It is ussualy seen that works contractors registered under
Punjab VAT Act, 2005 have always refund to claim from the Excise & Taxation
department due to the fact that their final tax liability is much lower/Nil
than the tax deductions made u/s 27 of Punjab VAT Act, 2005. It results in
blocking of their working capital till the time they get refund from the
Department.The solution to it is to resort to section 27(10) of Punjab VAT Act,
2005.
The relevant provisions of PVAT Act 2005 and certain relevant judgements have been discussed herebelow in this regard
Tax Deductions
from payments made to contractors:Section 27(1) of Punjab VAT Act, 2005
provides 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.
Thus if the value of the works contract exceeds Rs. 5 lakh, tax deduction @5% has to be made by the contractee at the time of making payment to the contractor. However it is to be noted that the settled law is that no deduction of tax at source is required where the payment is an advance and as a loan to the contractor
Tax Deductions
from payments made to sub-contractors:Similarly section 27(2) provides
that any contractor responsible for making any payment for discharge of any
liability to any sub-contractor or in pursuance of a contract with the
sub-contractor, for the transfer of property in goods (whether as goods or in
some other form) involved in the execution whether wholly or in part, of the
work undertaken by the contractor, shall at the time of such payment or
discharge, in cash or by cheque or draft or by any othert mode, deduct an
amount equal to 5% of such payment or discharge, purporting to be a part of
tax, payable under this act on such transfer, from the bills, invoices raised
by the sub-contractor as payable by the contractor.
Twice tax
deduction in a single works contract where there is sub-contracting: Where sub-contracting is done in a works contract, there will be twice tax deduction in a single works contract as not only the tax deduction @
5% in a works contract is required to be made
by the contractee from the payments made to the contractor but the contractor
also is required to deduct tax @ 5% from the payments made to the sub-contractor.
The settled law is that there can be only one deemed sales in a single
works contract as the deemed sales of goods in works contract takes place by
the principle of accretion. However in view of the provisions of section 27 of
Punjab VAT Act, 2005 in case of sub-contracting in a same works contract, the
tax deduction @5% would be made twice as explained above.
No tax deduction should
be there on labour/service element:There are always two parts in the works
contract one is deemed sales of material incorporated in the contract and other
is service/labour element. The tax under Punjab VAT Act, 2005 on works contract
is applicable only on the deemed sales of the taxable goods incorporated in the
contract within Punjab .
No tax can be levied on the labour/service element nor on
the inter state sales or purchase or sale or purchase in the cource of import
or export of goods as both are outside the purview of power of State Government
to levy tax as it was held by the
Hon’ble Supreme Court in Gannon & Dunkerley Vs. State of Rajsthan (1993) 1
SCC 364
In CWP No. 19355 of 2010 -KRBL Limited v State of Punjab and others,
decided on 14.1.2011, it was held by P&H HC that recovery can be effected
only if it is within the competence of the State Legislature. It cannot be
recovered initially providing the remedy of refund later on.
However the tax deduction @5% u/s 27 is made on the whole of the contract irrespective
of the fact that final tax liability in a works contract under Punjab VAT Act
will only be on the deemed sales of the goods incortporated and not on the
labour/service element. Section 27 doesnot take care of excluding
labour/service element for the purpose of tax deduction.
In Larsen & Toubro Limited vs. State of Haryana and others CWP
No. 14797 of 2010 it has also been held by Punjab & Haryana High Court as
under:
“Argument on behalf of the petitioner is that in the case of State
of Haryana, clarification does not take care of excluding service component of
the turnover and mere clarification is not sufficient unless appropriate
amendment is made in absence of which this Court may either declare the impugned
provisions ultravires or may declare the rights of the petitioner in consonance
with the judgment of the Hon’ble Supreme Court in Steel Authoritiy & BSNL
based on constitutional scheme of taxing power of the State Legislature under
Entry 54 of List II read with Articles 286 and 366 (29A) of the Constitution.
For that purpose, it may be held that tax at source will be limited to taxable
turnover i.e. after excluding service component in the contract and turnover of
inter state sales or sales outside the State or sales in the course of import.
For this purpose, the State may lay down a mechanism and till such a mechanism
was laid down, the deduction may be limited to the declaration of taxable
turnover by the petitioner to the contractor with a copy to the concerned
Assessing Authority subject to statutory provisions including those dealing
with the assessment, interest, penalty and recovery. In respect of cases from
the State of Punjab, it was submitted that pending working out of appropriate
mechanism by the State, either the provisions may be declared unconstitutional
or similar arrangement as suggested in the case of the State of Haryana may be
directed to be adopted.
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. as explained above the said dealer will not be making any deemed
sales of goods incorporated in the works contract awarded to it by PWD, hence
there will be no tax liability on the part of the said dealer.”
Thus as per the decision of P&H HC in the above noted
case Tax Deduction u/s 27 of PVAT Act, 2005 has to be only on the taxable
turnover involved in a works contract
Moreover no loss is also being caused to the revenue if the
tax deduction is made only on the taxable turnover as the final tax liability
of the works contractor under Punjab VAT Act, 2005 would also be only on the
taxable turnover.
Certificate of
NIL/Lower rate of tax deduction:Ussualy the tax deduction u/s 27 turns out to be more than the final tax liability of the works contractor, which results in blocking the working capital of the business till the time works contractor gets the refund of the excess tax deducted.
To avoid such excess deduction of tax
due to sub-contracting or due to non-exclusion of labour/service element from the
value of contract for the purpose of tax deduction, the contractor/subcontractor
should seek NIL/Lower rate of tax deduction certificate u/s 27(10) of Punjab
VAT Act, 2005.
Section 27(10) of Punjab VAT Act runs as under:
“Where on an application
being made by any contractor or sub-contractor the Commissioner or
Designated Officer is satisfied that no deduction of tax or deduction of tax at
a lower rate is justified, he shall grant him such certificate permitting no
deduction of tax or deduction of tax at a lower rate, as the case may be. On
furnishing of such certificate, the person responsible for deduction of tax,
shall comply with such certificate.”
If the final tax liability of the contractor or
sub-contractor is less or nil as the
case may be than the tax deduction made
u/s 27, then such contractor or sub-contractor must move an application u/s
27(10) to seek NiL or lower rate of tax deduction certificate and in such case
granting of NIL/Lower rate of tax deduction certificate will be justified.
Even if no sub-contracting is being done, the works
contractor should seek the certificate of tax deduction only on the taxable
turnover part of the works contract i.e after excluding labour/service element
from works contract and the inter state deemed sales, on the basis of the
abovesaid judgemernts.
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