What is a Works Contract?

There are certain contracts which are combination of both goods and services.

For example:- In construction contract where builder has to make a building, it involves both materials and services. Hence, both VAT/CST and Service tax is applicable             


Constitiutional Provison

Power to Impose VAT is given in Article 366 of constitution which states that

"tax on sale or purchase of goods" include

“a tax on the transfer of property in goods (whether as goods or in some other form)

 involved in the execution of a works contract

( Sub-clause (b) of clause (29A) of the Article 366)


How to compute Taxable Turnover?

We know that price charged from customer includes both component for goods and service


But VAT is payable on only goods and not services

In this case, Taxable turnover for VAT is computed by one of following methods



Method 1

Total turnover


Charges for Labor and Services

=Net taxable turnover


This method can only be used if charges for labor and service are quantifiable(can be measured)



Method 2

Cost of Goods(Cost of Raw materials)

+Cost of Conversion (Cost of converting raw material into finished product)

+Profit Margin

=Taxable Turnover


Or Method 3

Total Turnover


Standard rate of deduction for labor and service

=Taxable Turnover

*This standard rate is as per State VAT Act and may be different from state to state


What is the rate to be charged on Taxable Turnover?

If a furnished house is constructed in a works contract, it has various items  like Furniture,Electrical fittings,floorings,sanitary wares etc

VAT rate is different for different product which are mentioned in VAT Schedules


what rate is to be charged

In this case,there are 2 options


1. Schedule Rate:-

Compute taxable turnover of different items separately and levy VAT Rate on each item separately


2. Follow revenue neutral rate

If the values of individual goods are not identifiable,

contractor can pay tax at Revenue Neutral Rate (RNR) on whole taxable contract

(RNR which is about 12.5% but may vary from state to state)


Whether Input available for Work Contract?

In case of Work Contract, the dealer can take input on purchases

Input tax credit on capital goods is normally not available as goods are not used for manufacturing or sale

Note:- Composition Scheme is available in case of Work Contract also where input is not available.

However, in some States (e.g. Maharashtra) partial input tax credit is granted

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CA Maninder Singh

CA Maninder Singh is a Chartered Accountant for the past 14 years. He also provides Accounts Tax GST Training in Delhi, Kerala and online.