Levy of additional tax (surcharge) on lump sumcontracts

LEVY OF ADDITIONAL TAX (SURCHARGE) ON LUMP SUMCONTRACTS– NOT A LAWFUL LEVY

Following an order passed by the Haryana Tax Tribunal in the case of M/s Mahashiv Promoters (P) Ltd., Rohtak Vs. State of Haryana, reported at (2014) 47-PHT-223 (HTT), the Excise & Taxation Commissioner, Panchkulla has issued a circular dated 14.1.2014 to all subordinate authorities to levy surcharge on amount of tax paid by the lump works contractors in the State. The Assessing Authorities following these instructions have started levying additional tax (surcharge) as provided in S. 7-A of the Haryana VAT Act.  Although the circular itself states that there was a confusion on this issue, yet some of the Assessing Authorities have charged interest on the late payment of surcharge amount.

With due regard to the Hon’ble Haryana Tax Tribunal, the order passed by it is not consistent with the scheme of the Act. The Tribunal while adjudicating the issue referred to the provisions of Rule 46 and held that the tax paid by a lump sum contractor is a tax and hence the levy of additional tax (surcharge) is lawful. No one is denying that the tax paid by a lump sum contractor is not a tax.

The question is whether the charging section 7-A mandates the collection of surcharge or additional tax from a lump sum contractor or not. A plain reading of this section makes it clear that the additional tax can be charged on the “taxable turnover” of a dealer, except a retailer in lump sum composition.

The term “taxable turnover” has been defined in clause (zn) of sub-section (1) of S.2 of HVAT Act, 2003 to mean that part of the gross turnover which is left after making deductions as per the provisions of S.6 of the Act and then adding the value of the goods liable to tax under sub-section (3) of S.3 of the Act.

The term “gross turnover” has been defined under sub-clause (u) of S.2 (1) of the Act and means the aggregate of the sale prices received or receivable in respect of any goods sold, whether as principal, agent or in any other capacity, by such dealer and includes the value of goods exported out of State or disposed of otherwise than by sale;

The term “taxable turnover” has its germane in the term “gross turnover” which states that gross turnover would mean aggregate of sale price received in respect of goods sold in capacities referred to in the definition and includes value of goods export out of State or dispose of otherwise than by way of sale.

Even for the sake of argument it is assumed that his receipts from execution of works contract are part of “gross turnover”, yet to arrive at the figures of “taxable turnover”, the deductions are to be made as per the provisions of S.6 of the Act. None of the constituents as described in this section are permissible to be deducted from the receipts of contractors carrying out works contract. Besides, the statutory Return Form R-6 prescribed for lump sum contractor does not refer to any of the terms like “gross or taxable turnover” and refers to only “amount  received or receivable” on which he is liable to pay lump sum tax at the agreed rate.

The pertinent question on the issue is whether a contractor while executing a works contract is making a taxable turnover or not ? For this purpose it would be necessary to look at the provisions of S.9 of the Haryana VAT Act, which inter-alia states that the State Government may, in the public interest and subject to such conditions as it may deem fit, accept from any class of dealers, in lieu of tax payable under this Act, for any period, by way of composition, a lump sum linked with production capacity or some other suitable measure of extent of business, or calculated at a flat rate of gross receipts of business or gross turnover of purchase or of sale or similar other measure, with or without any deduction there from, to be determined by the State Government, and such lump sum shall be paid at such intervals and in such manner, as may be prescribed, and the State Government may, for the purpose of this Act in respect of such class of dealers, prescribe simplified system of registration, maintenance of accounts and filing of returns which shall remain in force during the period of such composition.

Now it is the point where the real issue starts. A lump sum contractor is executing works contracts which includes both supply and services and the States can levy tax on the supply portion of the contract. In order to offer a simplified method of taxation of works contracts, the scheme of lump sum composition was introduced in section 9 of the Haryana VAT Act. A works contractor never makes sales within the meaning of “gross turnover” or “taxable turnover” as referred to hereinabove.  In his case neither the gross or a taxable turnover is determined because he has offered  to pay lump sum in lieu of tax under the provisions of S.9 read with rule 49 of the Act.

The Hon’ble Haryana Tax Tribunal has only decided that the amount paid by the contractor is “tax” within the meaning of Rule 46 but other matters governing the method of calculation of contractor’s  liability was not discussed in the said order. The provisions of S.7-A have probably been overlooked while deciding the matter.

The machinery provisions of the Act are always preferred above the Rules, which (rules) may sometime be inconsistent with the provisions of the Act. In the case of East India Cotton Mfg. Co.Ltd. vs Assessing Athority   (1972) 30-STC-482, the Hon’ble Punjab & Haryana High Court has  held that “ Statues imposing pecuniary burdens have to be strictly construed; when the language of such a statute is plain and clear, it is not permissible to speculate the supposed policy behind the statute or even its impact.  A court cannot assume the powers of the Legislature and read into the statute words, which are not there.”

The controversy has now been set at rest by the Hon’ble Supreme Court’s recent judgement in the case of Bhima Jewellery Vs. Assistant Commissioner (Assessment), Kerala,  reported at (2014) 48-PHT-329 (SC),  in which the Hon’ble Court held as follows:

“Section 5D, which we have extracted earlier provides that additional tax can be levied and collected by the Revenue from a dealer who is liable to pay tax under sections 5 and 5A of the KGST Act at a particular rate. In the instant case, the dealer is not being taxed under section 5 or section 5A of the KGST Act but is paying tax at a compounded rate as envisaged in section 7 of the KGST Act and therefore will not be liable to pay additional tax under the amended provision of the KGST Act.

The aforesaid proposition is in agreement with several decision of this court, where the court has reached the conclusion that the option of composition of tax is like a bilateral agreement between the parties with an object to dispense with the rigors of regular assessment. The dealer is given the choice to opt for compounded payment of tax and once the option is exercise and the same is accepted by the concerned authority, it is no longer open to the dealer to request for a regular assessment as envisaged under section 5 or 5A of the KGST Act. Therefore, by no stretch of imagination, can it be said that when a dealer is assessed under compounding scheme, one is also being assessed under the regular procedure of assessment, namely section 5 or 5A of the KGST Act to have been made liable to pay additional tax as per section 5D of the KGST Act.

In view of the above, the High Court is not justified in confirming the demand notice issued by the assessing authority for payment of additional tax on the appellant who had already opted for paying tax at the compounded rates under section 7 of the KGST Act.”

In view of the foregoing discussions, I am of the opinion that with due respect of the order passed by the Hon’ble Haryana Tax Tribunal, the levy of additional tax (surcharge) as provided in section 7-A of the Haryana VAT Act 2003 is inconsistent with the lump sum scheme provided for the contractors and so is the circular issued by the Excise & Taxation Commissioner and need a reconsideration.

By: Advocate B.R. Bhalla,

Faridabad (Haryana)       

advocatebhalla@gmail.com