U. P. VAT : CIVIL WORKS CONTRACTS COMPOSITION SCHEME
By : E TAX SERVICES                            
S-84, BLOCK-II, GANGA SHOPPING COMPLEX, SECTOR-29
NOIDA-201301                                   

       For payment of VAT involved in certain types of specified works contracts of civil nature, the Government of Uttar Pradesh, vide its G. O. KA.NI.-2-1278/XI-2009-9(2)/ 08, Dated June 09, 2009, has announced a scheme for payment of composition money in lieu of actual amount of tax payable under the provisions of the U. P. VAT Act, 2008. Composition money is to be computed at specified rate percent of amount receivable in respect of contract executed in each assessment year. Concessions relating to value of goods supplied by the contractee and in respect of earth work have also been provided with specified conditions. Composition money payable is to be computed -
(i) @ 2 percent of the amount receivable in any assessment year for the contract executed in such assessment year, if execution of contract does not involve use of goods, imported from outside the State of U. P., more than 5 % of the value of the contract executed; and
(ii) @ 6 percent of the amount receivable in any assessment year for the contract executed in such assessment year, if execution of contract involves use of goods, imported from outside the State of U. P., more than 5 % of the value of the contract executed.

        Let us consider an example here. Let the total value of a particular contract executed during a particular assessment year be Rupees 5, 00, 00, 000/- and value of imported goods used be Rupees 25, 00,000/-. Since value of imported goods used is 5 % of the value of contract executed, the contractor will be required to pay 2 % of value of contract executed, i.e. 2 % of 5,00,00,000. This amount comes out Rupees 10, 00,000/-. Now in the same example, if we replace value of imported goods Rs. 25,00,000/- by Rs. 26,00,000/-, the percent of imported goods becomes 5.2 % which is greater than 5 %. In this case, composition rate of 6 % will be applicable and therefore, amount of composition will come out Rs. 30, 00, 000/-. We see that difference in between two amounts of composition money is Rs.20, 00,000/-. This difference in two amounts of composition money is 2000 percent of difference in two values of imported goods. Also we notice that this amount of composition money in latter case will remain unchanged even if contractor uses all goods imported from outside the State. Let us assume that the contractor uses imported goods of value Rs. 3, 50, 00,000/- (which is 70 % of total value of contract executed i.e. Rs. 5, 00, 00,000/-). In this case also amount of composition money will be Rs. 30, 00,000/-. In this case difference in 5 % and more than 5 % is Rs.3, 50, 00,000/-. This difference in two amounts of composition money is roughly 6.15 percent of difference in two values of imported goods.

        In my personal opinion, on this point scheme cannot be said to be rational. Here it is also to be noted that in reference to imported goods, word "use" has been used. Word "use" is wide open to include the goods which are consumed in the execution of the contract as well as the goods in which property is transferred to the contractee. Goods which are consumed in the execution of the contract form part of labour & service and value of such goods does not attract levy of VAT. Only value of those goods which are involved in the execution of the contract and in which property is transferred attract levy of VAT.

       It is widely accepted that civil works contracts normally involve 30 % of total value of the contract towards labour, service charges and profit accrued on them. Hence total value of goods in which property is transferred in the execution of a civil work contract may be taken 70 % of the total value of the contract. In order to make the scheme rational on this point, difference of 5 % and 70 % should have been divided suitably in between 2 % and 6% by fixing rates of composition as follows:

Percentage value of imported goods used

Composition money equivalent to rate percent of value of executed contract

Value exceeding 0 % and upto 5 %

2.0 % of value of contract executed

Value exceeding 5 % and upto 18 %

2.8 % of value of contract executed

Value exceeding 18 % and upto 31 %

3.6 % of value of contract executed

Value exceeding 31 % and upto 44 %

4.4 % of value of contract executed

Value exceeding 44 % and upto 57 %

5.2 % of value of contract executed

Value exceeding 57 % and upto 70 %

6.0 % of value of contract executed

        If the intention has been of including value of consumables in the value of imported goods referred, rate percent could have been fixed taking value percent of imported goods fixed as fraction of total value of goods used in the execution of the contract.

        Alternatively, if intention has been of including consumables in imported goods in all cases then in cases in which value of goods was to exceed 5%, composition money could have been determined as aggregate of 2% of value of contract executed and a sum computed as tax on exceeded value of imported goods.

        Another issue relates to concept of "value of imported goods". One contractor may interpret it as purchase price of goods, another may interpret it as sum of purchase price and freight & cartage, even another may add provable value addition to this cost. In order to prevent the loss of revenue and in order to bring uniformity, value of goods should have been defined as 120 % of the value of goods defined in sub-section (1) of section 2 of the U. P. Tax On Entry of Goods Into local Areas Act, 2007.

        Contractors have been required to make payment of composition money alongwith monthly or quarterly returns. Percentage of value of imported goods is to be worked out as fraction of the total value of the works contract executed during the assessment year. Such percentage cannot be worked out before end of the assessment year in cases of running contracts (contracts which remain incomplete in such assessment year). Similarly in cases of contracts execution of which have been completed, such percentage can be worked out only after expiry of the tax period in which execution has been completed.

        Supposing that a contractor, under bonafide belief, believes that in his particular contract, value of imported goods used during the assessment year will not exceed 5 % of the value of the contract executed. He pays composition money @ 2 % of the value of contract receivable in each tax period. But in the last tax period he finds that because of a valid reason or unforeseen circumstances, value of imported goods used has exceeded 5 % of the value of the contract executed. In this situation, he is left with two options. Either he should work out difference of actual amount of composition money and aggregate of composition money paid alongwith returns and should pay such differential amount of composition money alongwith tax return of the last tax period or he should file revised returns for all tax periods and should deposit differential amount for each tax period alongwith interest payable. In my view interest should not be charged where contractor has worked on bonafide belief. Provision for payment of such differential amount of composition money should have been made.

