Works Contract Service Tax liability under new ST Regime

[R.S. Mangal]

                          Service Tax on Works  Contract

 The new definition of works contract has been given under section 65B(54) of the Finance Act, 1994 which reads as follows:-
 “Works Contract means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out

(i)                 construction,

(ii)                erection,

(iii)             commissioning,

(iv)              installation,

(v)               completion,

(vi)             fitting out,

(vii)            repair,

(viii)         maintenance,

(ix)             renovation,

(x)                alteration

of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.”

Thus Works Contract is for

>        Must be carried by one person for another person for a  consideration

>       For execution of a contract

>       Transfer of property in goods on which sale tax is leviable and;

         such contract is for the purpose of carrying out any or combination of any activities as specified above.

In Relation of :

>       any movable or immovable property or

>       for carrying out any other similar activity or

>       a part thereof in relation to such property;

Valuation of Service Portion in the Execution of a Works Contract

Rule 2A of Service Tax Determination of Value Rules, 2006

Option I—

Taxable Value=

Gross Amount charged+ Fair Market Value of ggods and services supplied –Amount charged for such goods and services – Value of property in goods transferred -VAT or sales Tax-

Value of Works Contract shall include:

(i)      Labour charges

(ii)       Payment to sub-contractor for labour and services;

(iii)       Planning, designing and architect’s fees;

(iv)       Hire charges for machinery and tools

(v)       Cost of Consumables such as water, electricity, fuel

(vi)       Cost of establishment of the contractor relatable to supply of labour and services;

(vii)       Other similar expenses; and

(viii)       Profit earned by the service provider relatable to supply of labour and services;

Option –II   Specified % of ( Total amount i.e. Gross Amount charged+ Fair Market Value of goods and services supplied –Amount charged for such goods and services – Value of property in goods transferred -VAT or sales Tax)

 

Rule 2A Option – II

Where Value Cannot be ascertained as per Option-I then value shall be worked out as under:

S. No.	Nature of contract	Taxable Value
1.	Execution of Original Works	40%
2.	Execution of   contract for maintenance, repair, reconditioning or servicing of any goods	70%
3.	Other works contracts not covered by 1 & 2 above (including completion and finishing services such as glazing, plastering, installation of electrical fittings of an immovable property).	60%

Explanation on to Rule 2A

1. Original works means

(i)      All new constructions;

(ii)      All types of additions and alterations to abandoned or damaged structures to make them workable;

(iii)      Erection, commissioning or installation of plant, machinery or equipment whether pre-fabricated or

otherwise.

1. 2.  Total amount means the gross amount charged plus the value of any material supplied under the same contract or any other contract.   Where supply is free of cost, value shall be determined on FMV.

In option II,  No input tax credit of excise duty paid on goods, property transferred in execution of works   contract. However taxes paid on capital goods and input services will be available. taxmanagementindia.com

Thus in works contract, the option –II of paying service tax on the basis of a fixed percentage is only available if the VAT has not been paid on the material on actual basis. 

Important Notes-

1. New definition of Works contract  includes the services related to movable properties also.
2. The new provision will be applicable from 01.07.2012.
3. The new definition is more or less on line with the definition of works contract given is various State Sales/Vat Tax law/ Central Sales Tax Act. Pure Labour Contracts are excluded from Works Contracts. To fall under Works contracts service there should be  transfer of property in goods involved in the execution of such contract is leviable to tax as sale of good.s
4. In works Contract, property in goods should pass on the principle of accretion, accession or blending when works contract is getting executed. Accretion means when movable property gets embedded in immovable property like construction contract, Accession means movable goods attached to movable goods like spare parts fixed in the car or machinery, Blending means movable goods mixing with the goods of contractee e.g.printing or dyeing work.
5. Thus, many of the services related to movable properties under current scheme involving the material which earlier covered  repairs and maintenance services, Photography services,  Authorized service station,etc. will fall under works contract service in the negative list scheme provided the material involved therein is leviable to VAT/sales tax. Now  if t is a composite contract where both service and material value is involved and as such will be covered under the works contract. Thus, the annual maintenance contracts involving the material alongwith service will also fall under the purview of works contract under negative list.
6. Along-with changes in the spirit of works contract by amending the definition, the reverse charge method has also been extended to the works contract service. Under notification no. 30/2012-ST dated 30.06.2012, it is prescribed that the 50% service tax on works contract will be paid by the service recipient and 50% will be paid by the service provider in the cases where the service provider is an individual/firm/LLP and the recipient is the body corporate.
7. Further service recipient is not eligible to claim general exemption limit of Rs. 10 lakhs. Thus the service recipient has to pay service tax under reverse charge from the beginning itself.
8. In works contract services, where both service provider and service recipient is the persons liable to pay tax, the service recipient has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service.
9. Where the liability tax under reverse charge or partial reverse charge is on service recipient, then the point of taxation shall be the date of payment.
10. Reverse Charge liability is also there on services rendered by service providers located outside the taxable territory to service recipient located in taxable territory. However, there is exemption if  Services received from a provider of service located in a non- taxable territory to-

 (a)  Government, a local authority, a governmental authority or an individual in relation to any purpose other than commerce, industry or any other business or profession;

 (b)  an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities; 

Discussions to this article

[JAMES PG]

It is true that where the liability tax under reverse charge or partial reverse charge is on service recipient, then the point of taxation shall be the date of payment. As per the provision  to Rule 7 of Point of Taxation Rules, if the payment is not made within a period of six months of the date of Invoice, the point of taxation shall be determined as if this rule does not exist. This would inevitably mean that even if the payment to the service provider is not made within 6 months from the date of Invoice, Service Tax has to be deposited by the service recipient.

[Ashwani Rustagi]

Please clarify whether:

1. The product sent for FNC coating would be subject to tax on Reverse Charge basis? Would it be amount to part of manufacturing operations?

2. Cutter blanks sent for conversion (Job work) into cutter which is used in the manufacturing operations. Would it be subject to taxx on Reverse charge basis in hands of Service Receiver?

Please clarify.

[P S SATYA NARAYANA]

It is not clear the applicability of Works Contract Service tax on civil work being carried out in Agricultural sector - Coffee / Tea Plantations - where providing accomodation to its employees who are governed under Plantation Labour Act, is mandatory .

[AJAY KAMPALI]

Would the definition of "Works contract" cover "Printing" activity say of share application forms? Under sales tax law, Printing of such specialised items is a works contract.

[anil goenka]

If a company done work for set of new Bank Branches in contracted structure . there scope of works start from civil work (alteration or demonstration of the structure ) to fixing of globe sign, painting, floor fiting, furniture all works. Is the work fall under Original Works. Pls Advice