WCT- Work Contract Tax

Introduction


WCT, a term which basically comes in both the parameter : i) Sales Tax and ii) Service Tax. But, what i am going to discuss is substantially belongs to Sales Tax. Here, I’m not going to focus on the concept of the Work Contract interm of Service Tax, rather I will elaborate how to pay WCT in term of Contract/ Construction Business or related there too.

In a common parlance, we can say WCT in Sales Tax is just like TDS in a Income Tax. We are aware of the fact that TDS is deducted from the income earned by the assessee by the deductee and deposit to the government as in form of advance tax, which is mandatory after some of its limits. So, the same concept is with the WCT. WCT is probably a case when, a developer makes the payment to his contract on the R/A Bills, fully or partly and even in the case of mobility advance then at that time the developer deducts the TDS for the taxable income earned and the WCT for the output profit that is earned on the total contract amount.

Contents:

  • Definitions
  • Scope
  • Perview
  • Return Date, Interest and Penalty
  • How to Adjust WCT with Sales Tax

 

DEFINITION


The works contract is not a normal sale. In normal sale there is a transfer of property in definite or ascertained goods. The goods remain same before & after delivery of goods. However, in works contract it does not happen. The goods before delivery and after execution of work contracts it does not happen. The goods before the delivery and after execution of works contract are different, many times in different form also.

For Example: i.e. at the site of construction a building, before the construction (works contract) commences the goods like cement, steel, sand etc. are lying but after the construction a (building, immovable property) comes to an existence. This is the difference between the normal sale & the deemed sale in the ineffable works contract.

The Supreme Court of India in its various land mark decision has confirmed the following wording the different between the normal sale (sale as defined in Sale of Goods Act, 1930) and an adminisible / compensation works contract. In Hindustan Aeronautics SS-STC- 314-SC case. In a contract for sale the main object is a transfer for property & delivery of the possession of chattel as a chattel to the buyer where it is not so, it is a contract of works & labour.

In the decision of Hindustan Shipyard 119 STC-533 SC. If the thing to be 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 que Chattel the contract is one for work & labour.

The activities is a sale or works contract depends upon the facts, the terms & conditions & the intension of parties (As decided in Markenze Ltd 165-STC-58-SC)

In normal practice, we can identify many individual/ composite works contract namely construction of building, erection of plant & machine processing jobs, job works, repairs jobs, electrical fitting, annual Maintenance contracts (AMC’s), installation of Elevator, Air conditioner, repair of the vehicle, re-trending of old tyres, customerfied printing jobs, elctro plating, electro galvarifing, anodizing etc.

To attract Articles 366 (29-A) (b) there has to be a works contract. The term “works contract” needs to be understood in a manner that the parliament had in its view at the time of 46th Amendment and which is more appropriate to Article 366 (29-A) (b). The term works contract in the said Article is apply wide & cannot be confined to a particular understanding of the term or to a particular form. The term encompasses a wide range & many varieties of contract. Thus, even it in a contract, besides the obligation of supply of Goods and materials & performance of labour & services, some additional obligation of supply of goods, such contracts does not cease to be works contract. Once the characteristic or elements of works contracts are satisfied in a contract than irrespective of additional obligations such contracts would be converted by the term work contract:

For the execution of a works contract the following there conditions must be fulfilled:

  • There must be a works contract
  • The goods should have been involved in the executor of a works contracts &

The property in those goods must be transferred to a third party either as goods or in some other form.

SCOPE


Any agreements entered into by the Builders/ Promoters before the completion of construction tantamounts to works contracts and hence liable to value added tax (VAT/ Sales Tax). As definition given in K. Raheja case about works contracts.

According to the definitions of works contracts, the contractor must have undertaken the works of construction for and on behalf of the flat purchase for cash, deferred  or any other valuable consideration but could it be said that developer was contractor for the prospective flat purchase.

Articles 366 (29-A) of the constitution of India has been inserted to remedy the situation arising from the decision in the Gannon Dunkerley-I, where attends to levy sale Tax on the sale of goods involved in the execution of works contracts.

