Nut Crackers

FAQs under Karnataka VAT Act
Indirect Taxes

Issue 1

Whether advances received before commencement of work by the contractor from his client in executing works contract will be subject to tax (WCT)?

Reply

Advances received as a part of consideration for transfer of property in goods (whether as goods or in some other form) involved in the execution of works contract shall be included in the month in which execution of such works contract commences. (Explanation to Rule 3 of the KVAT Rules, 2005)

Issue 2 – Payments to sub-contractors

Rule 3(2)(i-1) of the KVAT Rules, 2005 reads “All amounts paid or payable to sub-contractors as the consideration for execution of works contract whether wholly or partly”. This implies that amounts paid alone will be eligible for deduction from taxable turnovers and amounts for which provision is made in the accounts (pending payment) will not be permissible for deduction.

Reply

It is possible to argue that the said rule 3(2)(i-1) must be read down to mean “all amounts paid or payable to sub-contractors as the consideration for execution of works contract whether wholly or partly”. This argument can be supported as follows:

• That in order to avail deduction one needs to satisfy the condition that the contractor is required to produce document in proof that the sub-contractor is a registered dealer liable to pay tax under the KVAT Act, 2003 and that the turnover of such amounts is included in the return filed by such sub-contractor.
   

• That the turnover declared by the sub-contractor in his return will be based on the invoice raised by him or advances received from the contractor.
   

• That the contractor claims deduction based on the invoice raised by the sub-contractor including advances paid to him.

Issue 3

Whether entry tax payable under both KTEG Act, 1979 and Special Entry Tax Act, 2004 can be adjusted against input tax credit available under KVAT Act, 2003?

Reply

Yes. In terms of Rule 127 of the KVAT Rules, 2005 a dealer can seek adjustment of such amount (i.e., input tax credit) towards the tax payable by him under KTEG Act, 1979 and Special Entry Tax Act, 2004.

Issue 4

The definition of capital goods is silent as to whether parts and accessories of capital goods will be treated as capital goods or as inputs.

Reply

Parts and accessories of capital goods will be treated as inputs and not as capital goods. Value Added Tax paid on purchase such goods shall be eligible for set off immediately.

Issue 5

Whether the definition of OUTPUT TAX includes CST payable? Can we set off CST payable against input Tax credit?

Reply

Central Sales Tax is payable under the CST Act, 1956. However, in terms of section 20 of the KVAT Act, 2003 set off of input tax paid on the locally purchased goods sold in the course of interstate sales would be permissible.

Issue 6

Is a transaction of deemed Export (sale against Form H) or sale to a unit located in SEZ in Karnataka exempt from payment of tax under the KVAT Act, 2003?

Reply

Sale to a dealer in Karnataka, in the course of export covered by Form H, would be treated as an export transaction, and as such levy of tax would be zero-rated. Thus, in terms of section 20 of the KVAT Act, 2003 set off of input tax paid on the locally purchased goods would be refundable.

However, sale to a SEZ unit located in Karnataka would be taxable under the KVAT Act, 2003 and the buying dealer; i.e., SEZ unit can avail input tax credit as may be prescribed. Till date no specific rules have been prescribed and as such, the set off / refund would be in the normal course through VAT returns.