Opinion on
Composition rate of Works Contract Tax
Applicability to Construction Work

Querist : ABC & Co. Contractor

Heard : The Chief Accounts Executive of ABC & Co.

The querist has posed query vide E-mail. The querist have stated that M/s. ABC & Co. hereinafter referred to as “the Contractor” is a Works Contractor. The contractor has received a work order from its employer. A copy of the work order is faxed to me. This work order is giving the details about the work to be done by the contractor; i.e., description of the work, quantity and the price details etc. The main job of the contractor is like that of an interior decorator who furnishes the premises as also undertakes the required civil works.

A perusal of the draft work order No. 001 dated 14-12-2007 shows that the main job or the intention of the job is to carry out the carpentry work at A-Wing of Amir Bldg.. I am informed that this is the name of the building which is still under construction and the work to be done prima facie appears to be the work required before the completion of the building or completion of the facilities required in the building.

To give a few examples about the type of work required: Item No. (a) refers to P/F wooden framework. Item No. (b) refers P/F of Palmet of door frame (the description for this item is 19 mm plywood finished with 12 mm Gypsm Board). The other description includes toughened glass fixed partition of specific type, soft board paneling, service counter, fixing of new chanelling groves, teakwood door frame, door frame for conference room, making of pantry platform etc.

It appears that the querist are sub-contractor of a main contractor who are doing construction contract of the building for which part of the work is allotted to the querist. On inquiry with the Chief Accounts Officer, I am informed that the querist are sub-contractor and the work to be undertaken by the querist is entirely the work to be done before the completion of the construction of the building. The querist are allotted the work for furnishing of the interior of the office premises and the main contract is related to the construction of office building.

With the above background the querist wishes to know whether the work undertaken by them is subject to composition at the rate of 5% or 8% if they chose to pay the tax under composition scheme.

Section 42(3) of the MVAT Act enables the State to prescribe the composition for the execution of works contract. The said sub-section provides lump sum payment by way of composition equivalent to 5% of the total contract value in case of construction contract and 8% of the total contract value in any other case. By way of explanation the construction contract is described to mean the contract as may be notified by the State Govt. in the Official Gazette from time to time. By virtue of this empowerment, the State Govt. has by a notification dated 30-11-2006 declared the contracts to be construction contract for the purpose of 42(3). 17 types of contracts are listed in the said notification one of them is construction of buildings. Part (b) of the said notification reads as follows :–

“(B) “Any Works Contract incidental or ancillary to the contracts mentioned in para (A) above, if such works contract are awarded and executed before the completion of the said contract”.

Kindly note the emphasize in Part (B) is on awarding and execution of works contract before the completion of the main contract. Therefore the basic ingredients required for a sub-contractor to fall in Part (B) of the notification are as follows:-

1. The main contract must befall in any of the contracts of construction mentioned in para (A) of the notification for construction contract.

2. It must necessarily be connected and incidental or ancillary to the main contract. The phrase incidental or ancillary to the main contract would mean that they are sub- contract required to be completed before the entire contract is complete and each of the sub-contract is in relation to the main contract only. To be more precise the main contract must specify (to take example of the type of sub-contract narrated hereinabove) that the entire building would be as per the design and quality approved and finalized as per specification of employer.

Thus in the present context if the main contract requires construction of a building fully equipped with the facility as also the type of the door frame, false ceiling etc. required as per the design and specification agreed upon by the Architect and the employer, the sub-contractor would be a contract covered by Part (B) of the notification.

3. Third and very import condition is that the sub-contract must be awarded and the execution completed before the completion of the main contract. This condition is possible of fulfilment only if the main contract requires the complete building to be given possession with facilities contracted for. In that event only it is possible to contend that the main contract is not complete till the sub- contractors work like the querist’s client’s work is complete. The completion of the works contract would mean not only NOC certificate but the completion certificate by the authority mutually agreed upon or the Architect appointed confirming completion of the entire job allotted. It is therefore essential that the main contract must have detailed specification about the special requirements of furnishing of false ceiling, special type of table tops, special type of doors etc. It is in that case only that it can be contended that unless the office as specified in the main contract is completely furnished the main contract shall not be deemed to have been completed.

In the present case before me I have no occasion to go through the main contract and its terms. However I presume the existence of conditions and terms as mentioned by me hereinabove in the main contract and with that condition it is possible for the querist company to claim that though they are sub-contractors their contract is awarded and executed before the execution of main contract of construction of building.

Under the said circumstances the contract undertaken by querist would be one falling under Part (B) of the notification and eligible for claim of composition as construction contract subject to 5% composition under the MVAT Act.

I opine accordingly.