Date : 19.03.2016

M/s. ABC LLP herein referred as ABC

M/s. XYZ Limited herein referred as XYZ

Reg: Case for opinion under MVAT Laws

We refer to consultation you had with us. You have some points to be clarified. The said point is as under:

Before giving opinion on the issues it will be useful to refer the question asked by ABC & XYZ.

A. ABC LLP is a sub contractor of XYZ Limited

B. Both parties would like to know the type of relationship between ABC & XYZ

C. Both parties would like to know the applicability and discharging method of VAT

D. Is Principal and Agent theory is applicable in this contract?

o If Principal Contractor is paying vat then will Sub Contractor be liable to pay VAT or not. Is there any form exchange process and if yes then explain

o If Sub Contractor is paying vat then will Principal Contractor will be liable to pay VAT or not. Is there any form exchange process and if yes then explain.

E. My Understanding View & Opinion on above

Before going ahead I have confirmed following things from both the parties.

Contract under question is a works contract case as per MVAT.
XYZ Ltd is Principal Contractor and ABC LLP is subcontractor

Fact of the Case:

XYZ Limited is a Body Corporate while ABC LLP is a LLP registered with ROC. XYZ Limited has certain contract and this contract has been further sub contracted to ABC LLP. This contract comes under definition of Works Contract. Now both the parties want to know the impact of VAT Chargeability on both and set off mechanism.

Opinion

Principal & Agent Relationship in Statute

Before going ahead I will prefer to refer to relevant legal back ground. As per MVAT Act, 2002 the relationship between principal contractor and sub contractor is deemed to be that of principal and agent.

The said position is clear from section 45(4), which is reproduced below for ready reference.

“(4) Where any sale has been effected by way of transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract and the contractor has executed the works contract awarded to him, through a sub-contractor, directly or otherwise, then notwithstanding anything contained in any law or agreement to the contrary, the relationship between the contractor and the person who has actually executed the works contract or part of it as a sub-contractor shall be deemed to be that of the principal and agent and accordingly,—

(a) where such principal assigns the whole or part of the execution of the works contract to different such agents resulting into the distribution of the turnover of the said sales amongst the principal and the agents or wholly amongst the agents whereby the principal escapes the liability to pay tax on the whole or part of the turnover of sales, then, having regard to the total turnover of sales, including the total turnover of sales in respect of execution of such contract, of the principal in the year of assessment being such that the principal would have been liable to pay tax under this Act ii such works contract had been executed by himself alone the liability to pay tax on such total turnover of sales shall he that of the principal;

(b) where such agent executes such works contract on behalf of the principal and each or either of them is liable to pay tax, then notwithstanding anything contained in any other law or any contract to the contrary, the principal and the agent shall be jointly and severally liable to pay tax in respect of the transfer of property in goods involved in the execution of such works contract;

(c) if the principal shows to the satisfaction of the Commissioner that tax has actually been paid by the agent on the turnover of sales, the principal shall not be liable to pay tax again in

respect of the same turnover of sales on which the agent has paid tax;

(d) if the agent shows to the satisfaction of the Commissioner that the tax has been actually paid by his principal on the turnover of sales on which he is liable to pay tax under this Act, then the agent shall not be liable to pay tax again on the same turnover of sales on which the principal has paid tax;

(e) no deduction from payment of tax under the preceding clauses shall be given to the principal or to the agent, unless a duly signed certificate in the prescribed form is produced;

(f) a contractor assigning execution of a works contract (either in whole or in part) to a sub-contractor registered under this Act may deduct from his total contract value or, as the case

may be, the turnover of sales, the value or the turnover of sales in respect of works contract executed through the said subcontractor provided a declaration in the prescribed form signed by such sub-contractor is produced;

(g) a sub-contractor who has been assigned execution of works contract (either in whole or in part) by a contractor may deduct from his total contract value or, as the case may be, the

turnover of sales, the value or the turnover of sales in respect of such works contract executed by him provided a declaration in the prescribed form signed by such contractor is produced.”

