Almost all States under their respective VAT laws have made provisions for deduction of VAT from payment to be made to the works contractors at the time of the payment (popularly known as works contract tax or VAT TDS on works contract). The Punjab VAT Act is no exception in this regard. Section 27 of PVAT Act deals with the provisions relating to tax deductions from payments to be made under a works contract. Here in this article the provisions of section 27 of PVAT Act 2005 are concentrated on in view of the latest decision of Hon’ble Punjab & Haryana High court in Larsen and Tourbo v State of Haryana case.
What is Works Contract: Before proceeding with the topic it is necessary to give a brief meaning of works contract. Works contract has been defined inclusively u/s2(zu) of Punjab VAT Act 2005 to mean as including any agreement for carrying out, for cash, deferred payment or other valuable consideration, building, construction, manufacturing, processing, fabrication, erection, installation, fitting out, improvement, modification, repairs or commissioning of any movable or immovable property.
In general terms works contract can be defined as a contract of some work for valuable consideration which includes both supply of goods as well as labour/services. Construction of buildings, roads, bridges, making of lifts, sign boards etc are some examples of works contracts.
Deduction of tax from payment made to works contractors under PVAT Act:
Section 27(1) of PVAT Act 2005 which deals with deduction of tax from payments made to works contractors, runs as under:
Notwithstanding anything
contained in any of the provisions of this Act, every
contractee responsible for making payment to any
person (hereinafter in this section referred to as the
contractor) for discharge of any liability on account
of valuable consideration, exceeding rupees five lac
in a single contract payable for the transfer of
property in goods (whether as goods or in some
other form) in pursuance of a works contract, shall,
at the time of making such payment to the
contractor either in cash or in any other manner,
deduct an amount equal to two per cent of such sum
towards the tax payable under this Act on account
of such contract:
Provided that any individual or Hindu
undivided family not registered under this Act, shall not
be liable for deduction of such tax.
Section 27(1) starts with the words “Nothwithstanding anything contained in any of the provisions of this act” which shows that the provision is a non abstante clause which means section 27(1) will be applicable irrespective of anything contrary to it contained in the other provisions of the Act.
On which amount the tax is to be deducted?: The first question that comes to mind while deducting tax under section 27 of PVAT Act 2005 is on which value of works contract Tax should be deducted i.e whether on the whole value of works contract including service component and interstate sales if any etc or only on that part of works contract on which the contractor is liable to pay tax under the relevant state VAT act.
Section 27(1) doesnot provide specific answer to it clearly. Although it is written in the said section that deduction is to be made for the amount payable for transfer of Property in Goods( whether in goods or in some other form) made in pursuance of works contract. Section 27(1) doesnot specify clearly whether the labour part included in the works contract or the value of the works contract involving interstate sales or sales in the cource of import are to be excluded or not while making tax deductions from the works contract payments by the contractee.
Hon’ble Supreme court in Steel Authority of India v. State of Orissa [2000] 118 STC 297(SC), Nathpa fhakri ft. Venture v. State of Himachal Pardesh[2000] 118 STC 306 (SC) and Rapti commission Agency v. State of U.P.{2006] 147 STC 566(SC), has taken a view that if a person is not liable for payment of tax at all, at any time, the collection of tax from him, with a possible contingency of refund at a later stage, will not make the original levy valid.
Labour component involved in the value of a works contract is not liable for any tax under Punjab VAT Act as also the interstate sales or sales outside the state and sales in the cource of import. If there is no levy of tax on a turnover then there cannot be collection of tax on it by the authorities.
If we consider the above view of the Supreme court then tax u/s 27 should be deducted only on the taxable turnover part of works contract that is to say tax should be deducted only on that part of works contract on which the contractor would be liable to pay tax under the relevant VAT Act.
The Hon’ble Punjab & Haryana High court in a latest case Larsen & Toubro Limited
Vs.The State of Haryana and others CWP No.14797 of 2010 Decided on 26.10.2010 wherein validity of statutory provisions in Sales Tax law in Punjab and Haryana for deduction of tax at source out of payment made to contractors for execution of works contracts involving transfer of property in goods at specified rate was challenged, has held considering the view of Supreme court in the cases referred above that the impugned provisions i.e section 27 of PVAT Act 2005 and section 24 of Haryana VAT act 2003 as ultra vires as it did not provide any mechanism for the exclusion of labour component or interstate sales or sales outside the sate or sales in the cource of imports from the value of works contract while deduction of tax, but instead of striking down the impugned provisions the Hon’ble court has decided on the proposal of the petitioners in that case that the provisions of section 27 of PVAT Act and u/s 24 of HVAT Act 2003 will be applicable only to the taxable turnover i.e. after deducting service component and turnover relating to sales outside State, in the course of inter-State sales or in the course of import. The petitioner (Contractor) will give declaration in respect of such payments to the persons making the payment(Contractee) with a copy to the concerned assessing authority.
The relevant portion of the said Judgment is produced herebelow:
“After due consideration of the rival stands, we find that the proposal made on behalf of the petitioners as an alternative to striking down statutory provisions being in consonance with the judgments of the Hon’ble Supreme Court has to be accepted. This is so as the States propose to do their duty of providing an appropriate mechanism to give effect to the law laid down by the Hon’ble Supreme Court. Accordingly, we hold that impugned provisions for deduction of tax at source will apply only to the taxable turnover i.e. after deducting service component and turnover relating to sales outside State, in the course of inter-State sales or in the course of import. The petitioner will give declaration in respect of such payments to the persons making the payment with a copy to the concerned assessing authority. This will be without prejudice to the provisions of assessment, levy of interest, penalty, recovery and all other statutory provisions. This arrangement will continue till any other appropriate arrangement is worked out by the States of Punjab and Haryana.
We further direct that pending assessments upto the year 2009-10, may be finalized within six months from the date of receipt of a copy of this order and with regard to assessment for the year 2010-11, a provisional assessment be made relating to TDS amounts within the same period.”
Thus tax u/s 27 of PVAT Act 2005 and u/s 24 of Haryana Vat Act 2003 tax on works contract needs to be deducted only on the taxable turnover of the works contract after the said judgment as explained above.
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