Note on Tax Deduction while making Payment to Contractor under Punjab VAT Act.

Note on Tax Deduction while making

 Payment to Contractor

Under Punjab Value Added Tax Act, 2005

Authored by… J S BEDI Advocate

Email ID: bediadvocate@yahoo.co.in

Contact Number: 98140-66336

As per the scheme of the Punjab Value Added Tax Act, 2005 Contractee who entered into Contract for Works Contract with Contractor is under an obligation to deduct 5 % while making the payment to the contractee if execution of which involves transfer of property in goods and liability on account of such contract exceeds Rs. 5 Lacs in a single Contract. These provisions do not apply to individual or HUF who are not registered under the Act.

Now the vital question arises that Section 27 and Rule 46 by virtue of which Tax Deduction is to be made are harsh provisions reason being there is no mechanism that on which value tax deduction is required whereas Section 27 casts liability to deduct 5% on the entire payment without appreciating that it is to be applied only on the taxable turnover i.e. after deducting service component and turnover relating to sales outside State, in the course of inter state sales or in the course of import. Here it is worthwhile to mention that Section 27(10) deals with the contingency that no deduction certificate or deduction of tax at lower rate certificate can be issued by the commissioner or Designated Officer but if we minutely examine section 27(10) then we will find that no time limit regarding the disposal of application is specified by the legislature.

Several writ petitions are filed in which these types of harsh provisions were challenged and struck down by Hon’ble Supreme Court of India and by different High Courts. Even this issue was challenged before the Hon’ble Punjab & Haryana High Court in case of M/s Larsen & Toubro Limited Vs. The State of Haryana and others was not declared unconstitutional but observed as under,

“After due consideration of the rival stands, we find that the proposal made on behalf of the petitioners as an alternative to striking down statutory provisions being in consonance with the judgments of the Hon’ble Supreme Court has to be accepted. This is so as the States propose to do their duty of providing an appropriate mechanism to give effect to the law laid down by the Hon’ble Supreme Court. Accordingly, we hold that impugned provisions for deduction of tax at source will apply only to the taxable turnover i.e. after deducting service component and turnover relating to sales outside State, in the course of inter state sales or in the course of import, The petitioner will give declaration in respect of such payments to the persons making the payment with a copy to the concerned assessing authority. This will be without prejudice to the provisions of assessment, levy of interest, penalty, recovery and all other statutory provisions. This arrangement will continue till any other appropriate arrangement is worked out by the States of Punjab and Haryana.”

There are no. of judgments in which similar issue was decided in favour of petitioner which are as under

1.      Steel Authority of India Limited (SC)

“Identical Provision in Orissa Sales Tax Act was considered and was held to be ultravires the power of the State Legislature to the extent it provided for recovery of tax out of non taxable turnover relating to component of inter state sales, outside sales or sales in the course of Import.”

2.      Rapti Commission Agency vs. State of UP 6 SCC 522

“Holding that Section 8E of the UP Trade Tax Act, 1948 which was identical to the impugned provisions should be held to be subject to what has been stated in Steel Authority of India Ltd. And Nathpa Jhakri Joint Venture. View taken by the Allahabad High Court in merely reading down that provision was disapproved.”

3.      BSNL vs. Union of India 3 SCC 1

“Holding that service component in a works contract could not be subjected to sales tax”

4.      Keshob Plants vs. BSNL 22 VST 422

“Holding that Section 10C of the Punjab General sales tax Act 1948 was ultravires the constitution being beyond the competence of state legislature

5.      Jaiparkash Associates Limited vs. State of MP and others 6 VST 1

“Holding that Section 35 of the Madhya Pradesh Commercial Tax Act, 1944 which was identical to impugned provision was ultravires the constitution.”

6.      Larsen and Turbo Limited vs. State of Jharkhand and others  140 STC 134

“Holding that Section 25A of the Bihar Finance Act, 1981 was unconstitutional”

7.      Larsen and Turbo Ltd. Vs. Commissioner of Sales Tax, Gujrat 124 STC 162

“Holding that Section 57A of the Gujrat Sales Tax Act, 1969 was ultravires the constitution.”

8.      Larsen & Turbo Ltd Vs. State of Karnataka 129 STC 401

“Holding that Section 19A of the Karnataka Sales Tax Act, 1957 was ultravires the constitution.”

Relevant Section and Rules

Section 27  

(1)     Notwithstanding anything contained in any of the provisions of this Act, every contractee responsible for making payment to any person (hereinafter in this section referred to as the contractor) for discharge of any liability on account of valuable consideration, exceeding rupees five lac in a single contract payable for the transfer of property in goods (whether as goods or in some other form) in pursuance of a works contract, shall, at the time of making such payment to the contractor either in cash or in any other manner, deduct an amount equal to two per cent of such sum towards the tax payable under this Act on account of such contract:

Provided that any individual or Hindu undivided family not registered under this Act, shall not be liable for deduction of such tax.

