What is VAT?

What is VAT?

Who Can Claim?

Documentation

VAT REFUND ENQUIRIES (Contact details)

What is VAT?

Currently set at 14%, Value Added Tax (VAT) is included in the price of most goods and services.
Foreign visitors are not excempt for paying VAT on purchased goods. They may, however, claim back
VAT paid on items taken out of the country when the total valued exceeds R250. The refund may be
claimed at the airport of departure, at various harbors and at customs offices.

Who Can Claim?

Non-residents on a temporary visit to South Africa are eligible to claim a VAT refund.

How to Go About Claiming Your Refund

Documentation

Simply identify yourself as a tourist to shop assistants, and request a Tax Invoice or an Export Tax
Invoice (also known as a VAT 263 Certificate), for the goods you have purchased. A Tax Invoice must
contain all the following information:

The amount of VAT charged, or a statement that VAT is included in the total cost of the goods.

The words "Tax Invoice" or "Export Tax Invoice"

The seller's VAT registration number

The seller's name and address

A full description of the goods purchased

A Tax Invoice Number

Date of issue of the Tax Invoice

 The buyer's name

The cost of goods in Rands

Note: An Export Tax will not include the seller's name, address or VAT registration number.

Inspection: Be sure to have your purchases readily available for inspection on your departure
from South Africa. NO INSPECTION, NO REFUND!

What documentation do you need to claim a VAT refund?

You need an original tax invoice reflecting the seller's name, address VAT registration number, invoice
number, your name and full postal address, a complete description of the item/s purchased, the cost of
the item/s in Rand with the VAT reflected separately or the cost including VAT with a statement that the
price includes VAT.

NOTE: Carbon copies, photostat copies or facsimiles of the original tax invoices are not acceptable. You
must insist on the correct documentation when purchasing an item.

You need to complete a VAT refund control sheet (VAT 255) which is obtainable at the international
airports, harbours, certain endorse, the offices of the Receivers of Revenue and the offices of the VAT
Refund Administration.

You must hold a foreign passport reflecting your country of residence/citizenship as other than South
Africa.

What procedure must be followed when claiming a VAT refund?

When departing from South Africa, you must present the above documentation, together with all the items
on which a VAT refund is claimed, at the VAT Refund Administration or Custom Office, as the case may
be.

NOTE: It is essential that all the items on which VAT Refund is claimed, are presented for examination. If
you cannot display the items and documents, you will not obtain a VAT Refund.

How to claim VAT if a problem was experienced at the airport ?

If you were unable to comply with the VAT procedure as stated above, the VAT Refund Administration is
prepared to consider your claim, if you submit the following documentation to them:

 A letter explaining the circumstances which prevented you from following the correct procedure.
 The form duly completed.
 The original invoices stamped either at the SA Airport on your departure, or at the US airport on
your arrival back in the USA.
 If you cannot comply to above you have to obtain a declaration (affidavit) by a "Notary Public"
declaring that he has actually seen the items and that they are in the USA.
 A copy of your passport showing the dates you entered and left South Africa.

Send the above to the following address:

(remember to keep copies for your own records) to the
 VAT REFUND ENQUIRIES
P O BOX 107
Johannesburg International Airport Post Office
South Africa
1627

Attention: Cathy Duncan or Lucia Moniz

If you have any further enquiries you can contact them at:

Telephone : 011 27 11 390-2970

Facsimile : 011 27 11 390-2787
E-mail : info@taxrefund.co.za

 When the claim is submitted it is very important that you indicate in which currency the refund is
required.
 Please be patient this process can take from two to three months.

Other contact details for VAT refund:

VAT Refund Administrator Pty Ltd
Tel : 27 12 3941117
Fax : 27 12 394143

INSPECTION, CLAIMS AND PAYOUT PROCEDURES

Departure Point Inspection Claims Payout

Johannesburg Produce goods prior to

International Airport check-in at the VAT
Inspection of Customs
Checks issued may be
Counter clearly sign-
Cape Town International cashed for foreign
posted in the Departure At VAT Refund Office
Airport currency at airport
Hall. Hand luggage may
banking facilities.
be inspected at the VAT
Durban International Refund Office after
Airport immigration.

Beit Bridge Border Post Checks may be cashed

(Zimbabwe) Produce goods for for foreign currency at
inspection to the VAT branches of Volkskas
At VAT Refund Office
Refund Officer at the bank in Messina (Beit
Lebombo Border Post departure point. Bridge) or Komatipoort
(Mozambique) (Lebombo).
Cape Town Harbor Present goods for The endorsed tax Postal VAT refund claims
inspection at Customs invoice, copy of tourists' will be paid by bank draft
Port Elizabeth Harbor and request a Customs passport and postal and posted to the
official to endorse the address should be tourist's country of
Tax Invoice. mailed to: residence in the currency
East London Harbor
of that country.
VAT Refund Administrator
Lanseria Airport P.O. Box 107
Johannesburg International
Airport Office
1627.
 Richard's Bay Harbor

Durban Harbor

ABOUT VAT:
 

The essence of VAT is in providing set-off for the tax paid earlier, and this is given
effect through the concept of input tax credit/rebate. This input tax credit in
relation to any period means setting off the amount of input tax by a registered
dealer against the amount of his output tax. The Value Added Tax (VAT) is based
on the value addition to the goods, and the related VAT liability of the dealer is
calculated by deducting input tax credit from tax collected on sales during the
payment period (say a month).

