Complete Guide to Understand Service Tax on Works Contract w.e.f. 01-07-2012
This post covers all the points related to Service Tax on Works Contract w.e.f. 1st july, 2012. This article is aggregated under following heads:
- Definition and Elaboration of Definition in Simple Words.
- Valuation of Works Contract under Rule 2A of Service Tax Determination of Value Rules, 2006
- Exemption to Works Contract Services
- Provision of Reverse Charge Applicable on Works Contract
With effect from 01-07-2012 Works Contract are covered under “Declared Services” under Section 66E of the Act:
Section 66E : Declared Services
“The following shall constitute declared services, namely ………
(h) Service portion in the execution of a works contract.”
By this inclusion, the service portion in a works contract has become taxable under the Service Tax provisions.
Meaning of Works Contract w.e.f. 1st July, 2012
DEFINITION OF WORKS CONTRACT
Section 65B(54) defines “Works Contract” as
“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 construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property”
In Simple Words/Explanations:
1. A contract where transfer of property in goods involved is leviable to tax as sale of goods: First part of the definition mandates that there must be transfer of property in goods in the contract while executing the contract. If no transfer of property is involved then it is not covered under works contract.
Also the Transfer of property in goods must be taxable under sales tax. If such transfer is not taxable under sales tax then contract is not covered under works contract.
Note: Service provider is providing consumables like oiling and lubricating the machinery then it is not covered in works contract as property of goods is not transferred but goods are consumed.
2. Such contract is for carrying out certain specified activities in relation to Movable or Immovable property: By this definition, the scope of “Works Contract” has been vastly increased by inclusion of “Movable Property” in the definition. Earlier, service tax works contract is restricted to construction related activities, but now all kinds of works contract activity is liable to be taxed under Service Tax. Like repair of vehicle, Movable machinery is also covered under works contract if material property of goods gets transferred while executing repair contract.
3. Such contract is for the purpose of carrying out
- fitting out,
Any other similar activity or a part thereof in relation to such property
- Pure Labor contract are not works contract.
- Buildings and structures on land means not only buildings or structures attached to earth but also things permanently fastened to a building or structure attached to earth.
- Pipeline or conduits are structures on land contracts for construction of such structure would be covered under works contract.
- Contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under ‘works contract’
Valuation of Services in works Contract w.e.f. 01.07.2012
Rule-2A of Service Tax Determination of Value Rules, 2006
Subject to the provisions of section 67, the value of service portion in the execution of a works contract , referred to in clause (h) of section 66E of the Act, shall be determined in the following manner, namely:-
1 Pay service tax on Value of services after deducting value of goods from the gross value:
Gross amount charged for the works contract less the value of property in goods transferred
- In the cases where VAT has been paid on ACTUAL value of transfer of property in goods, then this value will be considered while calculating the value of Works Contract.
- If the VAT is not paid on the ACTUAL value, the assessee will calculate the same for the purpose for service tax and it will be deductible from the gross value.
(i) Value of service portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in the execution of the said works contract.
Explanation.- For the purposes of this clause,-
(a) gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract;
(b) value of works contract service shall include, –
- labour charges for execution of the works;
- amount paid to a sub-contractor for labour and services;
- charges for planning, designing and architect’s fees;
- charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
- cost of consumables such as water, electricity, fuel used in the execution of the works contract;
- cost of establishment of the contractor relatable to supply of labour and services;
- other similar expenses relatable to supply of labour and services; and
- profit earned by the service provider relatable to supply of labour and services;
(c) Where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause.
2 Pay service tax at composite rate
- In case of original work, pay service tax on 40% value,
- In case of maintenance or repair or reconditioning or restoration or servicing of any goods, pay service tax on 70% value,
- In case of all other works contract, pay service tax on 60% value.
Service provider is also eligible to avail CENVAT Credit of input services and capital goods.
Explanation 1.- For the purposes of this rule,-
(a) “original works” means-
- all new constructions;
- all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;
- erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;
(b) Goods: Section 65B(25) “goods” means every kind of movable property other than actionable claim and money; and includes securities, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;
(c) “total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting-
- the amount charged for such goods or services, if any; and
- the value added tax or sales tax, if any, levied thereon:
Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.
Explanation 2.–For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.”.
Cenvat Credit: The Provider of taxable service could not take CENVAT credit of duties/cess paid on any inputs used in or in relation to the said works contract. However, credit in respect of taxes paid on capital goods and input services shall be available.
Exemption to Work Contract Services
1. Services provided TO the GOVERNMENT OR A LOCAL AUTHORITY OR A GOVERNMENTAL AUTHORITY Only.
1.1) Services provided to the Government, a local authority or a governmental authority by way of Construction, Erection, Commissioning, Installation, Completion, Fitting Out, Repair, Maintenance, Renovation, Or Alteration Of –
(a) Original Work for Non Commercial Use:– a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;
(b) Structure of Historical Importance:– a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);
(c) For structure of Educational, Clinical establishments:– a structure meant predominantly for use as
- an educational,
- a clinical, or
- an art or cultural establishment;
(d) Canal, Dam or Other Irrigation Works;
(e) pipeline, conduit or plant for
- water supply
- water treatment, or
- sewerage treatment or disposal; or
(f) Residential Complex:- a residential complex predominantly meant for
- self-use or
- the use of their employees or
- other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act; (MLA , MPs are person specified under this clause)
1.2) Carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation or Repair or maintenance of a vessel or an aircraft.
2. Services provided to ANY PERSON
2.1) Services provided by way of construction, erection, commissioning, installation, completion , fitting out, repair, maintenance, renovation, or alteration of,-
(a) Public Utility Services:– a ROAD, BRIDGE, TUNNEL, or TERMINAL for road transportation for use by general public;
(b) JNNURM, RAY Schemes:- a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
(c) Services to Charitable or Religious Trust:- a building owned by an entity registered under section 12AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;
(d) Pollution Control Equipments:- a pollution control or effluent treatment plant, except located as a part of a factory; or
(e) Electronic Cremation:- a structure meant for funeral, burial or cremation of deceased;
(a) Railways or Airport:- an Airport, Port or Railways, including Monorail or Metro;
(b) Residential House:- a Single Residential Unit otherwise than as a part of a residential complex;
(d) Storage Infrastructure & cold Storage:- Post harvest Storage Infrastructure for agricultural produce including a cold storage for such purposes(e) Food Grain Handling System:- Mechanized food grain handling system, machinery or equipment for units processing agricultural produce as foodstuff excluding alcoholic beverages;
3. Sub Contractor Services
- Service by Sub-Contractor
- providing services by way of works contract
- to another contractor providing works contract services → which are exempt;
(e.g. if any subcontractor is constructing an Airport, the services of Sub contractor are exempt because services are ultimately provided for exempt services)
Provision of Reverse Charge Applicable on Works Contract
The taxable services,
- provided or agreed to be provided by way of
- service portion in execution of works contract
- By any Individual, Hindu Undivided Family or Partnership Firm, → whether registered or not, including Association Of Persons,
- located in the taxable territory
- To a business entity registered as Body Corporate, located in the taxable
( In other words, if person providing the works contract service is Individual, HUF, Partnership Firm or Association of Person and person receiving the service is Company, then service tax will be payable by company instead of service provider.)
Liability to Pay Service Tax amount in case of Reverse Charge