       Third issue which I am going to raise here relates to tax liability on purchase of goods by contractor from within the State of U. P. from persons other than registered dealers. Scheme is silent on this point but heading of the G. O., issued this behalf, mentions about composition of tax payable under U. P. VAT Act, 2008. Tax payable under U.P. VAT act, 2008 certainly includes tax payable in accordance with provisions of section 5 of the U.P. VAT Act, 2008. Section 5 of the said act deals with levy of tax on purchases. But heading cannot be said conclusive and complete provision. Section 6 of the said Act (hereinafter referred to as the Act) deals with composition of tax. Scheme of composition has been issued under provisions of section 6 of the Act. In section 6 also there is no specific provision but sub-section (2) of section 6 speaks about non allowance of input tax credit in respect of purchase of goods held in opening stock on the date of commencement of the composition scheme. For this purpose, clause (e) of sub-section (1) of section 13 and clauses (w) and (x) of sub-rule (1) of Rule 21 have been made. Section 14 speaks about reversal of input tax credit. We can summarize these provisions as under:

(i) Sub-section (2) of section 6 says that no input tax credit be allowed in respect of purchase of those goods which are re-sold in the period of composition.
(ii) Clause (e) of sub-section (1) of section 13 of the Act says that partial or full amount of input tax credit be allowed in respect of goods which are held in closing stock on the date on which provisions of section 6 become inapplicable.
(iii) Clauses (w) and (x) of sub-rule (1) of Rule 21 speak that no input tax credit be allowed in respect of purchase of goods which are held in opening stock on the date of commencement of the scheme. Sub-rule (1) has been framed by the State Government in exercise of its powers under section 14 (1) of the Act.
(iv) Section 14 deals with reverse input tax credit. Sub-section (2) of the said section says that where input tax credit has not been admissible, if it has been claimed, the same shall stand reversed.

        Supposing that a contractor, at the time of commencement of the period of composition scheme, holds timber worth Rs.1, 00,000/- in opening stock. Such timber had been purchased from persons other than registered dealers from within the State. He had deposited Rs. 12, 500/- as tax on purchase of such timber. He has also claimed credit of input tax. Then in view of provisions of sub-section (2) of section 6, sub-section (2) of section 14 and clauses (w) and (x) of sub-rule (1) of Rule 21, he has to work out reverse input tax credit and has to deposit such amount. Also compliance of clause (e0 of sub-section (1) of section 13 cannot be made unless the contractor has deposited amount of tax on purchase.

        The State Government has also announced composition scheme in cases of brick-kilns simultaneously. In that scheme, tax levy on purchases of coal, sand, saw-dust and fuel wood from persons other than registered dealers has also been brought under the composition scheme. In scheme relating to civil works contract, there is no mention of purchases, made from persons other than registered dealers, of goods used in execution of the contract.

        We can also think about the issue from another angle. On the basis of value of goods imported by him, the State Government has fixed two rate percentages for computing composition money. This has been because of variation in actual tax liability. In this case, the Government does not receive VAT on earlier purchase or sale of such imported goods. In the similar manner, in cases of purchases from persons other than registered dealers, the State Government does not receive VAT on earlier purchase or sale. Also the State Government has not fixed any limit for use of goods purchased from persons other than registered dealers. Supposing that a contractor for use in execution of a contract makes all his purchases from persons other than registered dealers. Purchase value of such goods is Rs.1, 00, 00,000/-. Let us suppose that purchase of goods involves VAT liability of Rs. 10, 00,000/- (assuming that goods included attract tax liability at the rates of 4 % and 12.5 %). Let us suppose that total value of contract executed is Rs. 135, 00,000/-. Assuming that contractor is not required to pay tax on such purchases, then total VAT involved will be Rs.2,70,000/-. Let there be another contractor who makes purchases of all such goods from registered dealers after payment of VAT to them. In this case he will pay Rs. 10, 00,000/- to registered dealers as VAT and will not be entitled to claim input tax credit. Under composition scheme he will have to pay Rs.2, 70,000/- in addition to aforesaid Rs.10, 00,000/-. In this case total amount of revenue will be Rs.12, 70,000/-. In my opinion, the State Government has not intended so.

        For sake of argument one can say that brick-kiln composition scheme does not support aforesaid logic. Then the State Government has not fixed any limit for import of goods for use in manufacture of bricks to be sold in the period of composition. Also we should not forget that manufacturing cost of bricks mainly includes cost of coal which is brought by brick manufacturers mainly from outside the State. For brick-kiln manufacturers, purchases of sand, saw-dust and fuel wood are minor purchases and hence do not involve big revenue stake. But again as I have said that composition scheme relating to civil works contracts does not mention about coverage of purchases of goods from persons other than registered dealers whereas brick-kiln scheme has specific mention in this respect.

        In the aforesaid circumstances and in view of the legal provisions under the U. P. VAT Act, 2008 and U. P. VAT Rules, 2008, I am of the opinion that on purchases of goods from persons other than registered dealers, contractors participating in the scheme will have to pay tax under section 5 of the Act.

        We will welcome comments and suggestions from readers of this article. Readers can send their comments using E-mail: nitin@tradevat.com.