In the existing sales tax structure, there are problems of double taxation of
commodities and multiplicity of taxes, resulting in a cascading tax burden. For
instance, in the existing structure, before a commodity is produced, inputs are first
taxed, and then after the commodity is produced with input tax load output is taxed
again. This causes an unfair double taxation with cascading effect. In the VAT, a
set-off given for input tax as well as tax paid on previous purchases. In the
prevailing sales tax structure, there is in several states also a multiplicity of taxes,
such as turnover tax, surcharge on sales tax, additional surcharge etc. With
introduction of VAT, these other taxes will be abolished. In addition, Central Sales
Tax is also going to be phased out. As a result, overall tax burden will be
rationalised, and prices in general will fall. Moreover VAT will replace the existing
system of inspection by a system of built-in self-assessment by the dealers and
auditing. The tax structure will become more simple and transparent. That will
improve tax compliance and also augment revenue growth.

A full-fledged Vat was initiated first in Brazil in mid 1960's and then in European
countries in 1970's and subsequently introduced in about 130 countries, including
several federal countries. In Asia it has been introduced by a large number of
countries from China to SriLanka. Even in India there has been a VAT system
introduced by the Government of India for about last 10 years in respect of Central
Excise Duties. At the state level, the VAT system as decided by the State
Governments, would now be introduced in terms of Entry 54 of the State List of the
Constitution.

MAINTENANCE AND PRESERVATION OF ACCOUNTS:

1. Every person registered under the Act, every dealer liable to get himself
registered under the Act and every other dealer who is so required by an assessing
authorities, shall keep and maintain the following books of accounts disclosing true
and complete accounts of his daily transactions in Malayalam or in English together
with the vouchers and bills.

A daily cash book, that is to say, a record of all cash receipts and payments, kept
and maintained from day to day indicating the cash balance in hand at the end of
each day.

A journal, if the accounts are maintained according to mercantile system of

accounting.

A ledger

A purchase register showing date wise details of the person from whom goods are
purchased indicating the registration number, if the purchase is from a registered
dealer, details of goods, quantity and value of goods purchased, freight, delivery
charges or cost of installation which are separately charged, other charges, if any,
paid, and input tax for such purchases.

A sales register showing date wise details of the sales effected to registered
indicating the registration number of the purchasing dealer, quantity and value of
each class of goods sold, freight, delivery charges or cost of installation which are
separately charged, other charges, if any, received, and output tax for such sales.

A stock register showing date wise details of in-out- balance position of goods
indicating opening stock, goods purchased, goods received otherwise than by way
of purchase, goods received on stock transfer, goods sold or used for
manufacturing, goods disposed of otherwise than by way of sale or manufacturing,
consignment or stock transfer, goods bought or sold in the course of inter-state
trade or commerce or in the course of export out of or import in to the territory of
India, and the closing stock.

2. Every dealer shall keep separate purchase and sales accounts for different goods
liable to tax at different rates of tax.

3. Every dealer liable to pay turnover tax shall maintain separate accounts for the
goods liable to turnover tax.

4. Every dealer shall keep separate accounts in respect of sales or purchases in the
course of export or import and in respect of inter-state sales or purchases.
5. Every commission agent, broker, del credere agent, auctioneer or any other
mercantile agent shall maintain accounts showing:

o Particulars of authorization received by him to purchase or sell goods

on behalf of each principal separately and the date on which a copy
of such authorization in each case was sent to the assessing
authority.
o Particulars of goods purchased, or of goods received for sale on
behalf of each principal each day.
o Details of purchases or sales effected on behalf of each principal each
day.
o Details of accounts furnished to each principal each day.
o The tax paid on purchases or on sales effected on behalf of each
principal and the Chalan No: and date of remittance of the tax in to
treasury.

6. Every wholesale dealer, importer and manufacturer shall maintain day-to-day

stock accounts of each class of goods dealt in by him. The stock account shall
contain particulars of purchases or receipts, sales or deliveries and balance stock.

7. Every dealer liable to pay tax under the Act, other than a dealer paying
presumptive tax under Sub-section (5) of S (6) or compounded tax under section
8,shall maintain a VAT account showing month wise details of input tax, output tax,
purchase tax, Central Sales Tax, Entry tax, reverse tax, tax due, tax paid and input
tax, if any, carried forward to the subsequent return period together with credit and
debit notes issued in Form No…

8. Every dealer shall issue a bill or an invoice or cash memorandum in respect of

every sale and where the sale is subject to approval by the purchaser, such dealer
shall issue bill or an invoice or cash memorandum specifying therein that the sale
be subject to approval within a stated period of time.

9. Every such bill or invoice or cash memorandum shall be prepared in duplicate

unless a different procedure is prescribed by the Central Excise law as applicable to
such dealer, and shall be serially machine numbered. One copy of it shall be issued
to the purchaser, in the case of the sale bill and to the seller in the case of purchase
bill, and the dealer shall retain the other copy. The serial numbers assigned to the
bills, invoice or cash memoranda shall start from serial No.1 for any year and shall
run consecutively for the whole year. Separate series of bills invoice, or cash
memoranda shall be maintained for the sale of goods specified in different
schedules with the alphabets A, B, C & D respectively prefixed to each series, for
schedules One to Four, E for goods not falling under any of the four schedules, and
F for transfer of right use of any goods. The dealer shall intimate the series and the
opening numbers of bills, invoices or cash memoranda intended to be used by him
in a year to the assessing authority during the month of April and the number of
the first and last bills, invoices or cash memoranda issued during the month,
quarter or year, shall be noted in the monthly, quarterly or annual return filed by
the dealer.

10. Every manufacturer of goods shall maintain daily production accounts showing
quantitative details of the various raw materials used for the manufacture and the
quantitative details of the goods so manufactured.

