Para 9.1 of MF(DR) Circular No B1/16/2007-TRU dated 22/05/2007 clarifies as follows:
Works contract is a composite contract for supply of goods and services, A composite contract is vivisected and vat / sales tax is leviable on the transfer of
property involved in the execution of works contract vide Article 366 (29A) (b) of the Constitution of India and service tax will be leviable on services provided in
relation to the execution of works contract.
Further Para 9.10 of the aforesaid Circular clarifies as under:
Contracts which are treated as works contract for the purposes of levy of vat / sales tax shall also be treated as works contract for the purposes of levy of
service tax. This is clear from the definition under section 65 (105) (zzzza) of the Finance Act, 1994.
A check list is given below to help readers understand the legal requirements without going into complexities of law:
1. The works contract under Delhi VAT is applicable on those contracts wherein Labour and Material are indivisible.
2. It is applicable on contracts which are above Rs. 20,000.
3. The company needs to obtain separate TAN no. and register it self within 30 days of signing contract. Maximum penalty for delay is Rs. 20000/- (Rs. 100 per day).
4. The rate of Tax that needs to be deducted from contractor payment is 6% (by registered dealers it is 4%)
5. After deduction and deposit of of tax a returns needs to be filed in DVAT 48.
6. The TAN no. can be surrendered in case there are no such contract signed in subsequent period.
7. In order to avoid DVAT formalities you may ask contractors to provide separate bills for Materiel and Labour. This way you can avoid falling into works contract obligation.