Effect of this Principal & Agent Relationship

The effect of this section is that the liability of principal contractor and sub–contractor is joint and several.

If principal contractor has discharged liability sub contractor will not be liable to tax.

Principal contractor should issue Form 406/409 to sub contractor for claiming exemption for his sub-contract value.

If sub-contractor has paid tax he can issue Form 407/408 to principal contractor where by principal contractor will not be liable to tax to that extent.

Therefore before deciding liability of sub-contractor it is necessary to ascertain the above issue i.e. who is going to discharge liability. If principal contractor is going to discharge liability on whole contract value, sub-contractor has not to do anything but to obtain Form 406/409.

Credit Mechanism : The relationship being that of principal and agent, there is no sale/purchase between Principal Contractor and Sub Contractor.

VAT credit is available on purchases and sub-contract being not purchase benefit can not be claimed by way of VAT credit. However deduction from turnover/actual tax liability is available to the extent of liability discharged by the Sub Contractor. For that Form 407/408 should be obtained from the Sub contractor.

If at all Sub Contractor has charged tax in his invoice, Principal contractor can take credit of the same fully and should not reduce the same by 4% or otherwise, on account of discharging liability as per any composition scheme.

In other words Principal contractor gets full credit of VAT paid by sub contractor.

In nut shell set off will be available to principal contractor as per below

In non composition case set off is available in full to principal contractor
In case of 5% composition set off is available after reduction is made to the tune of 4% of purchases from RD.
In case of 8% composition set off is available upto 64% of set off available
In case of 1% composition no set off is available

Set off on purchases by sub-contractor will be available as per the method chosen by the principal contractor referred in Annexure 1.

There are more than one method for discharging liability on works contract. An Annexure 1 is annexed herewith giving indicative discharging and credit methods in detail alongwith connected issues.

Final Wording

If Principal Contractor discharges liability down the line sub Contractor will not be liable to tax. Principal Contractor should issue form 406/409 to Sub Contractor

Either way, to the extent of sub-contract value, sub-contractor will also be liable to VAT and he can discharge his liability and can issue form 407/408 to Principal Contractor whereby Principal Contractor will not be liable to that extent.

Whether the liability is discharged by Principal Contractor or Sub Contractor, Sub Contractor is entitled to VAT credit on its purchase. In Principal Books, Sub-contract credit will be by way of reduction from turnover/taxliability by obtaining form 407/408.

The VAT credit will be available as per MVAT Rules,2005. As per Rule 53( 4 ), if the Principal Contractor has adopted method of composition scheme then the Sub Contractor has to work out its VAT credit applying the said Rule and set off will be curtailed accordingly.

There are no specific formalities. Sub Contractor can take VAT credit in his return as any normal dealer. However sub contractor credit mechanism will depend on the method of discharging the liability adopted by principal contractor. If no tax payable sub contractor will be entitled to refund also for which it can file application for refund in Form 501.

On purchase, VAT credit will be as per VAT Rules. In case of Principal contractor the VAT credit depends upon choice of discharging method. In Annexure 1 indication about the VAT credit/reduction in VAT credit vis-à-vis method of discharging is given. The same may please be referred to.

Please note : If hire is without providing manpower (operator etc.) than it will amount to lease in hands of supplier and charging VAT will be correct. Hire of vehicle cannot be considered to be sub-contract work and you can get full credit of VAT on such rent.

Annexure 1

The methods of discharging tax liability as per MVAT Act,2002 are discussed below.

The liability is required to be discharged in relation to value of goods. As stated above tax is payable on value of goods and not on labour portion.

Following are six ways of discharging tax liability under MVAT Act,2002. This will apply to construction contractor as well as other Works Contractors also.

1- As per Clear Distinctive value in Agreement of Labor & Goods

If in the contract itself the value of the goods and labour is shown separately, then such values of goods will be taxable at appropriate rates.

If the values are not separately mentioned but only one value is specified, then the contractor can discharge liability by any of modes discussed below.