11. Every manufacturer in Jewellery of Gold, Silver and Platinum group of metals
shall maintain a manufacturing account.

12. Every dealer who is required to maintain stock accounts shall maintain
subsidiary accounts for each godown if there is more than one godown for keeping
his stock.

13. Where the accounts or records are maintained by means of computer or any
other electronic device, the dealer shall keep a print out of such accounts or records
on daily basis.

14. Accounts and other records maintained by a dealer shall be preserved by them
for a period of five years from the expiry of the year to which the assessment
relates or from the date of disposal of the appeal or revision arising out of such
assessment or from the date of completion of any other proceeding under the Act
connected with such assessment or appeal or revision whichever is later and shall
be kept at the place of business mentioned in the certificate of registration. Every
dealer who maintains accounts by electronic means shall intimate the concerned
assessing authority in advance along with the password. Such dealer shall also
retain them in the electronically readable format for the retention period specified in
this sub-rule.

2. CREDIT NOTES AND DEBIT NOTES:

The credit note and debit note specified in section 41 shall bear separate
consecutive serial numbers and shall contain the following details.

 Nature of the document (Whether debit note/credit note)

 Date of issue
 Name and address of the selling dealer (With registration number)
 Name and address of the buying dealer (With registration number)
 Number and date of the invoice in relation to which the credit note or debit
not is issued
 Amount credited or debited
 Tax due on the amount credited or debited

The much awaited Value Added Tax (VAT) has been introduced in Indian Taxation System from April 1, 2005. Now
India is a part of other 123 countries following VAT which was leaded first time by UK in 1973. It is said that 4 years is
very short period in introducing VAT in the country as compared to 10 years on an average by other countries.
Meaning of VAT
This section covers the complete meaning of VAT
referring to the global meaning as well as the meaning of
VAT in India. Extract has been also taken from history to
bring out the origin of VAT.
VAT-The Global Meaning | VAT-In India |
Central VAT | Modified VAT (Modvat)
Advantages & Disadvantages of VAT
Both side of the coin has been discusses in this section
to build up a think tank in you for VAT in India. All the
aspects has been appropriately and with ease is
discussed.
The Impact of VAT in India
What will be the impact of VAT among Indian Traders?
How will a product be treated at different steps in the
process of selling from the manufacturer to the final
consumer? And much more...
FAQs for VAT in India
The introduction of VAT in India is bringing craze on
certain aspects. People regularly hunt for an appropriate
answer for their questions. We bring you few FAQs in
this respect.
MAHARASHTRA VAT
Necessity of VAT in India
Why VAT is needed in India? Will it overcome the
loopholes of existing direct tax system? Will this system
make the traders comfortable? All these has been
discussed in this section.
Items Covered in Indian VAT
With the introduction of VAT in India, to minimise the
chaos, we have put forward the items covered in VAT in
a tabular as well as descriptive form to make it more
understandable.
States Welcoming VAT in India
Check out for the states joined hands with the system
and also the eight states still to join. Find out their details
and the expected time for them to welcome VAT in their
territory.
Quotes & Unquotes for VAT in India
What ministers are saying? What traders are saying?
What the mass is saying? We are capturing them in their
own words in this section. Check out regularly for latest
updates.
  

Maharashtra VAT ACT 2005

Maharashtra VAT SCHEDULE

Maharashtra VAT NOTIFICATION

Maharashtra VAT FORM

Maharashtra VAT Circular

CENTRAL EXCISE
 

Tariff Notification Circulars Central Excise Act

Non-Tariff Notifns Forms Central Excise Rules
Valuation Rules Challans Cenvat Credit Rules
Advance Rulings Compounding Central Excise Tariff
Settlement Cestat Appeal Rules
 
Clean Energy Cess Notifications
Automation of Central Excise and Service Tax (ACES): CBEC (Central Board of Excise
and Customs) launched a new website to achieve excellence in the formulation and
implementation of Customs and Excise initiatives aimed.

SERVICE TAX

Notifications Finance Act Taxable Services

Circulars Service Tax Rules Export of Services
Forms CENVAT Credit Rules Accounting Codes
Challans Advance Ruling Settlement

 Statutory Provisions for levy of Service Tax-Chapter V of the Finance

Act 1994 [as amended vide Finance Act (No. 2) 2010]  New
  Statutory Provisions for levy of Service Tax-Chapter V of the Finance
Act 1994 [as amended vide Finance Act (No. 2) 2009]  New
 Statutory Provisions for levy of Service Tax-Chapter V of the Finance Act 1994 (as
amended vide Finance Act 2008)
 Service Tax FAQ
 Service Tax (Determination of Value) Rules, 2006 (Word File) (As amended last amended
vide Notification No. 29/2007)
 Service Tax (Registration of Special Category of Persons) Rules, 2005 (Word File) (As
amended last amended vide Notification No. 6/2007-ST dated 1.3.2007)
 Taxation of Services (Provided from Outside India and Received in India) Rules, 2006
(Word File) (As notified vide Notification No. 11/2006-ST, Dated: April 19, 2006, last
amended vide Notification No. 31/2007 dated 22nd May 2007)
 Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 (Word File)
(Notified vide Notification No.32/2007-Service Tax dated 22nd May, 2007
 Statutory Provisions for Advance Ruling under Service Tax - Chapter VA of the Finance
Act, 1994(as amended vide Finance Act 2007)
 Automation of Central Excise and Service Tax (ACES): CBEC (Central Board of
Excise and Customs) launched a new website to achieve excellence in the
formulation and implementation of Customs and Excise initiatives aimed.

