Applicability of service tax to labour contractors

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hinal sampat (Querist)
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03 August 2012 I am working with a construction firm. We have several labour contractors appointed at different sites, whose invoice amount for the period 1st April, 2012 till date have exceeded Rs. 10 lacs.
These labour contractors do not avail service tax registration number as well as do not undertake to discharge the service tax liability. In this case, do we, as principals, have to undertake to discharge the service tax liability?
Please specify the section/ notification/ judgement, if any.

RENGARAJ R.K

RENGARAJ R.K (Expert)
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03 August 2012 Sub-contractors are not liable to pay the service tax if the main principal contractor has agreed to pay the service tax. The main contractor has to add the value of sub contractor's bill for arriving at the taxable turnover. Please refer Notn 11/2012 and Rule 2A.

Determination of value of taxable services involved in the execution of a works contract.- Subject to the provisions of section 67, the value of taxable service involved in the execution of a works contract (hereinafter referred to as works contract service), referred to in clause (8) of section 66E of the Act, shall be determined by the service provider in the following manner, namely:-

(i) Value of 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.

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, 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, -
(i) labour charges for execution of the works;
(ii) amount paid to a sub-contractor for labour and services;
(iii) charges for planning, designing and architect’s fees;
(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
(v) cost of consumables such as water, electricity, fuel used in the execution of the works contract;
(vi) cost of establishment of the contractor relatable to supply of labour and services;
(vii) other similar expenses relatable to supply of labour and services; and
(viii) profit earned by the service provider relatable to supply of labour and services;

(c) Where value added tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under this clause.
(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the taxable service involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-

(A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract:

Provided that where the gross amount charged includes the value of the land, in respect of the service provided by way of clause (8) of section 66E of the Act, service tax shall be payable on twenty five per cent. of the total amount including such gross amount;

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hinal sampat

hinal sampat (Querist)
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07 August 2012 Sir, thank you very much. Your explanation is very apt.
Sir, again one question that arises to me is that what will be the consequences, in the above case, if the principal contractors (i.e. we) also DO NOT AGREE to pay the service tax? In other words, if we do not add the sub-contractor's bill in our taxable turnover, then shall we be considered to have defaulted?

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