Credit Mechanism: It may also be mentioned that if one follows above method, he can avail full set off on goods purchased under VAT from local RD, subject to other conditions of set off.

2- As per Statutory Provisions

Under this system the tax payable on value of goods can be arrived at by adopting Rule 58 of VAT Rules,2005. The Rule 58(1) is as under:

“58. (1) The value of the goods at the time of the transfer of property in the goods (whether as goods or in some other form) involved in the execution of a works contract may be determined by effecting the following deductions from the value of the entire contract, in so for as the amounts relating to the deduction pertain to the said works contract:--

(a) labour and service charges for the execution of the works;

(b) amounts paid by way of price for sub-contract , if any, to sub-

contractors ;

(d) charges for obtaining on hire or otherwise, machinery and

tools for the execution of the works contract;

(e) cost of consumables such as water, electricity, fuel used in

the execution of works contract, the property in which is not

transferred in the course of execution of the works contract;

(f) cost of establishment of the contractor to the extent to which

it is relatable to supply of the said labour and services;

(g) other similar expenses relatable to the said supply of labour

and services, where the labour and services are subsequent

to th1e said transfer of property;

(h) profit earned by the contractor to the extent it is relatable to

The supply of said labour and services: -----“

(2) The value of goods so arrived at under sub-rule(1) shall, for the purposes of levy of tax, be the sale price or, as the case may be, the purchase price relating to the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.”

It can be seen that as per Rule 58(1) main provision, contractor can determine his own labour portion and take deduction of the same from gross contract value. The balance will be liable to tax. The said taxable portion is to be divided between 0%,4%/5% and 12.5% goods and tax be worked out accordingly.

Credit Mechanism: It may also be mentioned that if one follows above method, he can avail full set off on goods purchased under VAT from local RD, subject to other conditions of set off.

3- Standard Deduction Method –

In the alternative, i.e. if dealer cannot ascertain the labour portion on its own as per above, dealer can adopt the standard deduction given in Table in Rule 58(1). The said table is as under.

*Note : The percentage is to be applied after first deducting from the total contract price, the quantum of price on which tax is paid by the sub-contractor, if any, and the quantum of tax separately charged by the contractor if the contract provides for separate charging of tax.

In this standard deduction method if contractor cannot determine the labour portion on his own, he can adopt the standard deduction given in below Table. The portion remaining after given above deduction will be liable to tax at applicable rates i.e.0%, 4%/5% and 12.5%.

Credit Mechanism: It may also be mentioned that if one follows this method, he can avail full set off on goods purchased under VAT from local RD, subject to other conditions of set off.

“Table

Serial No.	Type of Works contract	*Amount to be deducted from the contract price (expressed as a percentage of the contract price)
(1)	(2)	(3)
1	Installation of plant and machinery	Fifteen per cent.
2	Installation of air conditioners and air coolers	Ten per cent.
3	Installation of elevators (lifts) and escalators	Fifteen per cent.
4	Fixing of marble slabs, polished granite stones and tiles (other than mosaic tiles)	Twenty five per cent.
5	Civil works like construction of buildings, bridges, roads, etc.	Thirty per cent.
6	Construction of railway coaches on under carriages supplied by Railways	Thirty per cent.
7	Ship and boat building including construction of barges, ferries, tugs, trawlers and dragger	Twenty per cent.
8	Fixing of sanitary fittings for plumbing, drainage and the like	Fifteen per cent.
9	Painting and polishing	Twenty per cent.
10	Construction of bodies of motor vehicles and construction of trucks	Twenty per cent.
11	Laying of pipes	Twenty per cent.
12	Tyre re-treading	Forty per cent.
13	Dyeing and printing of textiles	Forty per cent.
14	Annual maintenance contracts	Forty per cent
15	Any other works contract	Twenty five per cent

4- Composition Schemes @ 8%

In the alternative, if it is not in notified construction as referred below, contractor can pay tax by Composition Scheme and in that case, he will be required to pay tax on full contract value @ 8%. No deduction of labour charges etc. will be available.

