TDS Provisions for MVAT Works Contracts
In this post, we will explore how the Maharashtra VAT (Value Added Tax) act affects employers and contractors. While a seemingly small provision of MVAT Works Contracts, non-compliance can mean significant penalties and interest.
First we'll start with some definitions: any organization that has appointed a contractor and signed a job contract is required to deduct tax at source (TDS). An organization that appoints a works contractor is called an 'employer' and could be dealing in either goods or services. For employers in Maharashtra awarding works contracts, there are two types of tax obligations applicable to them, one under the Income Tax Act and another under the MVAT Act. This enactment is applicable to certain types of employers and has specific compliance requirements. Note that the tax component to which we refer here, and which we explore in-depth below, is distinct from (and over and above) income tax.
The TDS provisions were part of the Maharashtra Works Contract Act, of 1989 and also continued under the Maharashtra VAT Act but with certain amendments. Section 31 of the MVAT Act authorizes the commissioner of sales tax to bring suitable TDS schemes with respect to Works Contract or any purchase transactions. TDS provisions are applicable only for Works Contract transactions with a contract value greater than Rupees Five Lakhs.
Employers liable for deduction under TDS
- Central Government and any State Government
- Industrial, commercial or trading undertaking, Companies or corporations of the Central Government or of any State Government, and a port trust set up under the Major Ports Act of 1963
- Any company registered under the Companies Act, 1956
- Local authority, including a Municipal Corporation, Municipal Council, Zilla Parishad, or Cantonment Board
- A Co-operative Society excluding a Co-operative Housing Society registered under the Maharashtra Co-operative Societies Act of 1960
- A registered dealer under the Maharashtra Value Added Tax Act of 2002
- An Insurance or Financial Corporation or Company, and any bank included in the second schedule to the Reserve Bank of India Act of 1934, and any scheduled bank recognized by the Reserve Bank of India
- Any Trust, whether public or private
- A Co-operative Housing Society registered under the Maharashtra Co-operative Societies Act of 1960 which has been awarded contracts of value aggregating to Rupees 10 Lakhs or more in the previous or current year
- Societies registered under Societies Registration Act, 1860
The rates of TDS are prescribed at 2% if the contractor is a registered dealer and 5% if the contractor is unregistered dealer. TDS is applicable either at the time the bill is credited to the account of the contractor, or when payments are made toward the contract - whichever is earlier. In the case of advance payments made to the contractor that are adjustable against the contract value, TDS is to be deducted by the employer at the time of adjustment.
TDS is deducted from the net amount and no TDS is deducted from any VAT or service tax charged separately by the contractor. TDS does not apply to contracts under inter-state trade or imports/exports. No TDS is required when the principal contractor is making payments to a sub-contractor. In cases where the commissioner is satisfied that the contract is not a works contract, there are provisions to obtain certificates for no deduction of tax: the application is made in Form No. 410
The TDS amount should be paid within 21 days from end of the month in which the TDS is deducted. The Online Monthly TDS Return in Form No. 424 (previously Form 405) must now be uploaded, as per the monthly returns filing schedule in the MVAT Act.
Unregistered employers who have deducted tax at the source, on payment made to the contractors, are required to pay in Challan No. MTR-6 with a demand draft/ pay order, along with a photocopy of their PAN card before the deputy commissioner of Sales Tax. The employer should issue a TDS certificate to the Contractor. The TDS Certificate should be issued in form 402 after payment of TDS is made in Government treasury. The employer should maintain a separate register of TDS in Form 404.
Different interpretations of MVAT treatment can lead to disagreements between a Seller and a Buyer. For example, a Seller may treat a project as a series of divisible, separate contracts for the supply of equipment, whereas a Buyer might consider the project as a lump-sum contract and start deducting MVAT TDS from payments made to the Seller. In this scenario a dispute is likely, since the Seller does not consider itself liable to pay VAT under the Works contract and chooses to pay tax at the full rate of the value of supply.
To avoid such conflicts, the Contractor and the Buyer should arrive at a common agreement at the start of the project, regarding the MVAT tax treatment of all project transactions. Alternatively, the Contractor can seek exemption from TDS provisions by making an application in Form 410. If the tax treatment as a divisible contract is accepted, and if the Contractor obtains a certificate, then the Buyer will not deduct TDS and avoid further conflicts.
Any Employer who fails to deduct tax or pay MVAT to the government will be held liable and will be penalized through interest payments.
It is important for a Contractor to claim credit based on advice from its Contractee, to ensure that tax is not paid twice for the same invoice.
If a Contractor feels that its contract does not warrant TDS, it should obtain certificates for no deduction of tax in accordance with provisions of Section 31(1)(b)(ii).
Need for tax automation
For medium and large companies with high volumes of transactions, identifying contracts covered under TDS provisions may become a daunting, onerous task. That is where tax automation software can assist Contractors and Contractees.
By identifying contracts for TDS compliance at the purchase order (in case of Employers) or at order acceptance (in the case of Contractors) can help to avoid downstream conflicts, especially if both parties are maintaining complete tracking of invoice, payment and receipt transactions identifiers throughout the contract lifecycle.
Under the new system of Maharashtra VAT returns, TDS credit is not available to a contractor unless his employer post those corresponding TDS entries in the return utility database of state government. Automation for this functionality can be very useful for employers as well as contractors.
Under the new GST law, the Goods and Services Tax Network (GSTN) is attempting to incorporate such matching provisions. In GST, compliance requirements will be applicable across all of India, rather than just Maharashtra; this change will drive an extensive benefit from automation with respect to monitoring, calculation and filing.
To summarize, TDS on Works Contracts may seem like a minor issue for organizations but its timely identification, accurate calculation and timely compliance are absolutely essential to avoid interest and penalties imposed for noncompliance.
To learn more about how Avalara can help you with MVAT and GST automation, contact us through http://www.avalarabharat.com/contact/