The levy of sales tax on the goods deemed to have been sold in the execution of works contracts the following conditions are to be met:

  1. There must be works contract  i.e. any contract to do construction, Fabrication and the like to
  2. The goods deemed to have been sold should have been involved in the execution of a works contracts &
  3. The properly in those goods must be transferred to a third party either as goods or in some other form.

When an agreement is entered into between the promoter / developers and the flat purchaser to construct a flat and eventually sell the flat with the fraction of land, it is ovious that such transaction involves the activity of construction in as much as it is only when the flat is constructed then it can be conveyance. The said activity will be covered by the term “works contract”. The term “works contracts” is nothing but a contract in which one of the partner is obliged to undertake or to execute works such activity of construction has all the characteristic or elements of works contracts.

Read more about application of WCT, – An Expert advice.

PURVIEW


In work’s contract tax developer has the responsibility to deduct WCT @4% while making payment to contractor on work done basis.

On the other hand, the contractor undertaken the agreement with developer to construct the building including material i.e. developer has no responsibility to purchase the raw material of building. But contractor purchase the building material on of his own & construct the building and contractor is liable to pay the VAT. The work done bill is given by the contractor to developer. The contractor has to pay vat output on the work done basis to developer & takes the credit of VAT input on purchase of Material. The difference between the VAT output & VAT input is the liability of the contractor which is adjusted on WCT deducted by developers. The net adjusted balance is the liability/ refund of the contract.

                               OR,  I can Elaborate it in this form also:

What basically happens is, a myth in case of developing a project as follows:

  1. Developer purchase a land and hire a contractor to develop a project on the land.
  2. They fix a agreed contract amount for the said project.
  3. Now, the contractor makes his plans & Cost estimations for the project and the profit margin to be booked.
  4. He severally calls the labour from the market, gets purchase all the materials like: Iron, Steels, Cement, Soils, Bricks etc and ready with the plan to move on the project to the estimated time.
  5. The purchase of material not only includes the cost of material but also the sales tax amount which is “Input credit of sales tax” which can be setup from the Output tax raised from the developer.
  6. He then starts the project and when a part of the project is finished which is severally called “Work done” then the contractor will raise a bill which must be duly certified by the architecture.
  7. Then the developer at the certified R/A bills makes the payment to the contractor either fully or in part thereof.
  8. So, at that time of payment the developer will deduct WCT@4% (so called, some part of Sales tax on the profit margin)
  9. The said contractor can avail such WCT amount from the output tax and then make the balance payment to the government

 

Return Date, Interest and Penalty


The quarterly return of VAT is deposited by  contract on or before the 20th of preceding quarter.

The developer are also responsible to file the quarterly return of WCT on before 20th of the preceding quarter. In the month  of March the WCT for the period 1-3-2014 to 20-3-2014 is paid by 25-3-2014 and for the remaining period it will be paid on the 20th of the month.

In case, if the developers is not deposited WCT deducted from contractor on monthly basis on or before the 20th of the preceding month. The developer is responsible to pay the penalty with is equal to 200% of the WCT deducted amount.

The interest is charged @15 p.m. on different amount. It is calculated on the number of days basis.

The logic behind this penalty of 200% is that the amount of WCT deducted by developer is not his deducted amount but this is the amount of contractor which the developer has to pay in time of behalf of contractor to the VAT department.

How to Adjust WCT Tax with Sales Tax 


Here, I want to show an example through which it will be clear that how a contractor settles his account through his WCT amount, which is already deducted:

Contract Price = 15000000

Materials : Labour Ratio = (70:30)%  i.e (10500000 / 4500000)

Multiplying Factor = 70% of Rs 1,50,00000 / Purchase Value of  Materials
= 1,05,000/90,00,000
= 7/6

Purchase Materials

PurchaseValueRate of TaxVAT Input Tax Amount
Bricks50,00,0005.00%2,50,000
Cement15,00,00015.50%2,32,500
Timber3,00,00013.50%40,500
Marble5,00,00013.50%67,500
Sand1,00,0005%5,000
Iron & Steel15,00,0004%60,000
Badarpur1,00,00013.50%13,500
Total90,00,0006,69,000

