Choosing an Option to Pay VAT
- Dealers executing works contracts need to plan their VAT liabilities in such a way that they are able to mitigate the taxes to the maximum incurring least amount of risk.
- As far as VAT is concerned, the works contractor normally has three basic options under each of the state VAT – Regular Scheme (offering actual value of material), Standard Deduction Scheme (offering value as per standard tables) and the Composition Scheme (offering a lumpsum percentage on the gross turnover).
- So whenever one is quoting for a job, one normally tends to find out the best of these options for the total project. But what one needs to think is that whether there could be a hybrid scheme devised as a combination of two or all the three options to further optimise the component of VAT.
- Lets take an example from the state of Gujarat – In Gujarat the composition scheme of 0.6% comes with a condition that the goods can-not be imported from outside the state of Gujarat. Now if a project of Supply and Civil Foundation requires import of goods under the supply contract, then the two contracts can be taken separately and the composition can be applied for the civil foundation project.
- Further, lets say in the state of Tamil Nadu, an interior decoration project is obtained with interior decoration, supply of modular furniture, HVAC installation, Electrical fitting and other miscellaneous activities. Now Tamil Nadu offers a very high standard deduction percentage of 30% under the residual category. Besides the tax under regular and standard deduction scheme is discharged by application of scheduled rates which are either 5% or 14.5%. So the Interior and Modular furniture can be taken as a separate works contract making it eligible for 30% deduction if labour can-not be separately traced for the project. Secondly separate order may be obtained for items falling in the lower rate schedule of 5% in case the items are to be used in a manner that their identity may get lost and it may be difficult to separately identify and bill the same in a composite contract.
- Another example may be taken from the Union Territory of Daman and Diu, where the single rate of 4% applies to works contracts, irrespective of the actual goods and their respective VAT rates as may get incorporated in the contract. In such cases even if a separate supply is being done to the client, but the same should be made part of the single works contract to take benefit of the lower rate.
- Thus it can be seen that with the combination of state, nature of contract, client, source of procurement, role of sub-contractor and finally flexibility on offer with both client and suppliers, different solutions can be devised with a view to identify the most optimum one.