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Classification of Works contract and evaluating exemptions for airport authority

Engagement (Part 1): The airport authority had entered into a contract with various contractors for the construction of an airport terminal. The contract was classified by them as a Construction contract in relation to the construction of a building. Accordingly, the airport authority claimed an exemption on the said contract and had charged VAT on the Works contract at a concessional rate of tax available to a composite Works contract under Notification No. VAT.1506/CR-134/Taxation-1. However, the above view was opposed by the Department and they issued a show cause notice to the client. SKP was engaged by the airport authority to defend its views.

Our team gave an opinion in the form of a note, defending the views of the client by classifying the said contract as a Works contract in relation to construction of the building and advised them in determining the appropriate tax rate under VAT and service tax.  The note provided a detailed explanation on the classification of the contract as a Works contract in relation to construction of a building, which included research of definitions under various statutory laws, judgements, notifications and circulars. We evaluated the availability of various exemptions in order to determine the rate at which tax was to be charged on the said contract.

Engagement (Part 2): The company managing the airport operations was engaged in operating, maintaining, developing, designing, constructing, upgrading, modernising, financing and managing the airport. The company appointed an individual Engineering, Procurement and Construction (EPC) contractor to carry out these tasks. The contractor followed a ‘design and build’ approach for the execution of the contract. SKP was approached to provide an opinion on whether the various activities carried out by the EPC contractor could be considered to be a ‘Construction contract’.

Our team advised the client in relation to classification of the Works contract as a Construction contract based on definitions under various laws, judgements and clarifications issues by the department. We also advised the client on the applicability of appropriate tax rates under VAT and service tax on the contract. Further, the team also evaluated the various exemptions available under the new legislation in order to mitigate the tax applicable on the said contract.