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Impact of State Budgets on Construction Sector – Compiled by Consult Construction
- Every year we need to keep ourselves updated with the various changes that impact our businesses. Various changes are being made during the annual budget event at both central and state level. A lot of focus goes on the changes made by Central Budgets, as a result we tend to miss the state budgets.
- Like each year, this year also a lot of changes have been made in the state budgets. Each of those changes may not be relevant to the Construction Sector. Thus an attempt has been made by way of this article to study the various State budget amendments applicable to the project / construction sector.
- The states identified are as below :-
Lets look at detailed changes :-
Maharashtra VAT :- The relevant changes under Maharashtra VAT are as below :-
1. Amendment of section 2 of Mah. IX of 2005 – Defining the value of sales and Purchases :-
(1) in clause (20), after Explanation I, the following Explanation shall be inserted, namely :—
“Explanation—IA.—Purchase price shall not include the amount of service tax levied or leviable under the Finance Act, 1994 (32 of 1994) and collected separately by the seller.”;
(2) in clause (25), after Explanation I, the following Explanation shall be inserted, namely :—
“Explanation—IA.—Sale price shall not include the amount of service tax levied or leviable under the Finance Act, 1994 (32 of 1994) and collected separately from the purchaser”.
2. VAT cannot be levied on Service tax Amount :- If Service Tax is included in the turnover of Sales and purchases, then for the purpose of turnover of MVAT, service tax will not be included in it; i.e. VAT is not levied on Service Tax.A sigh of relief as cascading effect of tax has been removed.
3. Stringent provisions that may affect the builders :- Now, Department can issue notice of Assessment if he they have “Reason to Believe” that the Dealer has evaded Tax or has paid less Tax.The department can go back upto 6 years.
Tamil Nadu VAT :- The relevant changes under Tamil Nadu VAT are as below :-
- Works contract relating to sizing of yarn will be exempted from the present levy of VAT.
- Input Tax Credit reversal imposed at the rate of 3 per cent on the inter-state sale of goods as per proviso to section 19(2) (v) of Tamil Nadu Value Added Tax Act 2006, will be withdrawn henceforth.
- Clause (c) under Section 19(5) of TNVAT Act, 2006 will henceforth be withdrawn to enable the dealers to claim Input Tax Credit on the inter-State sale of goods without ‘C’ form. Above measure will eliminate additional burden on the dealers effecting inter-State sale of goods without ‘C’ form and will be cost effective for contractors in inter-state works contract.
- Reduction of VAT on LED lamps of all kinds from 14.5% to 5%.
- Reduction on VAT on air compressors, pump sets up to 10 hp and their parts thereof will be reduced from the present levy of 14.5% to 5%.
Rajasthan VAT :- The relevant changes under Rajasthan VAT are as below :-
1. Increase in VAT rate of Schedule V(Residual entry) to 14.50% from 14%. Hence the tax impact shall increase on goods falling under this schedule.
2. Insertion of entry in Rule 22A (GDC – Labour charges deduction list) - Notwithstanding anything contained in this rule, the taxable turnover for levying Vat on works contract, may be determined by deducting from the gross value of the contract, in so far as the amounts relating to the deductions pertaining to the said works contract
“bb. Value on which tax has been paid by the sub-contractor”
Hence the theory of tax payable either by the contractor or the sub-contractor has been given effect to in the state.
3. Exemption Notification –
Existing exemption Notification is substituted by Notification No. SO 270 dated 9-March-2015 as below :-
Two Options – Instead of a single exemption fee option, the government has introduced two options with following characteristics :-
Option A - The contractor will be liable to pay tax at schedule rates on goods purchased from outside the state.
Option B –The contractor will not be required to pay any tax in addition to the payment under the exemption fee scheme, although the composition rates in this option are higher as compared to Option A.
Option A –
- Works contract where the cost of material doesn’t exceed 5% of the total contract amount - 0.10%
- Works Contract relating to construction and repair of roads, runways, bridges, dams, drains excluding sewerage system, tunnels, canals, channels, barrages, railway tracks, causeways, sub ways, diversion, spill ways, boundary walls, buildings and water harvesting system - 0.75%
- Works contract awarded by Rajasthan VidhyutPrasaran Nigam Ltd., Jaipur VidhyutVitaran Nigam Ltd., Ajmer VidhyutVitaran Nigam Ltd., Jodhpur VidhyutVitaran Nigam Ltd. - 0.75%
- Any other kind of works contract not covered by item number 1 to 3 above - 2%
Option B –
- Works contract where the cost of goods involved in execution of works contract does not exceed five percent of the total contract amount - 0.70%
- Works contract relating to construction and repair of roads, runways, bridges, dams, tunnels, canals, channels, barrages, railway tracks, causeways, sub ways, diversion, spill ways, drains excluding sewerage system - 4%
- Works contract related to construction and repair of buildings, boundary walls, sewerage system, sewerage treatment plant, water supply works and water harvesting structures - 5%
- Works contract awarded by Rajasthan VidhyutPrasaran Nigam Ltd., Jaipur VidhyutVitran Nigam Ltd., Ajmer VidhyutVitran Nigam Ltd., JodhputVidhyutVitran Nigam Ltd. - 3.50%
- Works contract related to setting up of new enterprise or expansion of existing enterprise manufacturing fertilizer within the State with minimum investment of Rs.2500 Crore -1%
- Any other kind of works contract not covered by item number 1 to 5 above - 6%
The difference between the two options has already been explained above.
