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CA Sandesh Mundra

Consult Us For Construction

Practical Illustrations on Indirect Taxation

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Practical Illustrations on Indirect Taxation

In the previous article on service tax we have spoken a lot on theoretical issues relating to service tax. An attempt has been made in this article to bring out the practical calculations as carried out in the real world. Some of the issues are enumerated in the form of Illustrations  summarised as below:-

Various Illustrations on Service Tax and VAT

  1. Various Statutory Conditions prevailing in the Works Contract.

It is normally seen that when a contractor is awarded the work by the contractee, there can be varied kinds of statutory conditions as per the contract depending upon the client, depending on the state, depending on the area say within SEZ or outside. In all such circumstances the contractor needs to keep himself updated and abreast of the environment so that the invoice is issued properly and all the rightful claims are made and recovered from the client. Various issues are assumed in this illustration depending on whether the contractor is under regular / composition scheme.

 

  1. Sample Invoice for one of the conditions.

We have also found that the contractors face a lot of problem in proper disclosure of Free Issue Material, when the same has to be considered for the purposes of tax calculation. The illustrated invoice is one of the possible ways to raise an invoice in such a scenario keeping in mind the statutory compliances.

  1. Deriving the Point at which Service tax is payable as per POT Rule, 2011

a)      Point of Taxation rules have changed the world as regards the manner in which the service tax liability is going to be discharged henceforth. The illustration presents in a tabular format the manner in which the service tax becomes due under different scenarios. It also takes into account the provisions of Rule 6 of the said rules on Continuous Supply of Services (CSOS).

b)     Practical implications for civil Contractors.  -  It was being presumed by the contractors that the date of furnishing the uncertified abstract would be the date when the service tax becomes payable. But the recent circular from the department has clarified some finer aspects to the relief of the construction sector.

  1. Working under the Supreme Court Judgement of Gannon Dunkerly & Co.

This is a landmark judgment adopted by various vat departments across the country. Hence it is an attempt to illustrate the manner in which the taxable turnover is arrived at as per this judgement in case of indivisible works contracts.

  1. Taxability of road related works in a road contract

Road work, because of the exemptions has been marred with a lot of controversies, especially when the road work is part of another contract with various taxable works. The illustration takes an example of a work order to explain the various services which are taxable and which are not.

  1. Reduction of 60% Input while raising the Invoice under Works Contract service

This is one of the recent amendments in budget 2011. This is applicable to those contractors registered under the chapter of Works contract service and having sub-contractors who are charging service tax at full rate of 10.3% without reducing the value of material involved. Thus it is hinting at the fact that because excise credit on input goods is not available to the contractor paying service tax at 4.12% under Work contract service, he may pass on the purchase of these material to sub-contractors who will take the excise credit. These sub-contractors would subsequently bill to the main contractor, who would take full service tax credit on input services against the liability under Work Contract services. The position now stands changed subsequent to budget 2011.

 

 

 I   -   Illustration on Various Statutory Conditions in a Works Contract

 

A) If the contractor is under regular scheme under both VAT and Service Tax :-

 

 

 

Tax scenarios

Condition as per Work Order received from the client

Total Abstract Value including value of Mat (A)

Value of Mat (B)

Vat Rate % (C)

VAT Amt (D=C*B)

Labour (E=A-B-D)

Service Tax Rate % (F)

Service Tax Amount (G=E*F)

Bill Amount

1

Service Tax extra but VAT & WCT inclusive

10

3

4.00%

0.12

6.88

10.30%

0.71

10.71

2

Service Tax & VAT extra but WCT inclusive

10

3

4.00%

0.12

7

10.30%

0.72

10.84

3

Service Tax, VAT & WCT 2% extra (Note 1)

10.2

3

4.00%

0.12

7.2

10.30%

0.74

11.06

Note :-

 

When as per the W.O, WCT is extra then the same needs to be incorporated within the value of Abstract, as the same can-not be charged separately.

