Service tax and mvat on contractor

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CA Hussain (Querist)
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11 February 2016 my client has taken a contract from a builder for construction residential complex with material. The contract amount is decided for Rs.80,00,000/- plz anyone tell me how service tax and mvat will be charged on same.

Suresh Ramaswamy

Suresh Ramaswamy (Expert)
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12 February 2016 Both under the Finance Act 1994 (Service Tax) and MVAT Act 2002, in case of works contract i,e, composite contract for service and materials there are two methods of tax payment. In case detailed records and accounts are maintained and the component of materials consumed, property transferred and services rendered can be separately ascertained, then Service Tax is payable on services rendered and MVAT on the materials transferred. Such detailed accounting is not only time consuming, but also the effective savings is not commensurate with the effort put in and detailed record keeping.

In case of service tax , if the contract is for construction of residential complex it is covered by Clause (b) of Section 66E of Finance Act 1994 (as amended) and it would be Construction of Residential Complex Service. However your client is not the promoter or builder who will transfer the properties in the complex. Therefore the contract has to be covered under clause (a) of Section 66E. - Service portion in the execution of Work Contracts. Since the contract is for construction of new residential complex, it is execution of an Original Works chargeable to service tax on 40% of the contract value - and Works Contract service being covered under Reverse Charge Mechanism 50% of the service tax is payable by the service recipient i.e. your client has to charge the full service tax but only receive and pay 50% thereof to the Government that to on only 40% of the Contract amount. No CENVAT Credit can be claimed for input, goods, services and capital goods under this scheme.

Similarly under MVAT since detailed accounting is not being done the contractor has to opt for composition scheme. One of the schemes under Rule 58 of MVAT Rules allow the dealer to pay VAT @5% on the total contract value. However, this option can be exercised only in case of construction contracts notified in Notification No. VAT.1506/CR-134/Taxation-1 dt. 30/11/2006. The notified construction contracts include construction of buildings and hence your client may opt for this scheme. It is to be noted If the dealer opts for 5% composition scheme, input credit in excess of 4% of purchase price can be availed i.e. there will 4% retention in setoff according to Rule 53(4)(b) of MVAT Rules and balance setoff can be availed.

Under the other composition scheme the dealer may choose to pay VAT @8% on total contract value less the amount paid towards works contract executed by a registered sub-contractor. In case dealer opts for 8% composition scheme, 36% percent of total setoff amount is disallowed and balance 64% setoff can be availed as per Rule 53(4)(a) of MVAT Rules.

My knowledge of MVAT Act 2002 is purely theoretical since I have no clients in Maharashtra and my advice regarding MVAT may be reconfirmed from some other practitioner.