Introduction to Works Contract in Delhi VAT ( DVAT)
A Works Contract in Simple terms is a contract for carrying out certain works on any immovable or movable property of others. Article 366(29A) of Constitution of India has been formulated to impose a tax on transfer of property in goods involved in execution of a works contract. It Covers only those contracts which are composite in nature and segregated by fiction of law so that tax can be on transfer of goods involved.
Normally when any goods is sold, what shall be the applicable tax. Of course VAT/CST. Similarly when services of any nature are provided to service provider to service recipient, the applicable statute shall be Service Tax. Things sound that simple. In Case where a contract has both aspect of material as well as service it shall be called as Composite contract.
As Presented above in the Chart, A Composite Contract can be of two natures viz. Divisible and Indivisible Contract. First let’s discuss the Treatment of Taxes in Case of Divisible Contracts. (To Establish Divisbility of Contract is purely on nature of transaction and Professional Judgement and Lot of times this itself has been the subject matter of appeals to Judiciary).
In Case Of Divisible Composite Contract, Lets say of `100 say `80 of Material and `20 of Service Component. Then `80 shall be taxed at the rate as specified tariff applicable to the item and `20 shall be considered for computation of service tax.
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