[This article appeared in “Taxmann’s Service Tax Today” Vol. 8 Part 8 dt. 22-6-2007]
Works Contract under Service Tax- How to make it work?
By CA. Pradip R Shah
e-mail: pradip_shah@vsnl.com
Overlapping of Services
1.0 One of the surprising items of the Budget 2007 was levying Service Tax (ST) on Works Contract (WC). This is for the reason that no one has ever expected it nor it was debated at any level till date. Secondly, the existing provisions of S. 65(105)(zzh), 65(105)(zzq) and 65(105)(zzd) relating to services like commercial or industrial construction service, construction of complex, erection commissioning or installation were already taking care of the services covered under WC. A glance at the provisions of S. 65(105)(zzzza) of the Finance Act relating to definition of WC, will make one wonder how and in what respect it differs from the existing provisions. Was there any justification for inserting new service under the title “Execution of Works Contract”? Will it not lead to complications as the same service will fall into two different types of services? Which section will have to be applied for which service? Like these many other issues will crop-up.
1.1 WC has various aspects viz. definition, which goods have been transferred, value of goods transferred, credit for tax paid etc. An attempt as been made here to discuss definition and other connected aspects like classification of goods. In view of space constraint other issues viz. valuation, tax credit, composition scheme etc. emerging out of taxation of WC have not been covered.
WC under Local Sales Tax Laws
2.0 Levying tax on WC under local sales tax has generated lot of heat till date and will continue to do so even under the existing provisions of Value Added Tax (VAT) Act. Ever since the judgment of the Supreme Court in the case of Gannon Dunkerley, the heat has not cool down. This is despite the fact that large number of judgments by the Supreme Court and High Courts of the various states since 1954 i.e. the judgment of the Madras High Court in the case of Gannon Dunkerley, have tried to examine the issues involved from various angles. In the process, what has happened is that more and more new dimensions have been added, making the issue more complex.
2.1 As if this was not enough, the introduction of ST on WC has added one more dimension to the issue, though not in the realm of VAT but adding wooes for the service providers. The objective of levying tax on service is to put at par the service providers with manufacturers of the goods and have additional source of revenue. However, reading the provisions of ST on WC one is left in no doubt that the Government will not only get more revenue from WC service provider but also from chartered accountants as well. This is for the reason that these provisions will give additional boost to their professional assignments!
Wooes of WC under Sales Tax Laws
3.0 Levying tax on WC has not been easy task for any of the Sate Governments. Since the State Governments are not permitted to tax services, vivisecting the WC transaction and levying tax on transfer of property involved therein has posed serious problems. The issues arising therein are:
-Is the transaction a sale of goods or service?
-Is it a job work or works contract?
-If it is WC whether any property in the goods passes to the buyer?
-If the property is passing to the buyer then at which stage and in what form?
-Is it necessary that all the goods used should exist at the time of passing of the property?
-What will happen if certain goods get extinguished in the process of execution of WC and thus do not get transferred to the buyer?
-How to determine value of goods passing to the buyer?
- How to exclude value of services and levy tax on goods transferred?
- Whether any value is required to be assigned for the goods which have been consumed and could not be transferred?
3.1 Apart from that, all the State Governments started extending the definition of WC so that more and more activities, not falling into the category of sale of goods, can be covered. Having created enough complications, there was no alternative but to find out a short-cut which can solve all these issues. An easy solution was to have a composition scheme. Under the scheme, various transactions were identified which can be treated as WC. Percentages on an ad hoc basis have been fixed for service element involved in each one and tax is being levied on the remainder portion.
3.2 The problems encountered by the State Governments in levying tax in transfer of property in goods can also be faced by the Central Government if it wants to levy ST on it. This is for the reason that of the two aspects involved in the transaction, service is the other aspect. Since the ST is being levied on the service element of the transaction, as against value of goods transferred under VAT, all the issues as mentioned above are bound to arise here as well. Therefore, the easiest way for the Central Government was to devise the whole scheme in such a way that the service provider need not redefine the services or recalculate value of service element but to extract it from the one which has already been computed under the State Laws. It is for this reason one will come across reference to “levying of tax on sale” by the State Government in the Service Tax provisions. It will be appreciated that two different types of taxes are being levied on the same set of transactions under two different statues. Therefore, total value for levying tax cannot exceed the valuation adopted in each case. In order to avoid legal complications, the best solution is to adopt the valuation in the case of sales tax / VAT.