4. Substitution of Composition scheme for Real Estate Developers&builders –(Notification No.-SO 265 dated 9-March-2015)
- Registered dealers, commonly known as developers/ builders who, work as contractors, undertake the construction of flats, dwellings or buildings or premises and transfer them along with goods (whether as goods or in some other form) and land or interest underlying in the land. Now the dealer under this category has to opt for any one out of the two schemes below :-
- Scheme 1 - Rs. 1300 for every Rs. 2 Lacs of consideration or part there of (including land value) i.e. 0.65%
- Condition - Dealer has to pay tax on normal rates on goods purchased out of Rajasthan
- Scheme 2 - Rs. 8000 for every Rs. 2 Lacs of consideration or part there of. (including land value) i.e. 4%
- Condition - ITC is restricted for a dealer opting this Scheme.
Haryana VAT :- The relevant changes under Haryana VAT are as below :-
- VAT rate on LED lights, pipe-fittings and prefabricated steel structures is reduced to 5 percent from existing rate of 12.50%.
Madhya Pradesh VAT :- The relevant changes under MP VAT are as below :-
- Goods mentioned in schedule II of MP Vat Act, 2002 - rate of vat 13% increased to 14%.Tendency of states to increase tax rates are causing short term inflation. But with a object to keep the rates in line with GST it is helpful in long term as additional liability on transition will get covered.
West Bengal VAT :- The relevant changes under WB VAT are as below :-
- VAT registration limit has been increased to 10 lacs from 5 lacs.
- Threshold limit of annual turnover for payment of VAT enhanced from Rs. 5 Lakhs to Rs. 10 Lakhs.
- Threshold annual turnover limit for submitting VAT Audit Report enhanced from Rs. 5 Crs to Rs. 10 Crs
Karnataka VAT :- The relevant changes under Karnataka VAT are as below :-
- Increase in registration limit from 7.5 lakhs of annual turnover to Rs. 10 lakhs.
- Tax rate increased by 1% on Petrol and Diesel.
- Tax reduction from 14.5% to 5.5% on Industrial cables namely XLPE Cables, Jelly Filled Cable, Optical Fibre Cable and PVC Cable.
Kerala VAT :- The relevant changes under Kerela VAT are as below :-
- An additional tax of Rupees one per litre to be imposed on petrol and diesel
- Serviced villas to be treated at par with serviced apartments and made taxable at 12.5% under Kerala Tax on Luxuries Act.
- LNG exempted from VAT for a period of one year.
- Tax rate of electronic goods and systems notified by the Government, manufactured and sold for defence purpose of the country, reduced to 5%.
- Fabricated wall panels made by FACT from their by-product Glass fibre reinforced gypsum exempted from tax.
Goa VAT :- The relevant changes under GOA VAT are as below :-
- Imposition of VAT on CFL and LED bulbs, tubes, sanitary napkins and mobile phones (above Rs. 12,000) by bringing the same under Residuary Schedule of the VAT Act, 2005.
- Enhancement of VAT on Motor Spirit from 10% to 15%.
Assam VAT :- The relevant changes under Assam VAT are as below :-
- Disallowance of ITC in case of inter-State sales of goods made out of locally bought/manufactured goods has been withdrawn.
Andhra Pradesh VAT :- The relevant changes under AP VAT are as below :-
- “Any dealer who desires to import goods from other States or Union Territories or any dealer who desires to send goods to outside the State, shall electronically generate the way bill, through the official website of the Commercial Taxes Department or the Government of Andhra Pradesh. Such electronically generated waybill shall accompany the goods along with sale invoice or delivery note and shall be tendered by the person in-charge of the goods vehicle to the officer in-charge of the check post through which the goods vehicle first enters into the State or exits the State, as the case may be.”
Gujarat VAT :- The relevant changes under Gujarat VAT are as below :-
- Vat rate on aviation turbine fuel has been reduced from 30% ( for duty paid ATF ) and 38% ( for bonded ATF) to 5% when sold from cities other than Ahmedabad and Vadodara for scheduled commercial airlines service flights.