INCOME TAX
 Cost Inflation Index

 Notifications  Circulars  Forms

 Income Tax Act  Income Tax Rules  Challans

Income Tax Rates  Advance Ruling  DTAA

 LTU  Settlement  ITAT

  
Maharashtra VAT Rules

Method Of Payment.

1. Every payment of tax or interest or penalty or all of them payable under rule 28 and the amount of
balance of tax payable according to a return or revised return and penalty and interest payable
under rule 28 shall be accompanied by a return-cum-chalan.
2. Every payment of tax or interest or penalty or all of them not referred to in sub-rule (1) and every
payment of amount forfeited, composition money and fine imposed shall be accompanied by a
chalan.
3. The Form accompanying the payments as aforesaid shall be duly filled in, signed and verified by
the payer and the amount paid shall be stated both in words and in figures in the space provided
for that purpose in the respective Form.
4. The payments shall be made into Government Treasury. The portion of the concerned Form
marked ''for the payer'' shall be returned by the Government Treasury to the dealer duly
 receipted, and the portion of the Form marked ''for the registering authority'' shall be forwarded by
the Government Treasury to the registering authority specified in rule 14.
5. Subject to the provisions of section 33 and 34, no payment as aforesaid shall be made to any
officer or authority appointed by or under section 10.
6. The instalments granted, if any, under one order shall be for a period not exceeding one year.
The periodicity of payments shall not be more than monthly. The instalments shall be granted for
an amount inclusive of the interest chargeable, on the amount of tax under instalment.

Top

Claim and grant of set-off in respect of purchases held in stock in the appointed day,

1. While assessing the amount of tax payable by any registered dealer in respect of any period
starting on or after the 1st April 2005 but ending on or before the 31st March 2006, the
Commissioner shall in respect of the purchases or, as the case may be, entry of any goods made
by the registered dealer (hereinafter in this rule referred to as "the claimant dealer"] at any time
on or before the 31 st March 2005 and held in stock by him on 31st March 2005 at the close of
business, grant him a set-off of an amount equal to the aggregate of the following sums that is to
say,--
a. in respect of the said purchases covered by the Bombay Sales Tax Act, 1959, a sum
calculated in accordance with rule 44D of the Bombay Sales Tax Act, 1959, as the rule
stood immediately before the appointed day, if the conditions specified in the said Act
and Rule are fulfilled.
b. in respect of purchases covered by any of the earlier laws other than the Bombay Sales
Tax Act, 1959, a sum collected separately from the claimant dealer by the other
registered dealer or, as the case may be, person holding licence, by way of tax on the
purchase made by him from the other registered dealer or, as the case may be, person
holding licence, of the said goods.
c. any sum paid by the dealer on his purchases or, as the case may be, the entry of goods,
under the Maharashtra Tax on Entry of Motor Vehicles into the Local Areas Act, 1987 or
the Maharashtra Tax on the Entry of Goods into the Local Areas Act, 2002.
2. No set-off shall be allowed under this rule -
a. in respect of any purchase or entry of goods if the claimant dealer has claimed set-off,
drawback or, as the case may be, refund in respect of the said purchase or entry under
any earlier law, and
b. unless the goods are resold on or after the 1st April 2005 and on or before the 31st
December 2005 or are used in the packing of goods so resold.
c. in respect of goods treated as capital assets unless the said assets are purchased on or
after the 1st April 2003 or their entry in the State has taken place on or after the 1st April
2003 and are resold on or before the 31st December 2005.
3. The set-off under this rule shall be claimed
a. in respect of capital assets only when they are resold and such claim shall be made in
the return for the period in which the said capital assets are resold and
b. in respect of other goods in the period starting on the 1st April 2005.
4. The set-off under this rule shall not be granted unless the claimant dealer has complied with the
requirements of the notification issued under section 84.

Top

1. What is indivisible Works Contract ?

( Difference between Normal Sale & Works Contract )

The works contracts are not normal sales. In the normal sale there is a transfer of property in definite or
ascertained goods. The goods remain same before and after the delivery of the goods. However, in works
contracts it does not happen. The goods before the delivery and after the execution of works contracts are
different, many times in different form also. For example, at the site of construction of a building, before the
Construction (works contract) commences, the goods like cement, steel, sand etc. are lying but after the
Construction a building (immovable goods) comes to an existence. This is the difference between the `
Normal” sale and the “deemed sale” in the indivisible works contract .

The Supreme Court of India, in its various landmark judgments has confirmed in the following wordings the
difference between a normal sale (as defined under the sale of goods Act) and an indivisible / composite
works contract;

“In a contract of sale, the main object is the transfer of Property and delivery of the possession of Chattel as
a Chattel to the buyer, where it is not so, it is a contract of Works & Labour” (Hindustan Aeronautics Ltd. 55-
STC 314-SC).

“If the thing to be delivered has any individual existence before the delivery as the property of the party
who is to deliver it, then it is a sale. If the main object of the work undertaken is not the transfer of a
Chattel qua Chattel, the contract is one for work and labour” (Hindustan Shipyard – 119 STC 533-SC).

“The activity is a sale or works contract depends upon the facts, the terms and conditions and the intention
of the parties” (Mekenzis Ltd.-165 STC-58 SC)

In normal practice, we can identify many indivisible/composite works contracts namely construction of a
Building, erection of Plant & Machinery, Processing jobs, Job works, Repair jobs, Electrical Fittings, Annual
maintenance Contracts (AMCs). Installation of Elevators, Air Conditioners, Repairs of Vehicles, Re-trending
of old tyres, Customized Printing Jobs, Electro Plating, electro-galvanizing, anodizing etc. We would discuss
later , the levy of Sales Tax/VAT on such activities which are indivisible works contracts.

