Applicability of VAT or CST on Inter State Works Contracts
The concept of taxation of inter-state work contracts under VAT / CST is relatively new and complicated. Therefore we need to understand its implications on obligations of indirect taxes, as under:
The Central Government amended the definition of ` Sale’ under the Central Sales Tax Act, 1956 from 11.5.2002. With the said amendment, the states are empowered to levy C.S.T. on the interstate works contract. By the said amendment, the concept of `Interstate works contract’ was introduced in the C.S.T. Act by inserting in the definition of `Sale’, the words “Transfer of Property in goods involved in execution of works contract”.
When the Contractor dispatches his goods from one State to another under indivisible works contract, it is an interstate works contract. The sections 3,4,5 of the C.S.T. Act are applicable to such deemed sales.
Accordingly, the State of dispatch can collect the Central Sales Tax on such deemed interstate sales. The Contractors may not be allowed the interstate depot transfers in the cases of indivisible works contracts since such dispatches are made to the sites of the contractee situated in other state and the same are earmarked for the specific contractee. The Contractor would invoice to the Contractee from the state of dispatch and would charge CST as applicable, with or without C/D Forms.The CST Act was further amended to explain, the deductions available on the total contract price to the Contractor to arrive at the material value.
Please note that in interstate works contracts also, the C.S.T. is payable only on the Material Value/Price’ of the Contract and not on the Labour’ portion of the Contract.The examples of interstate works contract would be that of Contractor from Mumbai, dispatching goods from his Mumbai plant to the site in Chennai (Tamil Nadu) under a indivisible works contract or A Manufacture in Mumbai dispatching his own material to a processor in Surat and the processor returns back the processed material back to the Mumbai Manufacturer. The Surat processor would charge 4% CST against `C’ form on the material value of his invoice amount being a interstate works contract in his hands .When it is an interstate works contract, the Contractee would raise an invoice on the Customer situated in other state with applicable rate of CST on the Material value of the contract, but the Customer would not deduct any amount towards TDS since there is no provision of T.D.S. under the CST Act. TDS is to be deducted only in the local works contracts where the Contractor has charged VAT/Composition Tax.
In short, if the Contractor dispatches goods from his state to the State of the Contractee (Customer) under an indivisible works contract, it is a interstate Works contract in the hands of such Contractor subject to levy of CST which is collected by the state of dispatch . However, in the interstate works contracts also , C.S.T. is payable only on the `Material Value’ of the Contract .