Haryana Government instructions on civil works contracts/builders and developers

Instructions regarding civil works contracts/builders and developers – deductions allowable in computation of turnover and consideration liable to tax.
MEMORANDUM
It has come to the notice of this office that there is some confusion amongst the departmental officers in determining the gross turnover and deductions allowable therefrom and consideration liable to tax in civil works contract cases, especially in case of builders and developers of flats and buildings. It has led to lack of uniformity in assessment of tax in such cases and has also resulted into avoidable disputes. The matter has been examined and it has been considered necessary that suitable instructions should be issued in this regard correct assessment and recovery of tax in these cases. Accordingly, the following instructions are being issued:
1). Assessment of tax in case of building contracts (Agreement for sale of constructed building):
1.1 It has been noticed that several builders and developers enter into agreements with prospective buyers for sale of constructed flats,apartments or other buildings and claim that their transactions of sale of constructed buildings do not amount to transfer of property in goods involved in the execution of a works contract. However, such claim is contrary to the provisions of the Haryana Value Added Tax Act, 2003 (in short, HVAT Act), because the”sale” as defined under clause (ii) of section 2(1)(ze) of the HVAT Act includes “the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.” The term “works contract” has been defined under Section 2(1)(zt) which “includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the assembling, construction, building, altering, manufacturing, processing, fabrication, installation, fitting out, improvement, repair or commissioning of any movable or immovable property.” As such agreements or contracts entered into by the developers or others with prospective customers for sale of fully constructed apartments or flats or other buildings before the commencement of actual construction or before completion of construction, should be treated as agreements or contracts for execution of works contract of construction of building as held by the Hon’ble Supreme Court in the case of K. Raheja Development Corporation v/s State of Karnataka (reported in 141 STC at page 298). It is still a good law and has not been reversed by the Hon’ble Supreme Court in any subsequent judgment. Claims to the contrary, if any, should be rejected.
1.2 It has come to notice of this office that many developers/ promoters/ builders are not registered and not paying any tax, except tax deducted at source of Works Contract Tax (WCT) while making payments to the contractors engaged by them for the construction of building. Even where they are registered they are not filing returns in the form VAT R-1 or VAT R-6, as the case may be. They are actually filing returns in form VAT R-4A as contractee. The correct interpretation of law in such cases is that the developers/ promoters/ builders are liable to pay tax as works contractors. They need to be registered under the HVAT Act and are required to file their returns in form VAT R-1 or VAT R-6, as the case may be, disclosing the correct amount of total receipts, including the receipts from the prospective buyers of constructed residential/ commercial properties/ buildings.
2). Assessment of tax in cases of Joint Development Agreements:
2.1 In the case of Joint Development Projects, where typically there is an agreement between the owner of a land and a developer to develop such land which involves construction of a building or buildings (residential or commercial) on such land, there is an understanding that an agreed portion of the constructed building would be transferred by the developer to the land owner. The developer would be given the right of selling or transferring the balance portion of the constructed building along with the undivided share in the land on which it is built. The developer would then enter into agreement for construction of flats or apartments or the other built up areas with customers or for sale of constructed flats or apartments or other built up areas. In many cases the agreement by the developer for sale of constructed flats or apartments of other built up areas would be before their completion of construction. As mentioned earlier, in respect of both the agreements for construction and agreements for sale of built up area that are entered before the completion of construction, the developer would be liable to tax on the taxable turnover relating to transfer of property in goods involved in execution of such civil works contract of construction of buildings.
2.2 Further, generally a developer constructing a building in pursuant to a joint development agreement declares only part of the amounts received from his customers with whom he has entered into construction agreement as his turnover relating to the transfer of property in goods in the execution of such works contract. He would not declare the balance amounts received from the customers towards transfer of undivided share of land on which flat or other built up area is constructed and sold to them as part of his turnover. Similarly, he would not declare the value of goods transferred in the construction of the building relating to the share of the land owner as part of his turnover on the ground that no consideration is received from the land owner on such transaction.
2.3 The claim that the developer executes works contract of construction of a portion of a building without any consideration is not factually and legally sustainable. The correct view would be that the land owner has sold a portion of his land to the developer for a consideration and, in turn, the developer has agreed to construct a portion of the building for the land owner for an amount equal to that consideration.
(i) The developer in most of the cases collects amounts separately from his customers towards the transfer of undivided share of land on which their earmarked flat or other built up area is constructed. The aggregate of all such amounts would be the consideration that is to be taken as payable by the land owner towards construction of his share in the project.
(ii) In cases, where such amounts are not collected separately, the aggregate of amounts declared by the developer to be the value of undivided share of land transferred to the customers while registering with relevant authorities transfer of such land along with the customer’s portion of the building constructed on it, would be the consideration that is to be taken as payable by the land owner towards construction of his share in the project.
(iii) in case where the value of the undivided share of land transferred is not declared separately at the time of registration, the aggregate of the amounts fixed under the relevant law (circle rate) for the purpose of payment of fee or consideration that is to be taken as payable by the land owner towards construction of his share in the project.