2. What is a Deemed Sale ?

Under the State Sales Tax Laws, before the 46 th Amendment to the Constitution of India, the Sales Tax
was applicable only on the sales covered under the sale of goods Act (Normal sale). The indivisible works
contracts were not covered under the State Sales tax Acts since works contracts were not normal sales. The
Supreme Court confirmed this legal status in its land mark judgment in the case of Gammon & Dunkerely (9
STC 353). Due to this legal status, the states were denied the levy of Sales Tax on the indivisible works
contracts. Such contractors were outside the clutches of sales tax laws.

The then Finance Ministers of the States have requested the then Union Finance Minister to take necessary
legal steps so as to levy Sales Tax on indivisible works contracts.

Finally, the 46 th amendment to the Constitution of India has been made on 2 nd February, 1983 to add a
sub-article (29-4) as under,

“(b) a tax on the transfer of property in goods (whether a goods or in some other form) involved in the
execution of a works contract”.

After the said 46 th Amendment to the Constitution, the States were empowered to levy Sales Tax / Works
Contract Tax on such sales, called as “Deemed sales” involved in the execution of works contract. Due to the
said amendment, the concept of `Deemed Sale’ was introduced. The important features of deemed sales are
as under,

(a) It is not a normal sale as defined under sale of goods Act but a deemed sale of goods subject to sales
tax by the States.

(b) In the `deemed sales’ the states can levy Sales tax only on `the transfer of property in goods” . In other
words , the states can levy Sales Tax / VAT only on the `Material Value’ of the works contract and not on
the `labour portion’ of the works contract.
( c ) If in a contract there is no transfer of property in goods from the contractor to the contractee, then No
sales tax is applicable on such contracts, called as “ Pure Labour Jobs”.

(d) Under the deemed Sale , an artificial break up of indivisible works contract has to be made to arrive at
the `material’ value and the `labour’ value of the contract.

Therefore, after the 46 th Amendment to the Constitution of India, the States are empowered to levy sales
tax (now VAT) on such deemed sales but only on the `Material Value’ of the works contract. The High Courts
and the Supreme Court have suggested methods on “How to arrive at a material value from the total
Contract Price”. (Gannon Dunkerly’s SC Judgement 1993 ) (88 STC 204).

The Supreme Court has also allowed the States to come out with an alternative method to levy Sales Tax on
Works contract, if to arrive at material value is difficult. The states have come out with a alternative method
called as “Composition Tax” method to tax the indivisible works contract, which is a non-legal /alternative
method. The small percentage like 1%, 2%, 4%, 8% as Composition Tax is levied but on the total contract
price without any deduction which is available in the legal options under the State Sales Tax / VAT Acts.
After, the said amendment to the Constitution certain States a namely Maharashtra & Delhi have come out
with separate `Works Contract’ Acts. The other states incorporated the separate provision to levy Sales Tax
on the deemed sales in the works contracts. Under the State Sales Tax Acts or separate Works Contract
Acts, No contractor or contractee were entitled to claim any set off of Sales Tax paid to their vendors. There
was a double taxation in the hands of Contractors in the Sales Tax Regime.

3. Post VAT Scenario – Levy of VAT on Indivisible Works Contracts (Deemed Sales)

The states have introduced the new value Added Tax (VAT) System from 1 st April 2005. The other five
States have also followed from 1st April, 2006 and the State of Tamil Nadu has introduced VAT System from
1.1.2007. At present , only Uttar Pradesh and Pondicherry (U.T.) have not joined the VAT States / UTs .
They may join from 1 st April, 2007. Therefore, the VAT system is in force in most of the States and the
Union Territories in India.

All the VAT States have incorporated in their respective State VAT Acts, the provisions of `Works Contracts’
for levying the Sales Tax /VAT on the deemed sales involved in the execution of works contracts. There is no
Works Contract Tax (WCT) now, it is a VAT on the Works Contract transactions (Deemed Sales). The
Advantage to the Contractors is that under the VAT system, the Contractors like manufacturers can avail
VAT set off / Credit of the VAT paid to the local vendors, which was not available in the Pre-VAT Regime.

Please note that there is an Uniform Scheme of Taxation for levy of VAT on Works Contracts under all the
State VAT Acts. There is no separate or different taxation schemes in different States like in pre-VAT period
for works contracts . There is a uniformity under the works contract provisions in the Post VAT Regime. This
is a positive factor for Contractors under VAT Regime. In all the State VAT provisions, there are three
options available for the Contractors to levy VAT on deemed sales (Works Contracts) and VAT is leviable on
the `Material Value’ of the Contract. The said three options (Uniform in all the VAT States) are as under,

A-1 – Actual Labour Deduction (Legal Option)

A-2 – Standard Labour Deduction (Legal Option)

B - Composition Tax (Non Legal or Alternative Option)

Under the legal options A-1 and A-2, the State Governments can levy VAT only on the `Material Value” of
the Contract and not on the `Labour Portion’ of the Contract. Please note that the States are empowered to
levy tax on “Material Value” and not on “Material Cost” in the works contract. For example, VAT is applicable
on `Cement Block Value’ and not on ` Cement Cost’. Similarly, VAT is applicable on `Wooden Furniture
Value ’ and not on `Timber/Wood Cost’ in the hands of the Contractor.

