Published on March 11, 2014
SERVICE TAX ON WORKS CONTRACT Presented by : CA.Bharat Aggarwal Partner M/s Ashok Bharat & Associates
POINTS TO BE DISCUSSED IN TODAYS MEETING Definition of Works Contract Applicability and Exemptions Valuation of Taxable service Abatements
DEFINITION OF SERVICE “Service” as defined in Clause (44) of Section 65B of the Act states that the Service includes a declared service The term declared service is also defined under the said section as 1. An activity carried out by one person to another for consideration and 2. Declared as such under Section 66E of the Finance Act, 1994 (i.e. it must be Specified in Section 66E of the Finance Act,1994) Inclusion of “WORKS CONTRACT “ in Declared Services w.e.f 01.07.2012 works contract is covered under “Declared service” under Section 66E of the Finance Act,1994 As per Section 66E (h) “Service portion in the execution of works contract shall constitute declared services. By this inclusion, the service portion in a work contract has become taxable under the service tax provisions.
DEFINITION OF WORKS CONTRACT (CLAUSE 54 OF SECTION 65B Works Contract means 1. A Contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and 2. 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 3. of any movable or immovable property 4. or for carrying out any other similar activity or a part thereof in relation to such property.
FEATURES OF DEFINITION OF WORKS CONTRACT The new provisions are applicable w.e.f. 01.07.2012 The contract must involve composite supply of Goods & services 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. Contract with consumables are not covered under works contract as the property of goods is not transferred but the goods are consumed. For Example : Oiling and lubricating the machinery Pure Labour contracts are not covered under Works Contract. Transfer of Property in goods must be taxable under Sales Tax. If it is not taxable under Sales Tax then contract is not covered under works contract. The new definition of works contracts covers services related to “movable property” also. For example : repair of machinery will be covered under works contract if material property of goods gets transferred while executing the repair contract.
EXEMPTIONS IN RELATION TO CONSTRUCTION ACTIVITIES Following Exemptions are given to construction sector in notification no. 25/2012 dated : 20.06.2012 1) At Sr.No.12 , 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) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession; (b) 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) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; (d) canal, dam or other irrigation works; (e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or (f) 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;
2. At Sr.No.13, Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,- Public Utility Services (a) a road, bridge, tunnel, or terminal for road transportation for use by general public; JNNURM and RAY Schemes (b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana; Services to Charitable or Religious Trust (c) 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; Pollution Control Equipments or Electronic Cremation (d) a pollution control or effluent treatment plant, except located as a part of a factory; or a structure meant for funeral, burial or cremation of deceased;
Important Points to remember in Sr.No.13 Status of service receiver is not important. Only specified services are eligible for exemption. Construction of Roads for use by general public is exempt. Construction of Roads which are not for general public use e.g. construction of roads in factory, would be taxable. Repair and maintenance is also covered under this entry. Only “religious use” is specified in case of service to Charitable or Religious trust. If use is other than religious than the service is taxable.
3. At Sr.No.14, Services by way of construction, erection, commissioning, or installation of original works pertaining to,- (a) an airport, port or railways, including monorail or metro; (b) a single residential unit otherwise than as a part of a residential complex; (c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the „Scheme of Affordable Housing in Partnership‟ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India; (d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or (e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;
Important Points to remember in Sr.No.14 Status of service receiver is not important. Only specified services are eligible for exemption. Repair and maintenance not covered under this entry. Hence repair and maintenance are nor exempt.
4. At Sr.No.25, Services provided to Government, a local authority or a governmental authority by way of - (a) 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 (b) repair or maintenance of a vessel or an aircraft; 5. At Sr.No.29(h), sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt.
VALUATION OF WORKS CONTRACT SERVICE Service portion in the execution of works contract shall be determined as per Service Tax (Determination of Value) Rules, 2006 Rule 2A of Service Tax (Determination of value) Rules, 2006 Option 1 : Actual Method Option 2 : Composition Method
Option 1 : Actual Method Particulars Amount (Rs.) A Gross Amount Charged for Works Contract (Note 1) xxxx B (i) Less : Vat / Sales tax paid / Payable (xxxx) (ii) Less : value of Property in goods transferred in execution of works contract (Note 2) (xxxx) C Net Amount Chargeable for Service Tax (A-B) Xxxx D Service Tax on “C” above @ 12.36% Xxxx E Less : Input Cenvat Credit (xxxx) F Net Service Tax Payable (D-E) Xxxx
Note 1 : Gross amount of Works contract shall include : 1. Labour Charges for execution of works contract. 2. Amount paid to a Sub-Contractor for labour & Services 3. Charges for planning, designing and architect‟s fees. 4. Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract. 5. Cost of consumables such as water, electricity, fuel used in the execution of works contract. 6. Cost of establishment of the contractor relatable to supply of labour and services. 7. Other similar expenses relatable to supply of labour and services. 8. Profit earned by the service provider relatable to supply of labour and services. Note 2 : Value of property in goods transferred in the execution of Works contract : Value of property in goods transferred in the execution of works contract shall be value taken for VAT purpose.
Option 2 : Composition Method S.No Nature of Contract Taxable Value Net Service Tax liability (in % age) A. Execution of Original Works i.e. (i) All new constructions (ii) Erections (iii) Commissioning (iv) Installation 40% of “Total amount Charged” for Works Contract 4.944% B. Execution of contract for (i) Maintenance or (ii) Repair or (iii) Reconditioning or (iv) Restoration or (v) Servicing of any goods 70% of “Total amount Charged” for Works Contract 8.652% C. In case of works contract, not covered under S.No.(A) and (B), including (i) Maintenance, (ii) Repair, (iii) Completion and (iv) Finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property 60% of “Total amount Charged” for Works Contract 7.416%
EXPLANATION 1 – FOR THE PURPOSE OF CLAUSE (II) OF RULE 2A “Original Works” means (i) All new constructions (ii) All types of additions and alterations to abandoned or damaged structures on land that are required to make them workable. (iii) Erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise; “total amount” means S.No. Particulars Amount (Rs.) 1. Sum total of gross amount charged for the works contract xxx 2. Add : Fair market value of all goods and services supplied in or in relation to the execution of works contract, whether or not supplied under the same contract or any other contract, after deducting (i) the amount charged for such goods or services, if any; and (ii) the value added tax or sales tax, if any, levied thereon xxx
Fair value of goods & services so supplied may be determined in accordance with the generally accepted accounting principles. [proviso to Explanation 1 to Rule 2A] Example – Original Works S.No. Particulars Amount (Rs.) 1. Gross amount received excluding taxes 95,00,000 2. Fair market value of goods & services supplied by the service receiver excluding taxes 10,00,000 3. Amount charged by service receiver for 2 above 5,00,000 4. Total amount charges (1+2-3) 1,00,00,000 5. Value of service portion (40% of (4) above in case of Original works) 40,00,000
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