VAT or CST 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 indivisible works contract, it is an interstate works contract. The sections 3,4,5 of the C.S.T. Act are applicable to such deemed sales. 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.

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 .

6 comments:

SK said...

It has been mentioned in the above article that the contract has to be indivisible contract. Which provision of the law requires that the only an indivisible works contract would be eligible? Whether a works contract with separate value assigned for value of materials would not be covered by the aforesaid provisions?

Further, in case a contractor, registered in two states say Delhi and Gujarat undertakes a works contract in Gujarat for which material is procured from both Gujarat as well as Delhi, whether he can chanrge CST on the inter-state sale made from Delhi and if yes, how the invoicing would be made? Further, what will be the tax treatment in case the Gujarat office of contractor procures the material from a dealer in Rajasthan, then, whether such sale can also be treated as transfer of property in goods involved in the execution of a works contract and whether payment of local VAT can be avoided on such transaction?

Further, how the invoicing would be made in case of local purchases where inter-state CST sale is also being made under the said contract? Whether composition scheme in such case can be followed under the state VAT laws?

Views on the above query may kindly be sent to tax.idt.q@gmail.com

shivine said...

As per the above article a contractor registered in one state need not registered himself in another state where he is going to undertake a works contract because he is going to move the goods intended for executing the work contract from his state on which he is going to pay CST Sales Tax in his State? Then he need not worry about the Sales Tax liability in the state where he is going to under take the works contract since as per the above article the contractor has no liability to pay tax in the state where he is executing the works contract? Am I correct? Please enlighten me on the above point

Anonymous said...

Is it necessary that the Contractee and contractor should be in different states to enter into inter-state works contract, even if the destination of goods is to a third state ?

Anonymous said...

May not be. what is important as per Supreme Court Judgements, is movement of goods from one state to the other should be backed by PO / contract

Anonymous said...

Is it necessary to obtain C form from the client, in case of a indivisible works contract for the value of material procured from other states. if so, for which value the C form to be obtained and what is billing system and claiming of the exemption.

Anonymous said...

As per ur your article, the contractor can supply material with or with out 'D' form to the government department were he got contract. invoice will be made on CST rate. Am I right.

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