Credit Mechanism: If one pays tax as per above composition scheme, he will be entitled to setoff @ 64% of the normal set off otherwise available. The reduction will apply to the goods which get transferred and not to other goods. In other words, for those goods full set off will be available.

If principal contractor has followed this composition scheme then in case of sub contractor also set off will be as per above reduced amount at 64%.

5- Composition Schemes @ 5%

One more method of composition is available in case of Notified Construction Contracts. The list of notified construction contract is as under.

“FINANCE DEPARTMENT

Mantralaya, Mumbai 400 032, dated the 30^th November 2006

NOTIFICATION

The Maharashtra Value Added Tax Act, 2002.

No VAT.1506/CR-134/Taxation-1-- In exercise of the powers conferred by clause (i) of the Explanation to sub-section (3) of section 42 of the Maharashtra Value Added Tax Act, 2002 [Mah. IX of 2005], the Government of Maharashtra hereby notifies the following works contracts to be the ‘Construction Contracts’ for the purposes of the said sub-section, namely :-

(A) Contracts for construction of,--

(1) Buildings,

(2) Roads,

(3) Runways,

(4) Bridges, Railway overbridges,

(5) Dams,

(6) Tunnels,

(7) Canals,

(8) Barrages,

(9) Diversions,

(10) Rail tracks,

(11) Causeways, Subways, Spillways,

(12) Water supply schemes,

(13) Sewerage works,

(14) Drainage,

(15) Swimming pools,

(16) Water Purification plants and

(17) Jettys

(B) Any works contract incidental or ancillary to the contracts mentioned in paragraph (A) above, if such work contracts are awarded and executed before the completion of the said contracts.

By order and in the name of the Governor of Maharashtra. ”

If contract is covered by above list then dealer can discharge liability by paying 5% on total contract value.

Credit Mechanism: If dealer pays by this composition scheme then set off on purchases will be granted after reduction @ 4% of purchase price.

If principal contractor has followed this composition scheme then in case of sub contractor also set off will be after reduction of above 4%. If Sub Contractor does billing to Principal Contractor, then it should not be treated as purchase and entire turnover shall be deducted from the Principal turnover

6- Composition Schemes @ 1%

This scheme is prescribed by section 42(3A) for builders and developers who along with construction transfer immovable property like land. The notification prescribing the scheme is issued on 9.7.2010. The notification contains various conditions. The desiring dealer should go through the same for further information.

Credit Mechanism:Dealer may adopt any of the modes suitable in its case and contract wise choice can also be made.

In opting this option set off on purchases is restricted.

Way Forward in light of Above

1. XYZ can discharge the liability of VAT in full and provide the form 406/409 to ABC and in this case ABC is not required to charge VAT to XYZ.

2. Either Way ABC discharge the VAT on this sub contract part of work and Provide form 407/408 to XYZ then XYZ need not to worry for this part and take deduction from turnover while arriving the tax taxable turnover for vat payable. In this method XYZ will charge and collect full amount from his customer, but at the time of payment to Government he will deduct the sub contract portion and compute tax liability on balance part because PC has already paid VAT through sub contractor on said sub contract part.

3. Set off rule will be applicable to PC and SC as the case may be, as per the method opted by Principal Contractor.

4. Sub Contractor can not follow different method other than Principal Contractor’s Method as under VAT Law whole contract is one.

Disclaimer & Limitation

This opinion is provided on knowledge sharing basis which I have as per my best of knowledge study and understanding. This opinion does not create or establish any advise, direction and/or instruction to above referred company to follow as per the said opinion. Both companies are free to adopt as per their own understanding of their particular case and transaction. This I want to clear that, I will not be personally liable or indemnify to company or to any, if authority take another view. Both companies are free to follow as per its own best judgment. This is to confirm that we have not covered the Maharashtra Budget 2016 impact on this draft.

Understanding, View & Opinion Prepared BY

CA Pankaj Kumar Jaiswal

Partner : Asutosh & Pankaj

Chartered Accountants

Eternal Economics

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