15 October 2010
Dear Sir, Kindly examine the following case and advise us:
Background
We had constructed a private railway siding for a client in Madhya Pradesh where the contract was on EPC basis and Schedule of Rates was inclusive of MP VAT. We had opted for composite scheme for this project. The Client recovered VAT and deposited the recovered amount with Tax Authorities and issued appropriate TDS for it. The Agreement was excluding the element of Service Tax and the Client had to pay us the amount of Service Tax.
The Client did pay us the amount of Service Tax but recovered VAT on the gross amount and deposited the recovered amount with Tax Authorities. This can be illustrated as follows:
Value of Work done and Billed by us on the Client Rs 1000 Add: Amount added by the Client by way of Service Tax @ 10.3% 103 Gross Amount of the Bill passed by the Client 1103
Less: Recovery of Income Tax by Client 22 Recovery of VAT on Composite Rate 5% by Client 55 Total recovery effected by Client 77
Net amount released by Client 1026
Our Stand
It is understood that under the Service Tax Valuation Rules and Works Contract (Composition Scheme for Payment of Service Tax) Rules, VAT/Sales Tax is not to be included in value for purpose of Service Tax. Thus Service Tax is payable on value of work done only i.e. on net amount excluding VAT/Sales Tax from Gross value of the bill inn the transaction. As per this analogy, the above illustration should be calculated as under:
Value of Work done for which rates are inclusive of VAT/Sales Tax Rs 1000 Less: Element of MP VAT on Composite rate basis @ 5% on gross Value of bill i.e. 1000x5/105 48
Net Value of bill or Actual value of work done 952
Add: Amount of Service Tax to be paid on value of work done @ 10.3% 98 Less: Amount of Income Tax recovered by the Client 22
Amount to be received by us from Client 1028
Thus, it can be seen that the Client is depositing Rs 7 per thousand extra towards Vat and Rs 5 per thousand towards Service Tax with the authorities and in turn we are loosing hard earned revenue.
Assistance Required:
Kindly examine the above instance and advise whether our stand is correct and what corrective measure should be taken to rectify the problem.
15 October 2010
I am agree with your stand, but I also want to know, what is the reply of deducter. I think this type of issue can ber sorted out between the party.
CAclubindia
