BASIC CONCEPT OF WORK CONTRACT AND VALUATION UNDER WORK CONTACT TAX (WCT)

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In 1956, Ganon Drunkely case supreme court said that , no sale tax levied on work contract  because there as no sale of goods as goods in form. In Work contact goods and service both portion are involved. Hence  segregation of amount of goods and services not possible.

1982, Act amended and said that goods under work contract is treated as deemed goods. Hence, sale tax applied on deemed goods also.

In  1994, Service tax  came under picture because government want to levy the tax on services. But still that time service portion under work contract was not taxable under service tax.

Finally, in 2012, Government amended service tax act and service tax was levied on services portion under work contract also.

Now, we will understand what is sale, what is service and what is Work contract and Valuation of taxable value under respective act .

Generally there are following four categories of contracts.

  1. Supply of Goods
  2. Only labour or services
  3. Separate contract or divisible contract for labour and material
  4. Indivisible contract for labour and material.

 

SALE  / SUPPLY OF GOODS

“sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly “sale”

 SERVICE

“Service means any ACTIVITY carried out by a person for another for CONSIDERATION, and includes a DECLARED SERVICE, but shall not include;

(a) An activity which constitutes MERELY,

  1. A transfer of title in GOODS or IMMOVABLE PROPERTY, by way of sale, gift or in any other manner; or
  2. A transaction in money or ACTIONABLE CLAIM

(b) A provision of service by an employee to the employer in the course of or in relation to his employment.

(c) Fees taken in any court or tribunal established under any law for the time being in force.

 

WORK CONTRACT

Work Contract Means ‘work contract namely, an agreement (express or Implied) for carrying out for cash, for deferred payment or other valuable consideration, the building, construction manufacture, processing, fabrication, erection, installation, filling out, improvement, modification, repair or commissioning of any movable or immovable property’.

There is no thumb rule for identifying the work contract but we can conclude some conditions to identify the work contract.

Condition for understanding contract is for sale or Work Contract –

  1. There should be indivisible contract for supply of goods and service.
  2. Terms and Condition of Contact.
  3. Ownership of property or controls must be transferred to customer.
  4. Basic raw material or materiality amount of raw material should not be given by customer.
  5. Materiality amount (not negligible) of goods and materiality of services amount should be involved in contract.
  6. Basic information provided by customer are confidential under contract and which is not commercially saleable if customer breach the contract.

 

Analysis of Examples Under Work Contract Tax (WCT)

Sr No

Contract Type

Nature of Contract

Reason for Nature of Contract

Sale or Supply of Goods

Work Contract Tax

Labour or Services

1

Pest Control Services

Service

No Sale

 

Because it is Indivisible contact.
Material and service portion both include.

No Work Contract

 

Because transfer of property not
involved. Chemicals were consumed during pest control services.

 

Yes It Is Services.

 

Because service tax criteria of
definition of service is fulfilled.

 

There is activity between two
person for a consideration

2

Separate contract for supply of
material and repairing of road.

Sale And Service respective of
their portion.

Yes Supply of Material is under
SALE.

No Work Contract.

 

 

 

Because there is no indivisible
contract.

Yes labour portion for
repairing under SERVICE.

 

Full amount of contract is not
considered service because Trading or Manufacturing  of Goods is exempt under negative
list in service tax act.

3

Photography

Service

No Sale

 

Intention of the customer is not to
buy a paper photograph from the photographer. The photograph has no marketable
value .

No Work Contract Tax

 

Because,major payment towards skill and
comparatively raw material amount is negligible.

 

 

Yes It Is Services.

 

Because service tax criteria of
definition of service is fulfilled.

 

There is activity between two
person for a consideration

4

Printing of Question Paper

Work Contract

No Sale

 

Because it is Indivisible
contact.  Material and service portion
both include.

Yes Work Contract

 

Because it is a confidential type
of work and the price paid for supplying such printed question papers or
printed matters entails primarily the confidence, and secondly, the skill and
to a very small measure the material

 

Content provided on paper which is
confidential and not commercially saleable if customer breach the contract.

No Service

 

Because Trading or
Manufacturing  of Goods is exempt
under negative list in service

5

Supply of Bill Book, Voucher, Account
Registers

Sale

Yes Sale

 

Because press had produced a
commercial commodity which was capable of being sold or supplied

No Work Contract

 

Because Content provided on paper
which is not confidential and commercially saleable if customer breach the contract.

No Service

 

Because Trading or
Manufacturing  of Goods is exempt
under negative list in service

6

X Ray of Patient

Service

No Sale

 

 Intention of the Patient is not to

buy a X Ray from the Doctor. The X Ray has no marketable value .

 

 

No Work Contract Tax

 

Because,

major payment towards skill and
comparatively raw material amount is negligible.

 

 

Yes It Is Services.

 

 Because service tax criteria of
definition of service is fulfilled.

