Tax on deemed sale of exempted goods (Works contract).

If we go through section 11 of the Assam Value Added Tax Act, 2003, we can find that there is no scope for deducting the value of the exempted goods (First Schedule goods) from the gross turnover/ value of the works contract. In other words as per the Assam Value Added Tax Act, 2003, in case of works contract, the TIN holder contractor is liable to pay VAT @ 13.5% also on deemed sales of exempted goods.

The Constitution bench of the Supreme Court in Gannon Dunkerley (1993)’s case had clarified that “In our opinion, therefore, it would be permissible for the State Legislature to tax all the goods involved in the execution of a works contract at a uniform rate which may be different from the rates applicable to individual goods because the goods which are involved in the execution of the works contract when incorporated in the works can be classified into a separate category for the purpose of imposing the tax and a uniform rate may be prescribed for sale of such goods.” (para-236, 237).

Accordingly, it seems that the states are authorized to charge tax at a uniform rate in a works contract, but if we read the para 235 of the same judgment, it appears that the Supreme Court  had made it clear that, while calculating value of goods involved in the execution of works contract, the value of few goods are to be excluded. The Court clarified that:-:

 “We may, however, make it clear that apart from the deductions referred to above, it will be necessary to exclude from the value of the works contract the value of the goods which are not taxable in view of sections 3, 4 and 5 of the Central Sales Tax Act and goods covered by sections 14 and 15 of the Central Sales Tax Act as well as goods which are exempt from tax under the sales tax legislation of the State. The value of goods involved in the execution of a works contract will have to be determined after making these deductions and exclusions from the value of the works contract.” (para-235)

If we read all the above said three paras of the order, it appears that the power of State legislature in charging the tax at uniform rate is applicable only on the value of goods calculated as per the above said clarification of the Court. Now, I leave the matter for esteemed readers of this blog to think that, “whether in terms of the aforesaid judgment, tax on exempted goods can be levied”?

Note: Similarly, there is no provision in the Act to tax the deemed sales of declared goods in case of works contract @ 5%, but the department is levying tax @5% in view of the order of Hon'ble Gauhati High Court.