I have explained below, the said three options available for the Contractor, executing indivisible Works
Contract under the State VAT Acts (Uniform Across the States). Except the Rates of Composition Tax, the
Rates of TDS deductions, Returns and Payment dates, most of the Major Provisions are Similar / Uniform
under the State VAT Acts;

Actual Labour Deduction Option

A-1 Option (Levy of VAT on Works Contracts in the hands of the Contractor)

Under the legal option A-1, the VAT is payable on the `Material Value’ of the Contract. The deductions are
available for arriving at the Material Value from the total contract price. Such deductions are specified in the
corresponding provisions of the state VAT Acts which are based on the guidelines given by the Supreme
Court in the case of Gannon Dunkerley (88 STC 204) or the Contractors can arrive at the Material value /
price of the Contract by adopting cost + value Addition method. In this method, the Contractor adds to the
`Material Cost’ which is determined by considering all the purchase bills of the materials (imports, outside
the State and within the State), the margin on such material cost plus any incidental expenses attributed
towards the material value. In other words, the Contractor determines the Material Price after adding
Material Cost and Margin to such cost .

The 4% or 12.5% VAT would be applicable on such Material Value /Price, depending upon the classification
of such materials (Steel 4%, others 12.5% VAT) in which the property passes to the contractee . In this
option A-1, the Contractor can avail full VAT set off / credit of the VAT paid to the local vendors (Not on CST
paid to the outside the State Vendors) provided he obtains corresponding `Tax Invoices’ from his local
vendors. Therefore, the cost of VAT is zero for the Contractors in this legal option. Similarly, the
Contractee /Customer also can avail the full benefit except on the purchases covered under the Negative list
under the State VAT Act on which No VAT set off/Credit is available. Mostly the Civil Works , Construction
jobs, errection of immovable property (Structures) are covered in the Negative lists. On the other works
contract purchases, the full VAT set off / Credit is available to the contractee /customer. The T.D.S. (works
contract) provisions are applicable to the contractee in this option which are discussed later.

In nutshell, in the option A-1 (Legal), the Contractor gets full VAT set off / credit on the VAT paid on the
inputs and the Contractee also gets the credit, if it is not in the Negative list (Like processing Jobs, Job
works, Printing Jobs, Repair Jobs etc.) The Contractors are benefited under VAT System as the Contractors
can avail full set off / credit.

However, in this option the Contractor has to maintain proper books of accounts and the other records to
identify the material value of the Contract.

A-1 option is the Best option available since the Contractor levies VAT only on the `Actual Material Value’ of
the contract, even though it is litigation prone option. Many Contractors who execute big indivisible works
contracts, Turnkey Jobs opt for legal option A-1.

Option A-2 (Standard Labour Deduction)

(Legal) (levy of VAT in the hands of the Contractor)

Under the legal option A-2, the VAT is payable on the `Material Value’ of the Contract. The Material value is
calculated after deducting the `Labour Portion’ from the total contract value / Price.

However, in this option a table is available in the State VAT Act / Rules which shows `Standard Labour
portion’ attributed to the various works contracts. The Contractor has to deduct such `Standard Labour
portion’ shown in such tables from the total Contract price to arrive at the `Material value’. The Contractor
would charge 12.5% VAT, on such material value. Each State has provided the said `Standard Labour’
table , under this option. (Like in Maharashtra for Civil Works it is 30%, for Plant & Machinery 15% , for
AMCs 40% and for others 25% (Residuary)) .

The advantage in this option compare to the A-1 option is that it is litigation free. The Sales Tax
Departments would allow the said ` labour portion deductions’ as the same are provided in the VAT Rules
itself. Also no identification record has to be maintained by the contractor for the materials used in the
contracts. However, the Contractor has to consider both the options A-1 and A2 in the case where the
Contractee/ Customer does not get the VAT set off / credit and then selecting the cheaper option.

Like in A-1 option, in A-2 option also, the Contractor gets full credit / set off on the VAT paid on the inputs
and the Contractee also gets full set off of the VAT paid provided the said purchases are not in the Negative
list of VAT set off / credit. The TDS provisions are applicable to the contractee in this option also which are
discussed later.

Option-B -- Composition Tax (Alternative / Non legal option)

( Levy of VAT in the hands of the Contractor )

Option B is the “Composition Tax” option. This is a non legal alternative option, simplier option for those
Contractors who cannot maintain the proper Accounts, Record of the material and other portion in their
contracts. The contractee / customer prefers this option as small amount of Composition Tax 2% / 4% is
payable to the Contractor instead of 12.5% VAT payable in legal options. A-1 and A-2 . However , VAT
credit/set off is not be available to them in this option ( in this option , VAT Credit is available only in the
state of Maharashtra ) .

Under the “Composition” option, the Contractor has to pay Composition Tax (VAT) on the total Contract
value / price, No deduction of labour is available in this option. Similarly, No VAT set off / Credit is available
on the purchases of inputs to the Contractors and the same is not available to the Contractees also. (Except
under Maharashtra VAT Act/Rules, partial VAT Credit is available to both Contractor and Contractee in the
Composition Tax option). The Rates of Composition Tax differ from state to state. Generally it is 2% (for civil
contracts) @ 4% for other Contracts. However, exception is in Maharashtra State where the Rate of
Composition Tax is 5% on Civil Contracts and 8% on other Contracts. In Maharashtra, in this option , in
excess over 4% Credit is available on the input purchases for civil contracts (where composition Tax Rate is
5%) and 64% of the total credit available for other Contracts ( where Composition Tax Rate is 8%). Thus ,
partial VAT Credit is available to the Contractors in the Composition Tax option. However, full credit is
available to the Contractee in this option in Maharashtra provided such purchases are not included in the
Negative list under MVAT Rules.

