17 August, 2014

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Suggestions as filed to Haryana State VAT for Composition Scheme on Builders & Works Contractors

To,                                                                                                                      Date:-   14th July, 2014

Hon’ble Additional Chief Secretary to Govt. Of Haryana,

Excise and Taxation Department

Haryana

Subject: - Suggestions on draft notification no. Web 6/H.A.6/2003/S.60/2014 dated 5th July, 2014 for works contractors and developers – Reg

Respected Sir,

The Hon’ble Governor of Haryana has proposed several amendments in the Haryana VAT Rules (hereinafter referred as “Rules”) vide draft notification no. Web 6/H.A.6/2003/S.60/2014 dated 5th July, 2014 which relates to works contractors and developers in State of Haryana. As per the preamble of the draft notification, the Hon’ble Governor has invited suggestions in this regard from stakeholders prior to implementation of said notification.

Hence in light of above, we suggest that the following aspects shall be considered by your honour before the schemes are duly implemented pursuant to the said Rules.

Suggestions

I. Point of Tax Incidence shall be defined under New Rule 49A

a) As per Rule 49 (applicable to works contractors other than developers),

“A contractor other than developer falling under rule 49A liable to pay tax under the Act, may, in respect of works contract awarded to him for execution in the State, pay in lieu of tax payable by him under the Act on the transfer of property (whether as goods or in some other form) involved in the execution of the contract, a lump sum calculated at 5% of the total valuable consideration receivable (emphasis laid) for the execution of the contract”.

b) Hence, the point of tax incidence in respect to composition scheme for works contractors (other than developers) has been clearly defined in the Rule 49 i.e. when consideration is receivable. Whereas under the new Rule 49A i.e. composition scheme for developers no point of taxation has been defined.

c) As per Rule 49A,

“Tax shall be calculated at the compounded lump sum rate of one percent of entire aggregate amount specified in the agreement or value specified for the purpose of stamp duty, whichever is higher, in respect of the said agreement. Since when the tax incidence / point of taxation is not defined, the same will create confusion and uncertainty in the trade.”

d) Hence it is suggested to insert a clause in the notification which provides a clear point of tax incidence as per which the tax liability of 1% shall be incurred.

II. Developer definition may be suitably altered in light to L&T’s Judgement to exclude cases of ‘mere’ transfer of immovable property from levy of sales tax.

Under the currently prescribed Rule 49A there is incidentally no provision to exclude the consideration received by developers in cases where the entire consideration is received after the completion certificate which are contrary to recent rulings of Hon’ble Supreme Court in L&T Limited v. State of Karnataka (2013-TIOL-46-SC-CT-LB) which in principle accepts the law laid down in earlier judgement in case of K. Raheja case. This shall lead to confusion in trade and shall be addressed to for smoother implementation.

It is pertinent to note that even under Composition scheme for Delhi VAT Effectuated vide Notification No. 3(13)/Fin.(Rev-I)/2012-13/dsvi/180 dated 28th February,2013., there is a specific exclusion to this account. It mentions that,

“Contracts where the entire consideration is received after issuance of completion certificate by the competent authority are excluded here

III. Avoidance of Double taxation on interstate purchases

As per the current scheme prescribed under Rule 49A,

“The composition developer opting for composition under this scheme, shall not purchase or receive goods from any place outside Haryana to be used in the execution of the contract at any time during the period for which the composition remains in force under this Scheme”

“Where the goods are purchased or received in course of interstate trade and commerce or transferred from other states or imported from out of India have been used in the execution of the contract, then the composition developer shall pay the tax on their purchase price at the rate/s applicable on the sale of such goods in the State along with interest as applicable under the Act and such tax shall not be adjustable towards his composition tax liability”

It is worthwhile to note that the simultaneous application of above provisions along with no input tax credit and no entitlement to form C for interstate purchases will result in double taxation on inter-state purchases and will be severe discouragement to the state developers.

In order to address the issue, a clause similar to Rule 49 may be inserted which may allow the composition dealer the entitlement to form C / VAT D1 and then additional tax on purchase price may be recovered.

IV. Where agreement already entered and tax paid under actual / prescribed / Rule 49 scheme, the same shall be adjustable against the 1% liability of Rule 49A as prescribed.

For smoother transition to the prescribed scheme under Rule 49A, a transition period clause may be inserted as per which the developers can adjust their tax paid for taxable agreements prior to opting for composition scheme under Rule 49A.

Taxes paid under actual or prescribed or Rule 49 scheme may be provided as an adjustment from the liability under Rule 49A in regard to agreements which are opted by the dealer to be taxed under Rule 49A.

V. The dropping of already initiated proceedings can be supplemented with a Immunity from penalty and prosecution clause.

“Proceedings initiated by the departmental authorities against such composition developer shall stand dropped, once the composition dealer makes the full payment of his lump sum tax liability as per the scheme and intimate the same with proof of payment to the authority concerned.”