 

B) Contractor is under the Composition scheme (0.6%) under VAT and Works Contract Scheme under Service Tax

with Free Issue of Material being issued by  the client :-

 

Tax scenarios

Condition as per Work Order received from the client

Abstract Value (A)

Free Issue Mat (B)

Service Tax Rate %

Value for service Tax (C=A+B)

Service Tax Amount (D=C*4.12%)

Total Bill Amount (A+D)

 

1

Service Tax extra but VAT  inclusive

10

2

4.12%

               12

    0.49

     10.49

 

2

 

Service Tax, & VAT 0.6% extra

10.06

2

4.12%

               12

    0.50

     10.56

 

Note 1

Cost of FIM is added from the date of the amendment, i.e. 07.07.09, under Work Contract Service

 

 

 

 

 

 

 

 

 

 

C) Contractor is under the Composition scheme under VAT and 33% Abatment Scheme under Service Tax

With Free Issue Material being issued by the client :-

 

Tax scenarios

Condition as per Work Order received from the client

Abstract Value (A)

Free Issue Mat (B)

Service Tax Rate %

Value for service Tax (C=A+B)

Service Tax Amount (D=C*4.12%)

Total Bill Amount (A+D)

 

1

Service Tax extra but VAT  inclusive

10

2

3.40%

               12

    0.41

     10.41

 

3

Service Tax & VAT extra

10.06

2

3.40%

               12

    0.41

     10.47

 

Note 1

Cost of FIM is added  under the 33% scheme vide Notification No. 1/2006.

 

                                                     

 

 

 

 

 

Illustration II  -  Sample Invoice –

ABC Ltd.

 

 

 

 

 

 

Village - Mokha,

 

 

 

 

 

Dist. Gandhidham

 

 

 

 

 

Gujarat

 

 

 

 

 

 

LST No:

 

 

 

 

 

 

01234567890

 

 

 

 

 

 

 

Invoice No

 

R/10-11/001

 

 

 

Ref. No:

 

RA-01

 

 

 

 

Invoice Dated

05-Jul-11

 

 

 

 

Work Order Reference No.

ABC12345

 

 

 

Service Tax Registration No.

AAACQ0123BST001

 

 

Category of Service

Civil & Structural Work

 

 

Service Period

01-06-11 to 30-06-11

 

 

 

 

 

 

 

 

 

 

 

 

 

If VAT is paid extra

If VAT is inclusive

 

Break up of Abstract Value:

 

 

 

   51,00,000

 

   51,00,000

 

 

 

 

 

 

 

 

 

A) Material  (Detailed break up attached) 

 

 

 

 

 

Material

 

 

   11,00,000

 

   11,00,000

 

 

VAT – 10%

 

 

     1,10,000

 

    1,10,000

 

 

Charge towards Material

 

 

             

12,10,000

 

12,10,000

 

 

 

 

 

 

 

 

 

B) Labour Charges

 

 

 

     40,00,000

 

     38,90,000

 

Add : Cost of Free Issue Material

 

 

   15,00,000

 

   15,00,000

 

 

Gross Charges for calculation of Service Tax

 

 

   66,00,000

(40+11+15)

 

   64,90,000

 

 

Service Tax

 

 

    2,71,920

       2,71,920

    2,67,388

    2,67,388

 

 

 

 

 

 

 

 

 

 

 

 

 TOTAL (A + B)

   54,26,920

 TOTAL (A + B)

   53,67,388

 

For, XYZ Pvt. Ltd.

 

 

 

 

 

(Authorized Signatory)

 

 

 

 

 

 

                   

For e.g. Total Value of Abstract is Rs. 51 Lacs with value of labour as Rs. 40 Lacs and value of material being Rs. 11 Lacs in an Indivisible contract. Value of material is arrived by adding normal GP in the project to the landed cost materials. The contractor has opted for a regular schem under VAT and Service tax to be charged under the Works Contract Scheme. Value of FIM is Rs. 15 Lacs. Both the possibilities that VAT extra and inclusive is considered.

 

 

 

 

Illustration  III a  -   Illustration on Point of Taxation for the Construction Sector

S. No.

Completion of service

Iinvoice Date

Payment recd.

Milestone in contract when pmt is due

Point of Taxation

Remarks

1

April 10

April 20

April 30

April 8

April 20

Invoice issued in 14 days of milestone, hence date of Invoice is POT.