3.3 An issue that still baffles one is the reason for having overlapping of services. Moreover, as against large number of items being covered under VAT laws, why only limited items have been covered under the definition of WC. It appears that the definition of WC will be expanded in such a way that all the items covered under the definition of WC under VAT laws of the State Governments may be covered under the ST provisions. In such a scenario, various services as referred to above may be withdrawn from charge of tax. If it so happens, there will be consistency in chargeability and valuation of services throughout the country.
Classification of Services
4.0 One cannot have any objection about the methodology followed. However, one would have expected a clear picture in this regard. As we shall see while discussing various other aspects of taxation of WC there is no clarity. Let us have a look at the provisions of S. 65(105)(zzzza) regarding WC and compare it with other provisions.
Clause (a) of the definition covers
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WC Service
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Existing Services under various other provisions
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“works contract” means a contract wherein,—
(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and
(ii) such contract is for the purposes of carrying out,—
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(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise,
installation of
electrical and electronic devices,
plumbing, drain laying or other installations for transport of fluids,
heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work,
thermal insulation, sound insulation, fire proofing or water proofing,
lift and escalator, fire escape staircases or elevators; or
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(39a) “erection, commissioning or installation” means any service provided by a commissioning and installation agency, in relation to,—
(i)erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise; or
(ii) installation of—
(a) electrical and electronic devices, including wirings or fittings therefor; or
(b) plumbing, drain laying or other installations for transport of fluids; or
(c) heating, ventilation or air-conditioning including related pipe work, ductwork and sheet metal work; or
(d) thermal insulation, sound insulation, fire proofing or water proofing; or
(e) lift and escalator, fire escape staircases or travelators; or
(f) such other similar services;
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As can be seen, clause (a) covers “including wirings or fittings therefore” which is not the case under WC. It means that the services of pure wiring or fittings will not be covered under WC but will continue to be so under S. 65(39)(a).
Another difference here is clause “(f) such other similar services”. This is an enabling clause. However, provisions of WC are under (zzzza) very specific and similar services cannot be covered under WC.
4.1 Clause (b) is relating to construction of a building or a part thereof, laying down of pipeline etc. An important aspect hereof is that it should be related to commerce and industry only. Therefore, construction of building or laying down of pipeline for residential purpose will not fall under this clause. However, it may fall into other sub-clause.
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WC Service
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Existing Services under various other provisions
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(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or
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S. 65 (25b) “commercial or industrial construction service” means—
(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or
(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,
which is—
(i) used, or to be used, primarily for; or
(ii) occupied, or to be occupied, primarily with; or
(iii) engaged, or to be engaged, primarily in,
commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;
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S. 65(25)(b) is more exhaustive as it precisely defines what is covered there under. Later portion of S. 65(25)(b) specifically excludes services related to roads, airports, railways, transport terminals, bridges, tunnels and dams. These exclusions have been taken care of while drafting S. 65(105)(zzzza).
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WC Service
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Existing Services under various other provisions
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(c) construction of a new residential complex or a part thereof; or
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(30a) “construction of complex” means—
(a) construction of a new residential complex or a part thereof; or
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(d) completion and finishing services,
repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or
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(b) completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or
(c) repair, alteration, renovation or restoration of, or similar services in relation to, residential complex;
(64) “management, maintenance or repair” means any service provided by—
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorised by him, in relation to,—
(a) management of properties, whether immovable or not;
(b) maintenance or repair of properties, whether immovable or not; or
(c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle;
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4.2 First part of WC services refers to completion and finishing services. Unlike in the case of S. 65(105)(30)(a), which is applicable to residential complexes only, provisions hereof are applicable in all the cases. Same is the case with repairs or alterations which is applicable to both the types of building i.e. commercial and residential.
4.3 As can be seen, services like commercial or industrial construction service, construction of complex, erection commissioning or installation and are falling under more than one category. This will naturally call for applying provisions of S. 65A which lays down principles of classification. Applying these principles, wherever the WC attracts provisions of local VAT laws, provisions of S. 65(105) (zzzza) i.e. “Execution of Works Contract Service” will be applicable. In case, if for any reason, in a particular State, no tax is levied as sale of goods then such contract will fall into the category of commercial or industrial construction service, construction of complex, erection commissioning or installation. This is for the reason that WC under section (zzzza) has been defined as “works contract” wherein, transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods.” Thus, levy of tax as sale of goods is an essential condition; it is a specific condition for being chargeable under ST. If the WC fails to satisfy it then provisions of other clause may be applicable.