- There is new levy of tax on technical textile. The vat rate will be 5% including additional vat rate 1%.
Authors – CA Sandesh Mundra and Pooja Jajwani
Tamil Nadu Govt notifies the Tamil Nadu Value Added Tax (Amendment) Act, 2015 w.e.f. April 1st, pursuant to State Budget; Inter alia, allows full input tax credit on goods purchased within the State from a registered dealer for the purpose of sale in the course of inter-State trade or commerce u/s 8(1) & (2) of Central Sales Tax Act; Taxes air compressors, pump sets upto 10 hp and parts thereof, mosquito destroyers and insect killer devices, and LED lamps of all kinds @ 5%; Further, exempts fishnets, fishnet fabrics as also mosquito nets of all kinds from tax, in terms of Sec 15 : Tamil Nadu VAT Notifications
Booking of Material issued to Sub-contractor at construction site on free issue basis Options available -
Option advisable - Option No. 1
- Whatever option is selected the same should be consistently followed whether we have one site or multiple sites. And it is very difficult to follow option 2 consistently.
- Actual stock lying with sub-contractor may not be available with accuracy. Hence it is advisable to book the same as consumption. Because the stock issued to sub-contractor may be lying in four stages - Consumed and billed, consumed and unbilled, consumed and debitable, unconsumed. And it is practically not feasible to track the material in this fasion moreso when you would have to disclose the stock records periodically to bankers and statutory authorities in returns.
- At each period end the stock issued would be subjected to material reconciliation. Whatever excess is issued should be debited to the sub-contractor. The practise of debiting the sub-contractor can be consistently followed only when we have booked the consumption at the point of first issue.
- All statutory authorities say Income Tax, VAT and Service Tax may like to verify the stock records. If the same does not physically tally with the stock in our godown, the same may create complexities in assessment.
- All major construction companies including L&T, Simplex, and real estate companies in general follow option 1.
- The issue of MIS preparation in construction sector is taken care by having proper method of WIP valuation, which takes care of such issues in the best manner. Hence advisable to track the value of such items under the construction activities.
- If the number of items are more and the sub-contractors are also more than one, the possibility of obtaining incorrect stock figures is not ruled out. Auditors also would normally object to such policy and may like to avoid taking third party stock certifications at each reporting period.
- Complexities would also arise in case of materials returned by the sub-contractors, when the same has not been booked as issue in the first instance.
- In ERP softwares since estimates are available and the WBS tasks are small enough, following option 2 will add overhead of few more processes with minimal or no gain.
- These are some of the reasons based on which we advocate clients to follow option 1.
- Option 2 is more suitable for the manufacturing sector in their jobworking transactions when the finished goods are to be returned by the jobworkers. But for the uncontrolled environment of the construction sector, where there is no possibility of return of finished work physically, the same is not advisable.
- Puducherry Govt notifies Value Added Tax (Amendment) Act, 2015 w.e.f. April 1, 2015; Inter alia, amends definition of ‘tax period’ u/s 2(zk) to mean a ‘quarter’ for dealers opting for compounding scheme u/s 19 of VAT Act, and ‘calendar month’ for other dealers; A dealer can opt to pay registration fee for 3 years in advance by remitting a sum equal to 3 times of specified fees u/s 8(2); Registration certificate to be valid for 1 year / 3 years, as the case may be, and shall be renewed on expiry of validity period on payment of requisite fee, until cancellation; Increases the composite works contract tax rate to 5% from 4% (on 70% of value of consideration received / receivable) u/s 15;
- Also increases the turnover threshold for audit of accounts by Chartered Accountants / Cost Accountants from Rs 50 lakhs to Rs 1 Cr; Further, exempts retrospectively “aviation turbine fuel” sold to aircraft with maximum take off mass of less than 40,000 kgs operated by scheduled airlines, as specified in Sec 14 of CST Act, w.e.f. December 29, 2014; Makes corresponding amendments to Puducherry VAT Rules, including Rule 19, whereby every dealer opting for compounded tax rate should file return for each tax period in Form K on or before 15th of month succeeding the relevant quarter, alongwith tax payment proof : Puducherry VAT Notifications
Service Tax changes applicable from
A) Exemptions withdrawn
1. Goods Transport services
(a) by rail or water in respect of following products which were exempt earlier will now be taxable: Fruits, Vegetables & Eggs
Hence, Goods transport services by rail or water will not be taxable in case of Milk, Salt and foodgrain including flours, pulses and rice.
(b) by road in respect of following products which were exempt earlier will now be taxable: Tea, coffee, Jaggery, Sugar, Milk Products and edible oil
Hence, GTA (road) will not be taxable in case of Milk, Salt and foodgrain including flours, pulses and rice ONLY – rest all will be taxable.
