VAT on works contract – issues in Kerala
We have a peculiar problem in Kerala. Work contractors in Kerala, who do not opt for compounding, are not allowed to deduct the value of sub-contracts given to registered dealers while calculating their taxable turnover. However those contractors who opt for compounding are allowed to deduct the value of sub-contracts given to registered dealers.
This in effect results in both the main contractor and the sub-contractor paying value added tax on the same turnover, if the main contractor does not opt for compounding.
The Kerala Value Added Tax Rules, 2005 had a provision to deduct the value of sub contracts given to registered dealers till 31st December 2005. However the provision was removed by an amendment dated 31st December 2005. We understand that this amendment was a deliberate move by the government to make the contractors opt for compounding.
Since then contractors who did not opt for compounding have been suffering. The Audit Assessments have disallowed the value of sub-contracts while computing the taxable turnover of contractors.
It appears that the Kerala Government is refusing to recognise the verdict of the Andhra Pradesh High Court in Larsen & Toubro Ltd vs. State of Andhra Pradesh [2006] 148 STC 616 (AP). In that case the High Court had occasion to decide on the same issue and had held that the Andhra Pradesh Government must amend the Rules to ensure that both the main contractor and the sub-contractor were not called upon to pay tax on the same turnover.
We hope that the Kerala Government takes early steps to end the hardship of the contractors and also cancel the assessment orders issued by the Assessing officers.
The Kerala Finance Act, 2008 has introduced Section 20A – Condonation of Delay. Will this help the contractors? Please wait for our next post soon.