Applicability – new WC or Running WC
5.0 This may be true for new contract to be entered into henceforth. However, a question that remains to be answered is what will be the status of the contracts which are in the process of execution. It may be noted that bills in respect of such contracts are being raised in stages and each stage is billed separately. There is no direct answer to it. However, if the Dealer is not under composition scheme of the local VAT laws then services rendered after 1-6-2007 will be governed by the provisions of S. 65(105) (zzzza) and the tax will have to be paid accordingly. However, if the Dealer is under the Composition Scheme of the local VAT laws then it may not be possible to opt for the Composition Scheme under Service Tax. This is for the reason that the provisions of Rule 3 provides for the assessee to exercise the option prior to the payment of service tax in respect of such WC. Since the assessee has already started making payment for such ongoing WC, provisions of Rule 3 of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 cannot be invoked.
The table below will give some idea about the methodology to be adopted for classifying the services.
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Tax leviable under sales tax laws
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Covered within the definition of WC u/s 65(105)(zzzza)
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Whether the service is covered under any other provision of S. 65(105)
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Chargeable under
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Service A
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Yes
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Yes
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Yes
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WC
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Service B
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No
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Yes
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Yes
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Under appropriate section – not as WC
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Service C
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No
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No
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Yes
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Under appropriate section – not as WC
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Service D
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Yes
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Yes
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No
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WC
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Defining the WC
6.0 S. 65(105)(zzzza) defines “works contract” as
a contract wherein,—
(iii) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and”
The wordings “leviable to tax as sale of goods” are vague. As we know, despite the Empowered Committee having drawn a model code of VAT Act, none of the State Governments have adopted it. Each State Government has drafted VAT laws as per their requirements. Thus, there is no consistency in the state laws. Let us see a few of definitions of WC under some of the State laws.
Gujarat VAT Act:
S. 2 (23) “sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration and includes,-
(b) transfer of property in goods (whether as goods or in some other form) involved in execution of a works contract,
Explanation (ii):
for the purpose of sub-clause (b) of the expression “works contract” means a contract for execution of works and includes such works contract as the State Government may, by notification in the Official Gazette, specify;
Delhi VAT Act:
S. 2 (zo) "works contract" includes any agreement for carrying out for cash or for deferred payment or for valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, repair or commissioning of any moveable or immovable property;
Karnataka VAT Act:
S. 2 (37) 'Works contract' includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.
Andhra Pradesh VAT Act:
S. 2 (45) "Works contract" includes any agreement for carrying out for cash or for deferred payment or for any other valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, laying, fitting out, improvement, modification, repair or commissioning of any movable or immovable property;
Haryana VAT Act:
S. 2 (zt) "works contract" includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the assembling, construction, building, altering, manufacturing, processing, fabrication, installation, fitting out, improvement, repair or commissioning of any moveable or immovable property;
6.1 As can be seen from above, there are variations in definition of WC in each case. Looking to the provisions it appears that for the purpose of WC under Service Tax provisions of the respective state laws will have to be examined. If the services as mentioned in S. 65(105)(zzzza) are also covered under the state laws then it will be taxed as WC.
6.2 An offshoot of the application of the said definition will be in the case of a service which is, say, taxable as WC in the State of Maharashtra but may not be so in Karnataka or Andhra Pradesh. Does it mean that the same service will be treated separately under section 65(105)? As far as rate of tax is concerned it may not make any difference. However, it does make substantial difference when the assessee opts for composition scheme under WC. Composition Scheme under WC is more tax efficient than service being chargeable under other provisions. Is it not a case of discrimination?
Conclusion:
Transactions covered as WC under VAT laws forms fairly large portion of overall business activities. Same will be true for ST. Introduction of S. 65(105)(zzzza) is a beginning. Time is not far away when all the types of WC under ST may be brought under one umbrella of S. 65(105)(zzzza). The assessee will have to learn to live with it, earlier the better it is.
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