2

April 15

April 26

April 30

April 10

April 10

Invoice not issued within 14 days of milestone, hence date of milestone is POT.

3

April 10

April 20

April 15

April 9

April 15

Invoice issued in 14 days but payment received before invoice

4

April 10

April 26

April 5 (part) and April 25(remaining)

April 10

April 5 and April 10 for respective amounts

Invoice not issued in 14 days. Part payment before completion, remaining later

The relevance of POT is that from this date the service becomes due and needs to be paid on 5th/6th of subsequent month / quarter as applicable on case to case basis.

Illustration   III b   -   Practical situations after Point of Taxation Rule, 2011

Situation

Impact

As per the contract the milestone for payment is the last date of the month. Uncertified Abstract has been put up on 30th April of Rs. 100 Lacs which is certified on 30th May as Rs. 90 Lacs. Rate of service tax for sake of simplicity can be assumed at 10%

Service tax has to be paid on Rs. 100 Lacs  * 10% = Rs.10 Lacs on 6th May, 2011 as the milestone is the point of taxation as per Rule 6. It is then advisable to issue an Invoice of Rs. 100 Lacs for proper accounting. On 30th May, a credit note is to be issued to the contractee and adjustment of excess payment of Rs. 1 Lac to be made as per Rule 6(3) of the Service Tax Rules.

As per the contract the milestone for payment is the certification of invoice on a monthly basis. Uncertified Abstract has been put up on 30th April of Rs. 100 Lacs which is certified on 30th May as Rs. 90 Lacs. Rate of service tax for sake of simplicity can be assumed at 10%

Since according to us, the Abstract does not qualify to be an invoice or a challan as per Rule 4A of Service Tax Rules, the date of giving the abstract should not be considered as point of taxation. Further as per the milestone theory the point of taxation would be 30th May. But since the invoice is kept on 30th of May, the  point of taxation would be 30th of May and service tax of Rs. 9 Lacs would have to be paid on 6th June. This takes into consideration the latest circular from CBEC dt.18/7/2011.

Retention Monies are deducted by the client

Service Tax would have to be paid on such amounts on the date of furnishing the invoice.

Illustration  IV   -   Gannon Dunkerly -  For Contractors opting for payment of VAT under regular scheme instead of composition scheme

The Apex  court in the case of Gannon Dunkerley and Company and Others v. State of Rajasthan and Others & Larsen & Toubro Ltd. v. Union of India and Others (1993) 88 STC 204 (SC) has laid down the following deductions to determine the element of deemed sales in works contract :-

 

(i)             labour charges for execution of the works,

(ii)            amount paid to a sub-contractor for labour and services,

(iii)           charges for obtaining on hire or otherwise machinery and tools used for execution of the works contract,

(iv)          charges for planning, designing and architect’s fees,

(v)           cost of consumables used in the execution of the works contract,

(vi)          cost of establishment of the contractor to the extent it is relatable to supply of labour and services,

(vii)         other similar expenses relatable to supply of labour and services and

(viii)        profit earned by the contractor to the extent it is relatable to supply of labour and services.

 

     

 

The below is a working based on Profit and Loss A/c for M/s XYZ for the year 2010-11

Particulars

 

 Amount as per Audited Financials

 Eligible Deductions as per Above Judgements

Sales as per P&L Account

 

1,000,000 (A)

1,000,000

Less : Operating Expenses

 

 

 

Stores & Spares

 

50,000

50,000

Sub-Contractor Expenses

 

150,000

150,000

Departmental Labour

 

100,000

100,000

Wages

 

25,000

25,000

Equipment Hire Charges

 

55,000

55,000

Labour Expenses

 

1,500

1,500

Depreciation on Plant and Mach

 

15,000

Debatable

Depreciation on other Assets

 

7,500

0

Salary – Site Engg and Supervisors

 

25,000

Debatable

Salary – Admin Staff

 

15,000

0

Interest and Financial Charges

 

20,000

0

Office Expenses

 

12,500

0

Fuel for Machinery

 

12,500

12,500

Transportation Expenses:

 

11,000

11,000

Repairs   -Plant and Machineries

 

12,500

12,500

 

 

512,500

           417,500 (B)

Profit on Labour

(C = B * 20%) where 20% is rate of GP

                83,500

                501,000  (D=B+C)

Deemed Sales

 

 

499,000 (E=A–D)

 

 

 

 

 Purchases made in Works contract

Amount in Rs.