 

There is activity between two
person for a consideration

7

Buying Ready-made Jeans or shirts

Sale

Yes Sale

 

Because definition of sale
criteria fulfilled.

No Work Contact.

 

Because no Indivisible Contract.

No Service

 

Because Trading or
Manufacturing  of Goods is exempt
under negative list in service

8

Contract for stitching the Jeans
and cloth provided by customer.

Service

No Sale

 

 

Because Tailor was provided only
service. Transfer of Property not involved.

No Work Contact.

 

 

Because basic raw material
provided by customer.

Yes It Is Services.

 

 

Because service tax criteria of  definition of service  is fulfilled.

 

There is activity between two
person for a consideration

9

Contract for stitching the Jeans
and cloth not issued by customer.

Work Contract

No Sale

 

 

Because it is Indivisible
contact.  Material and service portion both
include..

Yes Work Contract

 

 

All Conditions of Work Contract
Satisfied.

No Service

 

 

Because Trading or
Manufacturing  of Goods is exempt
under negative list in service

10

Construction of House

Work Contract

No Sale

 

 Because it is Indivisible
contact.  Material and service portion
both include..

Yes Work Contract

 

 All Conditions of Work Contract
Satisfied.

No Service

 

 Because Trading or
Manufacturing  of Goods is exempt
under negative list in service

Valuation Under Work Contract Tax (WCT)

Particulars

Construction Contract

Section / Rule under MVAT Act

U/R 58(1) Actual Basis

U/R 58 Fixed Percentage

Sec
42(3)  Composition Scheme

Sec
42(3)(A)Composition Scheme

WCT Meaning in MVAT.

Work Contract Means ‘work contract namely, an agreement (express
or Implied) for carrying out for cash, for deferred payment or other valuable
consideration, the building, construction manufacture, processing,
fabrication, erection, installation, filling out, improvement, modification,
repair or commissioning of any movable or immovable property’.

Example

Builder sale a flat to Buyer for a consideration.

Construction like building, dam, road, cannel, jetty, pool,
treatment plant.

Sale

Sale = Gross Value of Contract – Labour and Service Charges,
Amount paid to Subcontractor, Amount paid to Sub contractor for  labour and services,charge for planning,
designing,architect fees, charges for hire of machinery, cost of consumable
such as water, electricity fuel,  Cost
of Establishment of the contractor relatable to supply of labour and
services, other similar expenses relatable to supply of labour and services ,
Profit earned by service provider relatable to supply of labour and services
–– cost of land

Sale = Gross Value of Contract -Payment to Subcontractor on
which VAT is paid and separately charged in the bill by subcontractor – Fixed
% (ex- Painting-20%, P & M -15%, Other work contract-25%) for
Labour and Service Charges of (Gross Value of Contract -Payment to
Subcontractor on which VAT is paid and separately charged in the bill by
subcontractor) – cost of land

Sale = Gross Value of contract -Payment to Subcontractor on
which VAT is paid and separately charged in the bill by subcontractor

Sale = Gross Value of contract -Payment to Subcontractor on
which VAT is paid and separately charged in the bill by subcontractor

Output VAT

As per Schedule (13.5% or 6%) of Sale

As per MVAT Schedule (13.5% or 6%) of sale

5%  of sale

1%  of sale

Input Tax Credit

setoff  = Full/ 100% of
Input VAT – U/R 52

setoff  = Full/ 100% of
Input VAT – U/R 52

Setoff after 4% of retention – U/R 53(4)

No Set Off

Section / Rule Under Service Tax

Rule 2 A(i) of Service
Tax Valuation Rule 2006

Rule 2 A(ii) of Service
Tax Valuation Rule 2006

Rule 2 A(ii) of Service
Tax Valuation Rule 2006

Rule 2 A(ii) of Service
Tax Valuation Rule 2006

WCT Meaning in Service Tax.

Construction means a Construction of a complex, building, civil
structure or a part thereof, including a complex or building intended for
sale to a buyer, wholly or partly, except where the entire consideration is
received after issuance of certificate of a completion by a competent
authority.

Example

Builder sale a flat to Buyer for a consideration.

Construction like building, dam, road, cannel, jetty, pool,
treatment plant.

Sale

Sale = Gross value of contract – the value of transfer of
property in goods involved in the execution contract

Sale = Gross Value of contract + Value of Land + Free Cost of
Material

Sale = Gross Value of contract + Value of Land + Free Cost of
Material

Sale = Gross Value of contract + Value of Land + Free Cost of
Material

Or

Sale = Labour and Service Charges, Amount paid to Subcontractor,
Amount paid to Sub contractor for
labour and services,charge for planning, designing,architect fees,
charges for hire of machinery, cost of consumable such as water, electricity
fuel,  Cost of Establishment of the
contractor relatable to supply of labour and services, other similar expenses
relatable to supply of labour and services , Profit earned by service
provider relatable to supply of labour and services

Output Service Tax

14% of sale(100%)