The amnesty if opted by developer shall result in dropping of proceedings already initiated by the departmental authorities. As a normal provision to amnesty and to encourage opting of this scheme from retrospective effect, the composition developer may be provided with explicit immunity from penalties and prosecution under the Act and rules thereunder.

VI. The ambit of “wrong/false declaration” may be clearly defined as it has high implications to the extent of amount being forfeited

"If it is found that the composition developer has made a wrong or false declaration or calculation, then the tax paid, if any, with the option shall stand forfeited.”

The wrong or false declaration or calculation can have a very wide ambit and can result in unnecessary harassment of opting dealers. To safeguard the interest of trade and encourage the opting for scheme, the ambit of what constitutes or what does not constitutes wrong or false declaration or calculation may be clearly prescribed.

VII. No provisions for opportunity of being heard on non acceptance of scheme or cancellation of scheme opting

There may be a clause prescribed that the scheme opting may be cancelled by departmental authorities in case of wrong / false declarations or calculations with a proviso that no order of cancellation shall be passed without an opportunity of being heard.

VIII. For Works Contractors 15 Days from date of revision of rates may be suitably amended to 90 Days (as in earlier scheme) or to a less of 60 days

“A lump sum contractor may, when rate of lump sum is revised, opt out of the scheme of payment of lump sum in lieu of tax payable under the Act by appearing before the appropriate assessing authority himself or through an authorised agent within fifteen days of such revision and expressing in writing his intention to opt out of the scheme of payment of lump sum. Such contractor shall be liable to pay lump sum for the period before the revision in lump sum rate at the un-revised rate and in respect of transfer of property in any goods, whether as goods or in some other form, involved in the execution of the contract(s) thereafter he shall be liable to pay tax as a contractor not being a lump sum contractor.”

In the current version of Rule 49, the number of days within which a contractor can opt out is ninety. A time limit revision for more than 15 days may be suitably considered.

IX. Composition scheme under Rule 49A may be made applicable in regard to the Developer works Contract Only.

As per Rule 49,

A contractor other than developer falling under rule 49A liable to pay tax under the Act, may, ‘in respect of works contract’ awarded to him for execution in the State,

A similar clause may also be inserted in Rule 49A so that the contracts / trading not falling under the said nature may be assessed as per normal provisions of the Act.

X. WCT Certificate format may be prescribed.

It has been proposed under Rule 49 that:-

“A lump sum contractor shall be eligible to claim set off of TDS only if on the date of filing of return, he is in possession of original TDS Certificate issued to him by the person making the deductions”

From above it can be inferred that TDS certificate shall be of significant essence to contractors executing works contract in Haryana. Considering this a separate form may be prescribed as TDS certificate for smoother facilitation of the above provision.

XI. First Instalment of tax plus interest may be liberalised to encourage more compliance

“The composition developer shall pay at least 75% of the tax (with interest) calculated and payable by him after adjusting the tax paid earlier while exercising the option from retrospective period and the balance 25% of the tax (with interest) shall be paid within thirty days of the communication of acceptance by the assessing authority”

In order to encourage more compliance and opting for scheme, the ratio of 50 : 50 may be adopted with leverage of extended period for I & II instalments. The same would result in more compliance and more scheme opting.

It is pertinent to note that the same structure has been even adopted by Delhi State VAT authorities. As per Delhi VAT amnesty scheme,

“The declarant shall pay at least 50% of the declared tax dues along with declaration in Form DSC-1 by 31.1.2014, and submit proof of such payment to the designated authority. Remaining tax dues shall be paid by the declarant on or before the 21.3.2014.”

XII. For smoother tax administration the clause as contained in Rule 49 i.e. once opted all subsequent contracts to be assessed under the scheme unless opted out shall also be inserted in Rule 49A.

As per Rule 49(7),

A lump sum contractor shall have to pay lump sum in respect of every works contract awarded to him after the award of the contract in respect of which he first elected to pay lump sum and he shall continue to pay tax in respect of contracts awarded before as if he is not a lump sum contractor.”

A Similar to above clause can be inserted in Rule 49A, that can allow more stability of legality that backs the assessment proceedings. In such a case all the transactions ( if liable to be taxed) shall be governed by the scheme from the time scheme is opted by developer till he opts out.

XIII. Option to exit the Scheme may be prescribed

As per Rule 49(8),

“A lump sum contractor may at any time by appearing before the appropriate assessing authority himself or through an authorised agent express in writing his intention to opt out of the scheme of payment of lump sum in lieu of tax payable under the Act.”

A Similar option may be prescribed in Rule 49A as well that may give flexibility in line with principles of natural justice to opt out of the scheme atleast for subsequent agreements

Hope the above suggestions shall be duly considered by your honour.

Yours Faithfully,

CA Ankit Gulgulia (Jain)

311, D-MALL, Netaji Subhash Place, Pitampura, New Delhi – 110034

ankitgulgulia@gmail.com

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