Understanding Cess Deduction Responsibilities in Construction: Who's Liable When Using Subcontractors?

Dear All,
Can anybody assist me in understanding the provisions of The Building & Other Construction Workers’ Welfare Cess Act, 1996 . ( 28 of 1996 ),regarding the responsibility of deduction of Cess under the Act, in case of the works being executed through engaging sub-contractors by the contractors for Principal.
regards

The Act does not clarify the responsibility as to whether the Principal Employer or Contractor is responsible for the remittance of cess. Generally, and on prima facie grounds, the Principal Employer is liable for the remittance of cess. However, they, i.e., the Principal Employer, always insist that Contractors remit the cess on a reimbursement basis.

In your case, I think you are subcontracting work to another contractor. In such a case, have you obtained permission from the Principal Employer to subcontract the work to another contractor? If yes, then you should have included a clause regarding obtaining such registration for the subcontractor. If not, then you are responsible for the same.

Regards, A. Prakash

I would like to add some more points:

1. Before payment of cess, the respective contractor/subcontractor must obtain a Registration Certificate under the BOCW Act (Building & Other Construction Workers (Regulation of Employment and Conditions of Services) Act 1996).
2. At the time of Cess Payment, the registration number needs to be furnished in the respective form.
3. One percentage of the Work Order Value (excluding all taxes) needs to be paid to the cess board along with details under Form IV of the act.

Understanding the Provisions of the BOCW Act

The applicable provision of law is Section 2(i)(iii) of the BOCW Act. According to this section, an employer in relation to an establishment includes, in relation to a building or other construction work carried out by or through a contractor, or by the employment of building workers supplied by a contractor, the contractor. The definition of a contractor, as per Section 2(g), includes a sub-contractor within its scope.

According to the Cess Act, the employer has the responsibility to pay. Therefore, in the case of work executed through a sub-contractor, it is the responsibility of the sub-contractor to deduct and make the cess payment.

Regards

Thanks Mr. A. Prakash & PRGHR,

My concern is whether the enactment adequately addresses the issue of deduction and ultimate liability of payment of Cess. To my understanding, the Principal/owner is liable to pay Cess on the entire value of the project (inclusive of costs on material and labor components). How far is the Principal entitled to recover from the Contractor and further, the Contractor from the subcontractor providing labor only?

Legal Interpretation of Cess Payment Responsibility

This position of law was covered by the Andhra Pradesh High Court in the case of Government Of Andhra Pradesh vs. Lakamsani Samba Siva Rao & Others, 2015. In paragraph 21, it is explicitly stated that contractors who construct structures for the principal employers should pay the cess, as I mentioned in my post. The court further stated that the Principal Employer can deduct the amount from the contractor's bill and remit it accordingly.

The Delhi High Court summarized this position in the decision of Builders Association Of India And Others vs. Union Of India (2007). The Cess Act and the Cess Rules ensure that the cess is collected at source from the bills of the contractors to whom payments are made by the owner. The law acknowledges that, in effect, the burden of the cess is passed on by the owner to the contractor.

Hope this helps.

Thanks to everybody in the discussion for the valuable contributions so far. We need to converge and reach a final consensus on the scope of liability in the contingency when a turnkey operation (A) hires the services of a Contractor (B), who further engages a subcontractor (C) – who is to be registered under the Act. Who has to pay, who has to deduct, and who has to reimburse? Can Contractor (B) rightfully seek reimbursement from its numerous subcontractors (C)?

Sorry if you feel that I am not so expressive in presenting my problem.

I would like to add that who will make the payment of the cess will be defined at the time of issuing the LOI/Work order to the contractor. It should be mentioned in the LOI who will be responsible for the payment. BOCW registration has to be done by both parties, i.e., the principal employer and the contractor. If the contractor makes the payment, then he will take reimbursement from the principal employer. Alternatively, the principal employer will directly pay the cess to BOCW. Whoever makes the payment of the cess will have to clear the assessment of CESS from the Labour Department of BOCW. They will check if you have paid all the cess amounts or not.