0.5% – Swachh Bharat Cess

0.5% – Krishi Kalyan Cess

4.50% of sale (For Others) (30%-
Abatement Rate)

4.50% of sale (For Others) (30%-
Abatement Rate)

4.50% of sale (For Others) (30%-
Abatement Rate)

Input Tax Credit

Input – No

Input – No

Input – No

Input – No

Capital Goods- Yes

Capital Goods- Yes

Capital Goods- Yes

Capital Goods- Yes

Input Service -Yes

Input Service -Yes

Input Service -Yes

Input Service -Yes

Particulars

Other
Than Construction Work Contract

Section / Rule under MVAT Act

U/R 58(1) Actual Basis

U/R 58 Fixed Percentage

Sec  42(3)  Composition Scheme

WCT Meaning in MVAT.

Work Contract Means ‘work contract namely, an agreement (express
or Implied) for carrying out for cash, for deferred payment or other valuable
consideration, the building, construction manufacture, processing,
fabrication, erection, installation, filling out, improvement, modification,
repair or commissioning of any movable or immovable property’.

Example

Immovable – Installation of Plant and
Machinery, Construction of Building.

Movable – Repair and Maintenance of
Vehicle, Composite contract of movable property.

Sale

Sale = Gross Value of Contract – Labour and Service Charges,
Amount paid to Subcontractor, Amount paid to Sub contractor for  labour and services,charge for planning,
designing,architect fees, charges for hire of machinery, cost of consumable
such as water, electricity fuel,  Cost
of Establishment of the contractor relatable to supply of labour and
services, other similar expenses relatable to supply of labour and services ,
Profit earned by service provider relatable to supply of labour and services
–Contractor for  – cost of land

Sale = Gross Value of Contract -Payment to Subcontractor on
which VAT is paid and separately charged in the bill by subcontractor – Fixed
% for Labour and Service Charges of (Gross Value of Contract -Payment to
Subcontractor on which VAT is paid and separately charged in the bill by
subcontractor) – cost of land

Sale = Gross Value of contract -Payment to Subcontractor on
which VAT is paid and separately charged in the bill by subcontractor

Output VAT

As per Schedule (13.5% or 6%) of Sale

As per MVAT Schedule (13.5% or 6%) of sale

8%  of sale

Input Tax Credit

setoff  = Full/ 100% of
Input VAT -U/R 52

setoff  = Full/ 100% of
Input VAT U/R – 52

setoff  = 64% of Input VAT
–  U/R 53(4)

Section / Rule Under Service Tax

Rule 2 A(i) of Service
Tax Valuation Rule 2006

Rule 2 A(ii) of Service
Tax Valuation Rule 2006

Rule 2 A(ii) of Service
Tax Valuation Rule 2006

WCT Meaning in Service Tax.

Work contract Means a contract wherein transfer of property in
goods involved in the execution of such contract is leviable to tax as sale
of goods and such contract is for the purpose of carrying out construction,
erection, commissioning, installation, completion, filling out, improvement,
repair, renovation, alteration of any movable or immovable property.

Example

Immovable – Installation of Plant and
Machinery, Construction of Building.

Movable – Repair and Maintenance of Vehicle,
Composite contract of movable property.

Sale

Sale = Gross value of contract – the value of transfer of
property in goods involved in the execution contract

Sale = Gross Value of contract + Value of Land + Free Cost of
Material

Sale = Gross Value of contract + Value of Land + Free Cost of
Material

Or

Sale = Labour and Service Charges, Amount paid to Subcontractor,
Amount paid to Sub contractor for
labour and services,charge for planning, designing,architect fees,
charges for hire of machinery, cost of consumable such as water, electricity
fuel,  Cost of Establishment of the
contractor relatable to supply of labour and services, other similar expenses
relatable to supply of labour and services , Profit earned by service
provider relatable to supply of labour and services

Output Service Tax

14.00% of sale (100%)

0.5% – Swachh Bharat Cess

0.5% – Krishi Kalyan Cess

Work Contract For Original Work – 6.00% of sale (40%-
Abatement Rate)

Work Contract For Original Work – 6.00% of sale (40%-
Abatement Rate)

Work Contractor of maintenance or
repairs or reconditioning or restoration or servicing of any goods – 10.50% of
sale (70%- Abatement Rate)

Work Contractor of maintenance or
repairs or reconditioning or restoration or servicing of any goods – 10.50% of
sale (70%- Abatement Rate)

Input Tax Credit

Input – No

Input – No

Input – No

Capital Goods- Yes

Capital Goods- Yes

Capital Goods- Yes

Input Service -Yes

Input Service -Yes

Input Service -Yes
Valuation of VAT and Service Tax in Work contract
Basic Understanding of Work Contract Tax (WCT) Valuation of VAT and Service Tax in Work contract Tax(WCT)
Downloads: 99, Size: 15.0 KB, Date: 19.Feb.2017

 

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