(2)           Any contractor responsible for making any payment or discharge of any liability to any sub-contractor or in pursuance of a contract with the sub-contractor, for the transfer of property in goods (whether as goods or in some other form) involved in the execution whether wholly or in part, of the work undertaken by the contractor, shall, at the time of such payment or discharge, in cash or by cheque or draft or by any other mode, deduct an amount, equal to two per cent of such payment or discharge, purporting to be a part  of the tax, payable under this Act on such transfer, from the bills or invoices raised by the sub-contractor, as payable by the contractor.

(3)           Every person liable to deduct tax at source under sub-section (1) or sub-section (2), as the case may be, shall make an application in the prescribed manner to the designated officer for allotment of Tax Deduction Number. The designated officer, after satisfying that the application is in order, shall allot Tax Deduction Number.

(4)           The amount deducted under sub-section (1) or sub-section (2), as the case may be, shall be deposited into the Government Treasury by the person making such deduction in the prescribed manner and shall also file a return of tax deduction and payment thereof in such form and in such manner, as may be prescribed.

(5)           Any deduction made in accordance with the provisions of this section and credited into the Government Treasury, shall be treated as payment towards the tax payable on behalf of the person from whose bills and invoices, the deduction has been made and credit shall be given to him for the amount so deducted on the production of the certificate, in the prescribed form in this regard.

(6)           If any contractee or the contractor, as is referred to in sub-section (1) or sub-section (2), as the case may be, fails to make the deduction or after deducting such amount fails to deposit the amount so deducted, the designated officer may, after giving an opportunity of being heard, by order in writing, direct that the contractee or the contractor shall pay, by way of penalty, a sum, equal to the amount deductible under this section, but not so deducted, and if deducted, not so deposited into the Government Treasury.

(7)           Without prejudice to the provision of sub-section (6), if any contractee or the contractor, as the case may be, fails to make the deduction or after deducting, fails to deposit the amount so deducted, he shall be liable to pay simple interest at the rate of one and half per cent per month on the amount deductible under this section, but not so deducted and, if deducted, but not so deposited, from the date on which such amount was deductible to the date, on which such amount is actually deposited.

(8)           Where the amount has not been deposited after deduction, such amount together with interest referred to in sub-section (7), shall be a charge upon all the assets of the person concerned.

(9)           Payment by way of deduction in accordance with sub-section (1) or sub-section (2), shall be without prejudice to any other mode of recovery of tax, due under this Act from the contractor or the sub-contractor, as the case may be.

(10)         Where on an application being made by any contractor or sub-contractor, the Commissioner or designated officer is satisfied that no deduction of tax or deduction of tax at a lower rate is justified, he shall grant him such certificate permitting no deduction of tax or deduction of tax at a lower rate, as the case may be. On furnishing of such certificate, the person responsible for deduction of tax, shall comply with such certificate.

Rule 46. Liability of persons in case of works contract.--(1)    A person entering into a contract with a contractor or a contractor entering into a contract with a sub-contractor for transfer of property in goods in execution of a works contract, shall furnish to the commissioner or the designated officer, particulars of such contract in Form VAT-25 within a period of thirty days from the date of entering into such contract.

(2)  A person entering into a contract with a contractor or a contractor entering into a contract with a sub-contractor for transfer of property in goods for execution of a works contract, who is also liable for deduction of tax, shall within a period of thirty days of accruing his liability to deduct the tax, make an application, complete in all respects to the designated officer in Form VAT-26, for allotment of tax deduction number. The designated officer shall allot tax deduction number to the person concerned within a period of seven days from the receipt of the application.

(3)        The tax deducted under the Act, shall be deposited by the person deducting the tax through a challan in Form “VAT-2” in the appropriate Government Treasury within a period of fifteen days from the close of each month. A monthly statement of the deposits made under sub-rule (3), shall be furnished by the persons concerned in Form “VAT-27” alongwith the proof of payment within a period of fifteen days after the date of deposit.

(5)  The person deducting the tax, shall issue a certificate of such tax deduction at source in Form VAT - 28, which shall entitle the contractor to claim credit for such amount in the return.

            That it is a settled preposition by the Hon’ble Punjab & Haryana High Court that no deduction of tax at source is required where payment is in advance and as a loan to a work contractor beside this tax cannot be deducted at source on supply of labour only or it cannot be deducted without appreciating that tax was leviable or not but still the VAT authorities are raising the eyebrow on the contractees that they should deduct 5% on entire amount so there is a need to amend the Section 27 otherwise the deduction of tax @5% without any mechanism is unconstitutional as the constitutional scheme of taxing power of the state legislature under Entry 54 of List II read with Articles 286 and 366 (29A) of the constitution, the taxing power should be limited by determining the taxable turnover after excluding service component in the contract and turnover of interstate sales or sales outside the states or sales in the course of Import.