Article Series – TDS under works contracts

Many may wonder, that whether the topic of TDS on Works Contract is worth writing an article upon. However the fact is that it requires a lot of care and attention whether you are a client or even if you are a contractor.
The various prima facie issues that one may face are:-
a) Base value on which the TDS is to be deducted.
b) Rate at which deduction is to be made.
c) Whether any credit is to be given to reduce the amount of tax to be deducted.
d) Whether there is a possibility to obtain lower rate certificate
e) Compliance required to be done for TDS deduction
f)  Whether exemption can be availed to ensure there is no deduction of tax
This and much more could arise when one practically deals with the issues related to VAT TDS or more popularly known as WCT.
It is also interesting to note that apart from the law as it stands in the statue there are various court judgments on this issue. This gives a basic understanding that the area has been prone to several litigations. The foremost being the base value on which deduction is required to be made. The constitution does not permit state to charge any tax on the value of labour, on the value of export sales or inter-state sales. However procedurally it may be difficult atleast in the case of works contract to split the value and arrive at the value of goods which have been sold in the particular state. Many states have made necessary amendments in their procedures itself that makes things very clear. One such case is the case of state of Gujarat, which has a defined a Form 702 for the contractors to claim the deductions as permitted by the constitution. Even if the states do not contain any specific rule in that regard one can very well challenge the same. (Honourable Supreme Court in the case of Steel Authority of India Ltd at (2000) 118 STC 297).
Further there can-not be any TDS on pure labour contracts. Here one may note that there is a difference between transferable and non-transferable goods. Several goods are required to execute a project. If the goods stand physically transferred to the client in the same form or in some other form, then the contract is liable to works contract. If the goods are such that even after the execution of the project they remain with the contractor in the same form or in some other form, then effectively there is no transfer of property.
One more issue is that the provisions of VAT TDS do not apply to advance payments / mobilization advances. This is so because mobilization advance is in the nature of a loan and is to be recovered in the running bills on a progressive basis. Hence tax deduction should be done at the time of adjustment of advance against bill for works executed and not at the time of making the advance. (CTT vs. New Holland Traders India (P) Ltd (2009)).