Service Tax on Works Contract

BACKGROUND:

Infrastructure development has been major thrust area in government policies in recent past. India is witnessing all round development in infrastructural facilities as never before. Better Road Network, Airport of International Standard, Metro Train, Dams, Flyovers, Bridges, Power Plant, Stadiums to host International games is telling the story of rapid development of country. Earning of Corporate engaged in these infrastructure and capital goods sectors are also making newer heights.  Government is also not lagging behind in seeking its pie in corporate earning in the form of taxation.

These infrastructure development activities primarily consist of construction, erection, commissioning and installation activities. As the very nature of business, corporate engaged in these business take turnkey contract of construction and erection, commissioning and installation activities. It has been more than 3 years since the government has brought these services under service tax net. Service tax was payable at the specified rate on the taxable value of the Contract. However there was an option to avail exemption of 67% value to turnover, in case of works contract.

In the aforesaid manner, government has attempted to levy service tax on works contract, but objection was raised in many cased against this levy in the tribunal. Tribunal, while deciding the appeals, has held in case of Daelim Industrial Company Ltd v. CCE (1994-2006) STT 438, a work contract cannot be vivisected and part of it subject to tax. The revenue’s appeal against the decision had been rejected by the Apex Court. Similar issue had also been decided in the case of CCE&C v. Larson & Toubro Ltd. In the case of Blue Star Ltd. v. CCE [2007] 7 STT 68, the assessee entered in to contracts with his customers for supplying plant, machinery or equipment and for commissioning or installation of the said plant, machinery or equipment. The revenue raised demand of service tax from the assessee on erection, commissioning and installation of machinery or equipment component of the contract. The demand was confirmed by the commissioner. But the tribunal, following the decision of Tribunal in the case of Larson & Toubro Ltd. (supra) upheld the assessee’s contention that service tax could not be levied on works contract and set aside the demand. The same principal has been reiterated in many judgments by the tribunal.

By now, Government has not been able to substantiate its stand to levy service tax on works contract. Hence it has brought new category of service viz. Works Contract, under service tax net and it seems that the Government will succeed to collect service tax on works contract under new category of service which otherwise was not happening.

Salient feature of new category of service:

It may be noted here that only following services are covered under this new category:

1. Works Contract for Erection, Commissioning and Installation.
2. Works Contract for Commercial or Industrial Construction.
3. Works Contract for construction of residential complexes.
4. Works Contract for Turnkey projects including engineering procurement, construction and commissioning (EPC) Projects.

It is noteworthy here that only those works contracts  are covered wherein transfer of property in goods involved in execution of works contract is exigible to VAT/Sales Tax. The provisions relating to this service shall come into effect from 1^st June 2007.

            Value of the works contract service shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. It may be, further, noted that gross amount charged for the works contract shall not include Value Added Tax (VAT) or Sales Tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract.

            However it is not very convenient for the assessee to maintain separate records to arrive at value of materials transferred during the execution of works contract. Hence there is an option to the assessee to pay 2% of gross value of works contract towards discharge of service tax liabilities. However if the assessee opts for above composition scheme of 2%, he will not take CENVAT credit of duties or cess paid on any input, used in said works contract. Please note that there is no restriction on Cenvat Credit of duy paid on Capital Goods and service tax paid on input services. Also the assessee is required to exercise this option before payment of service tax in respect of said works contract and option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract.