	The dealer shall pay tax on the value of the goods purchased/received from outside the state of Karnataka at a regular rate of tax applicable on such goods under Section 4 of the Karnatak VAT Act plus 4% of the total consideration less the value on which the tax is paid at a regular rate on purchase/receipt from outside the State.

A Works contract would include an agreement executed for building contruction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, repair or commissiong of any movable or immovable property.  In case of  a works contract, VAT/Works Contract tax is payable on the value of the transfer of property in goods in the course of execution of such a works contract.  The sale is deemed to have taken place at the time of transfer of the title or possession or incorporation of the godos in the course of the execution of a works contract, irrespective of the receipt of payment or on receipt of advance, whichever is earlier.

However, the Hon'ble High Court of Karnataka has, in the case of Nagarjuna Construction Company Ltd. Vs. State of Kanataka (W.P. Nos. 29932 - 29933/2009), struck down the provision which levies tax on mobilization of advance or advance received when there is no transfer of property in goods in the course of execution of a works contract whatsoever.  However, if any tax invoice is issued for the advance received, then, the VAT collected thereon is payable to the Government.

The levy of tax is only on the taxable turnover of goods trasnferred in the course of execution of the works contract, which is arrived at by allowing the deduction towards actual labour and other like charges incurred in the couse of execution of the works contract as per the provisions of Rule 3 (2) (1) of the KVAT Rules, subject to provision of documentary evidence in support of claim of such deduction.

In the even that the actual labour and other like charges incurred in the course of execution of the works contract are not ascertainable from the books of accounts maintained by a dealer, the deduction shal be allowed at the standard rate prescribed in the Table appended in Rule 3 (2)(m) of the KVAT Rules, 2005, depeding on the nature of works contract.

 

[Devendra Agarwal]

Tks dear

I wish to confirm/deliberate two issues related to construction works of Educational Insitutions (including Teeaching Hospital);-

1. Taking procurement services for receving, issue, and utilzation of standard quanitity of construction specified material as free item from a contractor also doing construction as basically a labour contractor (services only) and  have that service component also included in the services/construction contractor; and

2. Applicability of service tax on construction for charitable educational insitutions (including teaching hospital registered also registered as a clinic) exempt from payment of Service and Income Tax.

With warm greetings to all friends: 

AI Summary

Exploring VAT on Construction Contracts: Direct Material Invoicing, Labor Deductions, and Service Tax for Charitable Institutions A discussion on tax implications for construction contracts, particularly regarding VAT and CST, was initiated. The query focused on whether VAT applies to contracts involving labor and material procurement, where materials are invoiced directly to the owner. The response detailed tax rates for contractors based on whether goods are sourced from within or outside Karnataka, highlighting the Karnataka High Court ruling against taxing mobilization advances without property transfer. It also covered deductions for labor costs under KVAT Rules. Further, there was a request for clarification on procurement services and service tax applicability for charitable educational institutions.