Therefore, except in Maharashtra, in all other states No VAT set off / credit is available to both the
Contractor and the Contractee in the Composition tax option. The TDS provisions of Works Contract are
applicable to Conctractee in this option which are discussed later.

In Short, in all the States only the said 3 options (A-1, A-2 and B) are available in the hands of the
Contractors for levy of VAT on the local works contract transactions in the VAT system. If no VAT set
off/Credit is available to the Contractee / Customer, then the Composition Tax option is the Cheapest since
the Rate of Composition Tax is lower than 12.5% VAT. Therefore , if the Contractee / Customer can not avail
the VAT set off / Credit in all the three options , then , the VAT / Composition Tax paid to the contractor is
the cost to such Contractee /Customer, hence in such cases the Contractor and Contractee should select the
Best option available after considering the Actual Figures in all the three options.

The States have provided separate sections / Rules under the respective State VAT Acts for the works
contracts transactions which include said three options of levy of VAT , TDS , VAT Credits and Negative
lists .

4. General Negative list Items for Works Contracts under State VAT Act & Rules

(a) Purchases effected by way of works contract where the contract results into an immovable Property .

(b) Purchases of Building material which are not resold but are used in the activity of Construction. (Free
issues)

(c) Purchases of works contracts made by the Contractee in Civil Contracts .

(d) Any purchases of Consumables or of goods treated as Capital Assets by the Contractor/dealer where he
is principally engaged in doing job work or labour work and is not engaged in the business of manufacturing
of goods for sale by him.

(Please refer to the specific provisions of works contracts under the relevant state VAT Acts for such
Negative lists)

5. Tax deducted at source (TDS) provisions of works contracts under the State VAT Act & Rules

In most of the State VAT Acts, the provisions of Tax deducted at source (TDS) are incorporated. The logic
behind the TDS (WC) provisions is that the Contractors are not organized in many cases and they do not
pay taxes on time , therefore in this provision the contractee / customer deducts the prescribed % of TDS
from the Contract Price and pays the same before the prescribed dates, directly, to the respective State
Government through the specified challan. The TDS is to be deducted by the specified customers only as
notified by the State Governments. Generally, the dealers registered under the State VAT Acts, State and
Central Governments, Corporations, Government Undertakings, Co-operative Societies only have to deduct
the said TDS (WC) and not by all the Customers. The monetary limit of the turnover is prescribed between
Contractor and Contractee for such deduction in the hands of the Customer in most of the VAT Acts.

It is responsibility of the Contractee / Customer to deduct the prescribed % of TDS (As provided in the
relevant VAT Act & Rules) and pay the same to the State Government before the prescribed date, otherwise
interest / penalty is leviable on such Contractees / Customers.

However, as per the State VAT Act provisions, the Seller (Contractor) is liable to pay VAT, if No TDS is made
by the Contractee/Customer. The State Governments have prescribed different VAT Forms under the
provision of TDS (WC). In certain States, the Contractee has to obtain TANs (Tax deductible Account
Number) and file Annual Returns of TDS under the TDS provisions .

In Maharashtra, under MVAT Act, 4% TDS is applicable (instead of 2%) in the case where the Contractor
has not obtained the VAT TIN certificate (URD Contractor).

6. Provisions of Works Contract for Main and Sub-Contractor under the State VAT Laws.

The following two types of VAT levies are provided for the transactions of works contracts between the Main
contractor and the Sub-Contractor,

 In certain States, (like Maharashtra) Main and Sub Contractors are treated as single legal Entity.
Therefore, there is no VAT/TDS applicable between the transactions of the Main and the Sub-
Contractor . The VAT Forms are exchanged between the Main and the Sub Contractors to declare
that they have discharged VAT liability for their portions of the Contracts. In such cases, the Main
Contractor gets the deduction of the value of the work executed by the Sub Contractor. The main
and the Sub Contractor are jointly and severally responsible for the compliance under the works
contract provisions of the VAT Act .
 In certain states ( other than Maharashtra), the Main and the

Sub Contractors are treated as separate legal Entities, like separate two dealers under the VAT Act.
Therefore, in such provisions , Sub contractor charges applicable VAT/Composition Tax to the Main
Contractor, avails Credit of the VAT paid on the inputs and the Main contracts also charges VAT/Composition
Tax applicable to the Contractee/Customer and avails the Credit available to him against the VAT paid to the
Sub-Contractor. They are assessed / audited separately under the State VAT Act provisions.

It is advisable that the Main Contractor and the Sub Contractor should discuss all the relevant VAT
provisions before opting for the specific method of levy of VAT / Composition Tax to avoid complications at a
later date.

7. VAT & Service Tax, both , Applicable on certain Works Contracts.

On certain Works Contracts both VAT (WC) & Service Tax are applicable on the Contract price since there
involves the transfer of property in goods (sale of goods / materials) subject to VAT levied by the State
Government and rendering of Taxable Service subject to Service Tax levied by the Central Government.
Thus, the both the state & the Central Governments levy VAT & Service tax on the same taxable base i.e.
Contract Price, respectively.

The Contracts /Taxable services where both VAT and Service Tax are applicable are shown as under ,

 Construction contracts, Civil Jobs

 Annual Maintenance Contracts (AMCs)
 Errection of Plant and Machinery etc.