Understanding the Provisions of Cess Under the Act

Let's proceed to understand the provision regarding the applicability and liability of payment of Cess under the Act. Relevant for this purpose are the following:

• Section 2(i) of The Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996

The term "employer" is defined as:

"Employer," in relation to an establishment, means the owner thereof, and includes:

(i) In relation to a building or other construction work carried on by or under the authority of any department of the Government, directly without any contractor, the authority specified in this behalf, or where no authority is specified, the head of the department;

(ii) In relation to a building or other construction work carried on by or on behalf of a local authority or other establishment, directly without any contractor, the chief executive officer of that authority or establishment;

(iii) In relation to a building or other construction work carried on by or through a contractor, or by the employment of building workers supplied by a contractor, the contractor.

• Section 2(g) of The Act

The term "contractor" is defined as:

"Contractor" means a person who undertakes to produce a given result for any establishment, other than a mere supply of goods or articles of manufacture, by the employment of building workers or who supplies building workers for any work of the establishment; and includes a sub-contractor.

• Section 7 of the Act: Registration of Establishments

Registration of establishments:

(1) Every employer shall:

(a) In relation to an establishment to which this Act applies on its commencement, within a period of sixty days from such commencement; and

(b) In relation to any other establishment to which this Act may be applicable at any time after such commencement, within a period of sixty days from the date on which this Act becomes applicable to such establishment, make an application to the registering officer for the registration of such establishment:

Provided that the registering officer may entertain any such application after the expiry of the periods aforesaid, if he is satisfied that the applicant was prevented by sufficient cause from making the application within such period.

(2) Every application under sub-section (1) shall be in such form and shall contain such particulars and shall be accompanied by such fees as may be prescribed.

(3) After the receipt of an application under sub-section (1), the registering officer shall register the establishment and issue a certificate of registration to the employer thereof in such form and within such time and subject to such conditions as may be prescribed.

(4) Where, after the registration of an establishment under this section, any change occurs in the ownership or management or other prescribed particulars in respect of such establishment, the particulars regarding such change shall be intimated by the employer to the registering officer within thirty days of such change in such form as may be prescribed.

• Section 3 of The Building and Other Construction Workers’ Welfare Cess Act, 1996

Levy and collection of cess:

(1) There shall be levied and collected a cess for the purposes of the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996, at such rate not exceeding two percent, but not less than one percent, of the cost of construction incurred by an employer, as the Central Government may, by notification in the Official Gazette, from time to time specify.

(2) The cess levied under sub-section (1) shall be collected from every employer in such manner and at such time, including deduction at source in relation to a building or other construction work of a Government or of a public sector undertaking or advance collection through a local authority where an approval of such building or other construction work by such local authority is required, as may be prescribed.

(3) The proceeds of the cess collected under sub-section (2) shall be paid by the local authority or the State Government collecting the cess to the Board after deducting the cost of collection of such cess not exceeding one percent of the amount collected.

(4) Notwithstanding anything contained in sub-section (1) or sub-section (2), the cess leviable under this Act including payment of such cess in advance may, subject to final assessment to be made, be collected at a uniform rate or rates as may be prescribed on the basis of the quantum of the building or other construction work involved.

Comments

For the purposes of the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996 (27 of 1996), a cess at the rate of one percent of the cost of construction incurred by the employer is to be levied and collected, vide S.O. 2899, dated 26th September, 1996.

I propose to converge on the following to discuss further:

(1) Cess is applicable on the entire cost of the works. Generally, the contractor is not entrusted with works equal to all the costs of the works, meaning thereby he can’t be burdened with payment of Cess on that part of the total costs of the works not assigned to it. Therefore, it is the principal/owner who is the best point to levy Cess to achieve the objectives.

(2) There can’t be levying of Cess at different levels for the same works. It is either the Principal or the Contractor or the Sub-Contractor(s) who can be levied with Cess, not two or all of them.

(3) The enactments need amendments regarding the fixation of liability at the individual level of owner, contractor, and sub-contractors.