2. Services provided by a mutual fund agent to a mutual fund or assets management company, distributor to a mutual fund or AMC, selling or marketing agent of lottery ticket to a distributor. Service Tax on these services shall be levied on reverse charge basis.
3. Following services provided to government, local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:
i. a civil structure meant for use other than for commerce, industry, etc.
ii. a structure meant predominantly for use as an educational, clinical, or an art or cultural establishment.
iii. a residential complex predominantly meant for self-use or the use of their employees.
4. Exemption to services provided by way of construction, erection, commissioning or installation of original works pertaining to an airport or port
5. Exemption to services provided by a performing artist in folk or classical art form of (i) music, or (ii) dance, or (iii) theater, will be limited only to such cases where amount charged is upto Rs. 1,00,000 for a performance. It is further clarified that the exemption shall not apply if services provided by artist as a brand ambassador;
6. Departmentally run public telephone, Guaranteed public telephone operating only local calls; Service by way of making telephone calls from free telephone at airport and hospital where no bill is issued.
B) New Exemptions introduced
1. Goods transport agency service provided for transport of export goods by road from the place of removal to an inland container depot, a container freight station, a port or airport is exempt from Service Tax vide notification No. 31/12-ST dated 20.6.2012. Scope of this exemption is being widened to exempt such services when provided for transport of export goods by road from the place of removal to a land customs station (LCS).
2. Any service provided by way of transportation of a patient to and from a clinical establishment by a clinical establishment is exempt from Service Tax. The scope of this exemption is being widened to include all ambulance services.
Life insurance service provided by way of Varishtha Pension Bima Yojna is being exempted.
3. Service provided by a Common Effluent Treatment Plant operator for treatment of effluent is being exempted.
4. Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labeling of fruits and vegetables is being exempted.
5. Service provided by way of admission to a museum, zoo, national park, wild life sanctuary and a tiger reserve is being exempted. These services when provided by the Government or local authority are already covered by the Negative List.
6. Service provided by way of exhibition of movie by the exhibitor (theatre owner) to the distributor or an association of persons consisting of such exhibitor as one of it’s members is being exempted.
C) Reverse Charge Mechanism
1. Manpower supply and security services when provided by an individual, HUF, or partnership firm to a body corporate are being brought to full reverse charge. Presently, these are taxed under partial reverse charge mechanism;
2. Services provided by mutual fund agents, mutual fund distributors and agents of lottery distributor are being brought under reverse charge consequent to withdrawal of the exemption on such services.
D) Rationalisation of Abatement
1. Transport for Goods
At present, service tax is payable on 30% of the value of rail transport for goods and passengers, 25% of the value of goods transport by road provided by a goods transport agency and 40% for goods transport by vessels. The conditions also vary.
A uniform abatement is now being prescribed for transport by rail, road and vessel. Service Tax shall be payable on 30% of the value of such services subject to a uniform condition of non-availment of CENVAT Credit on inputs, capital goods and input services.
2. Air Transport of Passangers
At present, Service Tax is payable on 40% of the value of air transport of passenger for economy as well as higher classes, e.g. business class. The abatement for classes other than economy is being reduced and service tax would be payable on 60% of the value of such higher classes.
3. Abatement is being withdrawn from services provided in relation to chit fund business consequently Service Tax shall be paid on full consideration received by way of fee, commission or any such amount.
Maharashtra Value Added Tax Act – Work Contract - Levy of VAT on service tax – Sale Price – Turnover -
HELD – On plain reading of section 2(25) and 2(33), service tax cannot be read into sale price since the definition of ‘sale price’ and ‘turnover of sales’ is not as wide as in Andhra Pradesh General Sales Tax Act. Therefore, the decision in Central Wines cannot be stretched to include service tax into the sale price - The service tax is leviable on service value. It has no relation with the goods. It is independently leviable on value of service under the Finance Act. So on plain reading of the inclusive part of the definition of ‘sale price’ u/s.2(25), the service tax could not form the part of sale price - The service tax and VAT are mutually exclusive. Therefore, it would not be liable to VAT under MVAT Act - Determination order of the Commissioner is not sustainable in law and liable to be set aside – Value of goods supplied in execution of work contract is determined in accordance with the rule 58 of the MVAT Rules. The VAT is levied on the value of goods supplied in execution of works contract. In addition, the assessing authority added service tax into the sale price so determined. The said is not permissible as the service tax and VAT are mutually exclusive and service tax would not be a part of sale price – Appeal partly allowed.
M/s SUZLON INFRASTRUCTURE LTD Vs THE STATE OF KARNATAKA