Proportion to Total Purchases (F)

 Tax Payable

Purchase - 4%

      150,000 (G)

66%

(150000 / 228000)

13,132

 (E*66%*4%)

Purchase - 12.5%

        78,000 (H)

34%

(78000 / 228000)

 21,339

(E*34%*12.5%)

 Total Purchases

            228,000

 

                  34,470  (I)

 

 

Input Credit on Purchase

                  15,750  (G)

 

 

Payable

                  18,720   (I-G)

Illustration  V  on Road Contract

M/s XYZ has received a Works contract with following items :-

Item Code

Description

Value in Rs. Lacs

Taxability - Service Tax

1.1

Excavation

5

Taxable

1.2

Back filling

2

Taxable

1.3

Concrete

4

Taxable

1.4

Shuttering

5

Taxable

1.5

Internal road construction

10

Exempt as per Circular No.B1/6/2005-TRU dt.27-7-2005

1.6

Laying of Cables alongside road

2

Exempt as per Circular No.123/5/2010-TRU dt. 24-5-10

1.7

Laying of electric cable between grids / sub-stations

4

1.8

Laying of electrical cable upto distribution point of residential / commercial comples

5

1.9

Laying of electrical cable beyond distribution point of residential / commercial complex

6

 Taxable as per Circular No.123/5/2010-TRU dt. 24-5-10

2.0

Installation of Flood Lights

5

2.1

Reinforcement

25

Taxable

2.2

Painting and Finishing

20

Taxable

2.3

Repair of Road

15

Exempt as per Circular No. 110/4/2009 – ST dated 23-2-2009

 

Grand Total

108

 

Thus out of Rs. 108 Lacs, service tax is to be charged on Rs. 72 Lacs  only.  It may be noted that Cir No. B1/6/2005-TRU dated 27-7-2005 clarifies as follows – If the contract for construction of commercial complex is a single contract and the construction of road is not recognised as a separate activity as per the contract, then the service tax would be leviable on the gross amount charged for construction including the value of construction of roads.

 

 

 

 

 

 

 

Illustration  VI  -  Amendment in Work Contract Rules, 2007

  • The Works Contract Rules, 2007 have been amended in the last budget

To provide for restriction in availment of CENVAT credit to 40% of service tax paid on services relating to erection, commissioning and installation services, commercial or industrial construction services and construction of residential complex services in case service tax has been paid, without availing the abatement benefit under notification 1/2006.

S.No.

Situation

Before Finance Bill, 2011

After Finance Bill, 2011

1

 

Mr C (sub-contractor) charges service tax to Mr B (contactor)@ 10.30% on total bill value of Rs.1 cr i.e. Rs. 10.3 Lacs. Sub-contactor has purchased all material and taken excise credit on the same.

 

Mr B charges service tax to Mr A (client) under Work Contract composition scheme @ 4.12%

Mr B will get an Input Credit of Rs. 10.3 Lacs

Mr B will get an input credit of 40% of Rs. 10.30 Lacs = Rs. 4.12 Lacs

 

The author is a chartered accountant practising in the construction sector and can be reached at

E - This email address is being protected from spambots. You need JavaScript enabled to view it.

M – 9426024975

Web – www.consultconstruction.com

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CA Sandesh Mundra, Consultant – Management Audit and Indirect Taxation - Chartered Accountant, Diploma in Information System Audit, Diploma in Insurance & Risk Management , Certificate from ICAI on International Financial Reporting Standards. Actively associated with clients in the industrial construction sector since last 9 years.He possesses special skills in structuring the indirect tax component of the works contracts and as management auditor, has visited several construction sites in various states like Orissa, Rajasthan, Gujarat, Maharasthra, Madhya Pradesh etc. During the course of said visits he has been to very large industrial complexes, refineries, power plants etc

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