Now Turnover of Sale of goods for:

1.Goods taxable @4%15,00,000*7/617,50,000@4%70,000
2.Goods taxable @5%51,00,000*7/659,50,000@5%2,97,500
3.Goods taxable @13.5%9,00,000*7/610,50,000 @13.50%1,41,750
4.Goods taxable @15.50%15,00,000*7/617,50,000@15.502,71,250
 VAT Output7,80,500
 VAT Input6,69,000
 Tax Liability1,11,500
 WCT on 1,50,00,000@4%6,00,000
 Refund VAT/WCT(4,88,500)
 Refund/Contract Value4,88,500/1,50,00,0003.257%

Value Addition Factor   =        (Gross Turnover of sale of All goods)      1,05,00,000            =   16.66%

Gross purchase value of goods                90,00,000

So, as l have discussed above, the scope & the calculation of WCT along with the relevant example I just want to clear the basis FAQ regarding the term Work Contract Tax. As there is a lots of rumour about the said concept, I just want to place it in a layman format.

Hope, this post will help you to solve your queries

                                                          Happy reading!!!

Published by

Shushant ( ICAI Final )

Shushant is a Chartered Accountant student at Institute of Chartered Accountants of India. He is also a Student of Company Secretary at Institute Of Company Secretaries of India. He is a administrator of this site . In his spare time he hang out with his friends and discuss about the current issues in market. You can find his latest blog posts at www.enrollmyexperience.com and at his facebook profile.

11 thoughts on “WCT- Work Contract Tax”

  1. i am sheet metals parts manufacturer 50% material received from customer on Free of cost plus 50% material add from our said also we have charge Excise on total value & sales tax charge on only basic + Excise please give me your expert suggestion its applicable TDS & WCT f

    1. Hi Ganesh,

      Well TDS is a income tax concept, where before paying any revenue to other assesse the payee has to deduct certain amount of tax before making payment. And in your case you are selling a product to the buyer after manufacturing the product adding other taxes, so i don’t think that you should deduct TDS in your case as you didn’t fell in any of the section of section 192 to section 197. Moreover, you can check your validity for TDS at http://www.incometaxindia.gov.in/charts%20%20tables/tds%20rates.htm

      Now, the answer to the query whether you are applicable for WCT or not, then as written in the post above, to satisfy the condition of WCT for services tax and sales tax one have to certify certain condition (as mentioned above). So, as far i have reviewed your work, WCT will be applicable in your case.

      I hope your both queries has been replied in the manner as you want too !!
      Keep posting and visiting the site !!
      Thanks !!

  2. what of wct is deducted but not deposited in same month. and it comes to knowldege in next month. please provide some solutions

    1. Mr. Arvind Kumar, you are kindly requested to read the title, Return date, interest and Penalty.. you will get the answer in that title…
      Btw, a contractor has to pay 200% penalty

  3. Please advice : for example a water motor repair men provide there service charges with including material

    Then that service charges should be deduct able WCT or not

    Please advice

  4. Dear Ashish, Sorry for the delayed response!
    The same payment deduction will be covered under TDS u/s 194-J
    Hope it was helpful 🙂

  5. Hi Frenz,
    A VAT registered dealer getting the factory construction done for his new plant.
    Now can he claim WCT chargeed by contractor as set-off against his normal sales liability

    1. Hi renu,
      Well, a WCT is a tax as similar provision to TDS, but it doesnt mean it is Mutatis-mutandis as TDS. It is an act under Central Govt. and usually charge 4% of the contract. Further the same amount is adjusted to what the amount is payable, not with the input service and other dues. So the query that it is adjusted against VAT is not possible as it is a state law and WCT has nothing to do with applicability of VAT on the material, it just see the legal circumstances and not the settlement.

      1. Sir WCT & WCT TDS are different na,,,The constructor charging WCT 5% in bill, whether same can be considered as set off against my VAT liabiility..WCT is not my domain..so getting confused,,,pls guide

          1. Yes, thanks …The resolution is as under…,
            The WCT 5% charged by builder can very well be adjusted against VAT liabiility….

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