Please note that in such Works Contracts / Taxable Services, the working for levy of VAT & Service Tax is to
be done, separately, as per the provisions of VAT & Service Tax. Only in the case where the Contractor opts
for A-1 legal option of actual labour deduction method, he can pay Service Tax on the actual labour portion
and VAT on actual Material value. Otherwise only A-2 (Standard deduction) and B (Composition Tax) options
are available under VAT and No deduction for levy of Service Tax for the Contractor. The Abatements are
available under the Service Tax law for specific Taxable Services towards the value of material / goods
involved in the same. Like 67% Abatement from the contract value is available under the Construction
Services .

 Concept & Levy of C.S.T. on Inter state Works Contracts

The Central Government amended the definition of ` Sale’ under the Central Sales Tax Act, 1956 from
11.5.2002. With the said amendment, the states are empowered to levy C.S.T. on the interstate works
contract. By the said amendment, the concept of `Interstate works contract’ was introduced in the C.S.T.
Act by inserting in the definition of `Sale’ , the words “Transfer of Property in goods involved in execution of
works contract” .

When the Contractor dispatches his goods from one State to another under a individuals works contract, it is
a interstate works contract. The sections 3,4,5 of the C.S.T. Act are applicable to such deemed sales in the
interstate works contract. Accordingly, the State of dispatch can collect the Central Sales Tax on such
deemed interstate sales . The Contractors may not be allowed the interstate depot transfers in the cases of
indivisible works contracts since such dispatches are made to the sites of the contractee situated in other
state and the same are earmarked for the specific contractee. The Contractor would invoice to the
Contractee from the state of dispatch and would charge CST as applicable , with or without C/D Forms.

Recently, the CST Act was further amended to explain, the deductions available on the total contract price to
the Contractor to arrive at the material value. Please note that in interstate works contracts also, the C.S.T.
is payable only on the Material Value/Price’ of the Contract and not on the Labour’ portion of the Contract.

The examples of interstate works contract would be that of Contractor from Mumbai, dispatching goods from
his Mumbai plant to the site in Chennai (Tamil Nadu) under a indivisible works contract or A Manufacture in
Mumbai dispatching his own material to a processor in Surat and the processor returns back the processed
material back to the Mumbai Manufacturer. The Surat processor would charge 4% CST against `C’ form on
the material value of his invoice amount being a interstate works contract in his hands .

Please note that when it is an interstate works contract, the Contractee would raise an invoice on the
Customer situated in other state with applicable rate of CST on the Material value of the contract, but the
Customer would not deduct any amount towards TDS since there is no provision of T.D.S. under the CST
Act. TDS is to be deducted only in the local works contracts where the Contractor has charged
VAT/Composition Tax.

In short, if the Contractor dispatches goods from his state to the State of the Contractee (Customer) under
an indivisible works contract, it is a interstate Works contract in the hands of such Contractor subject to levy
of CST which is collected by the state of dispatch . However, in the interstate works contracts also , C.S.T. is
payable only on the `Material Value’ of the Contract .
9. How the Contractee / Customer should look into the Works Contract purchases for Minimum
cost.

Under the VAT System, the Contractee/Customer can avail the full VAT Credit/Set off of the VAT paid to the
Contractor through the tax Invoices, provided such purchases are not in the Negative list of set off/VAT
Credit.

However, in the cases where the Contractees / Customers do not get any VAT set off / Credit, they should
note the following points to reduce their VAT Cost,

(a) To decide the Best option of “Levy of VAT/Composition Tax” before the execution of the Works Contract
Commences.

(b) To insist the Contractor to buy maximum inputs from local vendors only and the VAT Credit thereof
should be passed on to the Contractee by reducing his sale price , accordingly .

( c ) In case of free issues supplied by the Contractee / Customer to the Contractor , if the price of the
contractor is `Net off’ the material value supplied by the Contarctee then there is no negative VAT impact to
the Contractee . Otherwise, there is VAT cost in the hands of the contractee with regards to the VAT paid on
the purchases made by the Contractee and given as free issues to the Contractor.

(d) Prescribed % of TDS payment to the government and timely issuance of TDS certificates to the
Contractors.

(e) To insist the Contractor to show the VAT applicable, separately on the invoice (Tax Invoice, in the case if
the Contractee can avail the credit)

(f) To add the clause in the agreement with the Contractor, “If any additional liability on Account of VAT
(WC) arises at a future date shall be borne by the Contractor”.

10. The summary of the Main Points with regard to provisions of levy of VAT/Composition Tax
under the State VAT Act & Rules.

 Deemed Sales (WC) are taxed under the provisions of the State VAT Act, there are no separate
Works Contract Acts.
 For local works contract transaction State VAT (WC) is applicable and for interstate works contract
transaction , the Central Sales Tax (C.S.T.) is applicable as covered under the CST Act.
 No VAT/CST is applicable on the pure labour Jobs (No material of the Contractor / Job worker is
involved)
 Under the State VAT Acts, VAT is applicable on the `Material Value” of the Contracts only as
determined by the three options as discussed earlier and under the C.S.T.Act also CST is applicable
on the `Material Value’ only.
 In the contracts , `where both the sale of goods and rendering of Taxable service are involved, both
VAT & Service Tax is payable on the same contract price subject to the relevant provisions under
both the VAT & Service Tax Laws.
 Proper clauses of VAT/CST should be incorporated in the Agreements between the Contractor and
Contractee to avoid litigation.
 Under the VAT System both the Contractor and the Contractee can avail full VAT set off/Credit
subject to the Negative List.
 The Contractee should ask for the price reduction from the Contractor to pass on the `VAT Benefit’
availed by the Contractor on his local purchases.

I am sure the Readers will get useful information in this article on “VAT & Works Contracts” and both the
Contractor and Contractee can plan their works contracts transactions in a better and cheaper way in
future.