MVAT - WORKS CONTRACT - COMPOSITION SCHEME

Section 42(3) provides for a Works Contract Composition Scheme, whereby a dealer, at his option, may choose to pay tax @ 5% on Construction Contracts (as notified) or in case of other contracts @ 8% on the total contract value. (After deducting there from the amount paid towards sub-contract, if any.)

However, in respect of such (other) contract/s, where the dealer has chosen to pay tax by way of composition @ 8%, the amount of set-off available on inputs will be restricted to 64% of the total amount of set-off for respective goods used in such contract/s.

In case of construction contracts (notified), where the dealer has chosen to pay composition @ 5% (w.e.f. 20-6-2006), the set-off on inputs is available subject to retention @ 4%, as provided in Rule 53.

Such retention/reduction shall not apply to set-off on capital assets, the goods, the property in which not passes in the execution of works contract. (w.e.f. 8-9-2006).

Sub-section (3A) is inserted w.e.f. 1-4-2010 to empower State Government by issue of notification to provide composition scheme for registered dealer who undertakes construction of flats, dwellings or buildings or premises and transfer them in pursuance of an agreement along with the land or interest underlying the land. Accordingly a Notification has been issued providing for a composition scheme whereby a dealer (builder/ developer) can discharge his tax liability by paying composition amount @ 1% without entitlement for any set-off.

Notes:

1. A dealer, executing works contract, whether chooses to pay tax u/r. 58 or under the composition scheme, u/s. 42(3), is entitled to issue tax invoice in respect of all such sales effected by him by way of execution of works contract, by charging tax separately in such tax invoice.
2. A dealer (contractor) is free to choose either sale price method or composition scheme, as he may deem fit, qua each contract. There is no requirement of any prior approval etc.
3. The relationship between the contractor and sub-contractor is considered as that of principal and agent. Thus, the responsibility for payment of tax is joint and several. It has been provided, therefore, that liability to pay tax may be discharged either by the main contractor or the sub-contractor. If the main contractor chooses to pay tax on the entire contract, he may issue a declaration and certificate (in Forms 406 and 409) whereby the sub-contractor shall not be liable to pay tax on the portion of work undertaken by him. Similarly where the sub-contractor undertakes to pay tax, he shall issue a declaration and a certificate, (in Forms 407 and 408), to the main contractor regarding payment of taxes made by him on his portion of works contract. Thus the main contractor will be liable to pay tax only on the difference.
4. Builders/developers opting for 1% composition scheme under section 42(3A) are not entitled for any set-off.