TAX EFFECTS TO
DEVELOPER ON SUPPLIES TO TURNKEY CONTRACTOR
CA NISHANT MUNDADA
INTRODUCTION
There is a lot of ambiguity regarding taxation of turnkey
construction contracts in India. It starts from the fact that a turnkey
construction contract involves both labour and material therefore, both Service
tax and Value Added tax is levied on the same transaction. The process becomes
complex depending upon the various factors such as the Scope of work, the
nature of the contract, whether the contract includes any further sub –
contracting, whether individual prices have been specified for different tasks
, whether the contract involves off –shore and on – shore activities, etc.
TURNKEY CONTRACT
A turnkey contract is a business arrangement in which a project is delivered
in a completed state. Rather than contracting with an owner to develop a
project in stages, the developer is hired to finish the entire project without
owner input. The builder or developer is separate from the final owner or
operator, and the project is turned over only when it is fully operational. In
effect, the developer is finishing the project and “turning the key” over to
the new owner.
Turnkey contracts offer several advantages over traditional construction
contracts. The developer still owns the building until the project is complete
so he has financial motivation to get the job completed as quickly and
efficiently as possible. A turnkey contract also provides more time for the
developer to search for interested investors before he is required to pay for
the completed project. These agreements also save inexperienced owners from
making difficult construction decisions, leaving these decisions in the hands
of the builder.
The primary drawback of this contract is the lack of control the
owner maintains over the design and construction decisions. For some owners,
this may mean the project is not perfectly suited to their needs once it is
complete. For others, this drawback may be cancelled out by the potential for
cost savings and shorter construction schedules.
CONSTRUCTION TURNKEY
CONTRACT
A Turnkey Construction Contract is a type of construction contract
under which the construction firm is obligated to complete a project according
to proposed criteria for a price that is fixed at the time when the contract is
signed.
The Tunkey Contract arrangement is now a common thing, used for
construction projects ranging from single building to large - scale
developments. Under a traditional lump - sum Turnkey contract, the owner agrees
to pay the developer a fixed sum of consideration to complete a project that is
built to the owner's specifications. The owner is given many opportunities to
make decisions throughout the project, and to make changes as needed. In a
turnkey contract, the owner is generally left out of the building process
entirely as the builder handles all decisions and challenges related to
construction.
In Turnkey construction contract, the owner agrees to pay to the
contractor the contract price in consideration of the performance of Work by
the Contractor of its obligations under the Contract, as detailed in the
contract and as per the Bill of Quantities.
WORK ORDER ESSENTIALS
The Work Order for execution of work between Turnkey Contractor and
owner generally specifies all the details which are essential for the Turnkey
construction contact. A typical Construction Turnkey Contract has the following
key points:
·
Scope of Work
·
Contract Price which owner
agrees to pay
·
Terms of Payments
·
Duration of the Contract
·
Special Condition of the Contract
for Supply and Delivery of Material by the contractor
·
Condition for Price adjustment
for contractor
·
Terms and Condition in respect
of Inventory to be maintained And
SUPPLY OF MATERIAL
In turnkey construction contract, the owner may supply certain material
like Cement, Steel, Ready Mix Concrete etc. to the turnkey contractor for
executing the work. Other than this, the owner also provides General Electricity
and Water to the Turnkey construction contractor to execute the work. The cost
of all the supplies provided by the owner is adjusted in the payments to be
made to the turnkey construction contractor at agreed prices as per the
contract.
TAX IMPLICATIONS ON
TURNKEY CONSTRUCTION CONTRACTS
A. VALUE ADDED TAX
The work agreed by the owner and the turnkey construction
contractor would be considered as a Works Contract under Sec 2(24) of the
Maharashtra Value Added Tax, 2002. Thus, the turnkey contractor will charge
Value Added Tax (VAT) on the amount of Work done including price adjustments of
Material, Electricity, Water and Material testing provided by the owner at the
rates specified in the rate schedules.
The owner will also be liable for payment of
Value Added Tax (VAT). The Material like Cement, Steel, Ready Mix Concrete etc.
supplied by the owner to the turnkey construction contractor would be
considered as a “Deemed Sale” under Sec 2(24) of the MVAT Act, 2002 and owner
will have to pay Value Added Tax (VAT) on the specified rates. The Input Credit in respect of VAT paid by
the turnkey construction contractor will be available provided production of
information as requisite under Section 48 read with Rule 52 of the Maharashtra
Value Added Tax.
B. SERVICE TAX
The work agreed by the owner and the turnkey
construction contractor will be regarded as a Works Contract. Thus, the turnkey
contractor will charge the Service Tax (VAT) on the amount of Work done
including material price adjustments and Material, Electricity, Water and
Material testing provided by the owner at the rate specified by the Finance
Act.
The Owner will also be liable for the payment
of Service Tax under Finance Act. The Material testing and other service
provided by the owner on the behalf of Turnkey Construction Contractor will be
regarded as a Taxable Service and will be liable for Service Tax.
C. CENVAT CREDIT
The owner being developer is liable for
payment of service tax on various services provided such as “Construction of
Residential Complex” or “Construction of Commercial Complex” etc. Post 01.07.2012, the developer being eligible
for CENVAT Credit can avail the CENVAT Credit of all input services.
However, the sale of goods being “trading”, will be an exempt services
and hence CENVAT Credit to that extent may be required to be reversed applying
Rule 6 of the CENVAT Credit Rules, 2004.
The owner can avail the Cenvat Credit in
respect of Service Tax charged by the turnkey construction contractor subject
to the provision of Rule 6 sub clause 3 of Finance Act. As per the provision of
Rule 6 (3), the owner needs to reverse the Cenvat Credit taken in respect of exempted
services. There are three options for owner:
i.
pay an amount equal to [six
per cent.] of value of the exempted goods and exempted services,
ii.
Maintain separate accounts
for the receipt, consumption and inventory of inputs and take the CENVAT credit
only on inputs and need to pay the amount attributable to Exempted goods.
iii.
If separate books of
accounts are not maintained then owner has to pay amount specified under Rule 6
(3A).
Special Points to be noted: -
1.
Value of exempted goods shall
be the difference between the value at which Material, Water and Electricity
supplied by the owner to the Turnkey construction Contractor and the cost of
goods sold of the Material, Water and Electricity provided or 10% of the cost
of goods sold of the Material, Water and Electricity provided whichever is
higher.
2.
The Owner has to intimate in
writing to the Superintendent of Central Excise in respect of payment made by
the owner for CENVAT Credit taken on exempted goods and the method adopted for
payment of tax on reversal of such CENVAT Credit as attributable to the
exempted services.
It came to the notice of the CBEC that certain field
formations have taken a view that all activities incidental to seed testing are
leviable to Service tax and only the activity in so far it relates to actual
testing has been exempted in the Negative List.