2.4 The amount payable by the land owner towards construction of his share of the building shall be calculated on the basis of:
(a) the aggregate of amounts received from his customers by the developer with whom he has entered into construction agreements or entered into agreements for sale of constructed building before completion of such building, towards transfer of undivided share of land to them; or
(b) the aggregate of amounts declared by the developer to be the value of undivided share of land transferred to the customers with whom he has entered into construction agreements or agreements for sale of constructed building but before completion of such building; or
(c) aggregate of amounts fixed under the relevant law as the value of undivided share If land transferred to the customers with whom he has entered into construction agreements or agreements for sale of constructed building but before completion of such building, should be taken as part of the total consideration or total turnover relating to the works contract executed by the developer and assessed to tax after adding it to the total consideration or total turnover declared by the developer, if not already included, taxable turnover in such cases shall be determined after allowing the deductions as provided in the HVAT Act and Rules. The addition to be made to the total consideration or total turnover towards construction of the land owner’s share of the building shall be calculated on the basis discussed at (i), (ii) and (iii) above and added to the monthly or other periodical receipts declared by the developer or builder as received from his customers. Further, on the date of handing over possession of the land owner’s share of constructed building to the land owner, it shall be taken that the consideration towards such construction has been made in full and added to the total turnover of the developer or builder or dealer, if not already declared.
2.5 It may be noted that in some cases even the land owner also may have entered into agreements with prospective buyers in respect of his portion of building being constructed by the developer or builder. In such cases, even the land owner would be liable to tax on the taxable turnover relating to transfer of property in goods involved in the execution of works contract of such building (though actually carried out through the developer or builder). However, it shall be ensured that both the land owner and the developer or builder is not assessed to tax on the same transaction.
3). Composition tax scheme:
3.1 Where a builder or developer has opted for payment of tax on his turnover relating to transfer of property in goods involved in execution of works contract under the composition scheme as provided under Section 9 of the HVAT Act, the total consideration on which such dealer is liable to tax would not include the amount received from the customers towards their undivided share in land. However, as explained earlier, in the case of joint development projects this exclusion would not be applicable.
3.2 Further, deduction is allowable towards amounts paid to sub-contractors as per the provisions of the HVAT Act.
4). Measure of tax and Deductions towards labour and other like charges:
4.1 As held by the Hon’ble Supreme Court in the case of Gannon Dunkerley & Co. and Others (reported in 88 STC at page 204), since the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in the works and not the cost of acquisition of the goods by the contractor. The Hon’ble Supreme Court did not accept the contention urged on behalf of the States that in addition to the value of the goods involved in the execution of the works contract the cost of incorporation of the goods in the works can be included in the measure for levy of tax. Incorporation of the goods in the works forms part of the contract relating to work and labour which is distinct from the contract for transfer of property in goods and, therefore, the cost of incorporation of the goods in the works cannot be made a part of the measure for levy of tax contemplated by article 366(29-A)(b).
4.2 Since a composite works contract involves supply of materials as well as supply of labour and services, the cost of establishment of the contractor would have to be apportioned between the part of the contract involving supply of materials and the part involving supply of labour and services. The cost of establishment of the contractor which is relatable to supply of labour and services cannot be included in the value of the goods involved in the execution of a contract. Only the cost of establishment which is relatable to supply of material involved in the execution of the works contract can be included in the value of the goods. Similar apportionment will have to be made in respect of profits also. The profits which are relatable to the supply of materials can be included in the value of the goods and the profits which are relatable to supply of labour and services will have to be excluded. This means that the cost of establishment of the contractor as well as the profit earned by him to the extent the same are relatable to supply of labour and services will have to be excluded. The amounts so deductible would have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor. The value of the goods involved in the execution of a works contract will, therefore, have to be determined by taking into account the value of the entire works contract and deducting therefrom the charges towards labour and services which would cover:
(a) labour charges for execution of the works;
(b) amount paid to a sub-contractor for labour and services;
(c) charges for planning, designing and architect’s fees;
(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;
(e) cost of consumables such as water, electricity, fuel, etc., used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and
(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;
(g) other similar expenses relatable to supply of labour and services;
(h) profit earned by the contractor to the extent it is relatable to supply of labour and services.
4.3 The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor.
4.4 Only where the labour and other like charges are not ascertainable from the books of accounts maintained by a works contractor the same shall be arrived at by adopting standard percentage rate prescribed in the table provided under rule 25(2) of the Haryana Value Added Tax Rules, 2003. It may also be noted that while allowing deductions towards labour and other like charges actually incurred and ascertainable from the books of account, the gross profit earned by the builder or developer on such charges are also allowable as deduction. However, where deduction is allowed at standard rates under rule 25(2) of the Haryana VAT Rules, 2003, no further deduction towards profit margin is allowable.
4.5 Further, if the works contract has been executed partly or wholly through a sub-contractor, then not only the profit earned by the sub-contractor on account of labour and like charges is allowable as deduction, even the gross profit earned by the main contractor on such charges shall also be allowable as deduction.
5). All the concerned shall note and follow the above instructions in all the applicable cases. It is to be noted that the above instructions are based on the terms of the general agreements and contracts relating to the civil works contracts and judgments of the Hon’ble Supreme Court and would be applicable wherever the facts and circumstances are similar. Unless any term or condition of a contract or agreement relating to execution of a civil works contract makes it totally different from the transactions discussed above, the above instructions shall be followed in all cases of civil works contracts.
6). These instructions should be brought to the notice of all the assessing authorities working under your control for immediate follow up. A complete exercise and survey should be conducted in your district for all the works contractors/builders and developers of buildings/flats and a complete dossier be prepared and regularly updated for ready reference.
(Anil Malik)
Excise & Taxation Commissioner,
Haryana, Panchkula