19 October 2013
Dear Experts, Some contractors are charging service tax of 12.36 % on 33.33 % and 66.67 as cost of material and some are charging 12.36 % on 40 % and balance 60 % being cost of material. Please tell me correct calculation and notification reference and date of applicability... thanks
19 October 2013
There are various types of contractors e.g.civil, electrical, labour, construction, etc. Depending on the nature of contract contractors register themselves as Service Providers under various categories. However, by and large contractors prefer to register themselves as Service Providers under the category Works Contract Service, basically since there is no need for detailed accounting and there is a sizable abatement from the bill in computing ST liability.
Presuming that the contractors you are referring to, on the facts and circumstances stated, are registered as service providers under Works Contract Service the following opinion is given.
Notification No 24/2012 dated 06th June 2012 notifies the substitution of New Rule 2A in the Service Tax (Determination of Value) Rules 2006.
The normal method of determination of service value is as under:
“2A. Determination of value of service portion in the execution of a works contract.- Subject to the provisions of section 67, the value of service portion in the execution of a works contract , referred to in clause (h) of section 66E of the Act, shall be determined in the following manner, namely:-
(i)Value of service portion in execution of works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred 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 or payable, 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 other- wise, 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 or sales tax has been paid or payable on the actual value of property in goods transferred in execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause."
Most contractors do not have such sophisticated accounting facilities at their disposal and hence certain thumb rules have been laid down as under:
(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the service portion 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;
(B)in case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods, service tax shall be payable on seventy percent of the total amount charged for the works contract;
(C)in case of other works contracts, not covered under sub-clauses (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property, service tax shall be payable on sixty per cent of the total amount charged for the works contract;
Explanation 1.- For the purposes of this rule,- (a) “original works” means- (i) all new constructions; (ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable; (iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;
(d)“total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting- (i) the amount charged for such goods or services, if any; and (ii) the value added tax or sales tax, if any, levied thereon:
Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.
Explanation 2.-For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.”.
A perusal of the above Rule 2A of Service Tax (Determination of Value) Rules 2006 clearly lays down three different rate for various services rendered by a contractor under Works Contract. These are as follows:
Where the services under the Works Contract is for a new / original construction work, additions and alterations to abandoned / damaged structures, erection, commissioning or installation of plant, machinery or equipment or structures, pre-fabricated or otherwise - the service component is 40% of the invoice and materials 60%.
Where the services under the Works Contract is for maintenance or repair or reconditioning or restoration or servicing of any goods - the service component is 70% of the invoice and materials 30%.
Where the services under the Works Contract are for other works including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property - the service component is 60% of the invoice and materials 40%.
Thus as per the rules the service component of a contractor's invoice is one of 40%, 60% or 70% and no other rate.
There is no rate of service 33.33% and materials 66.67% in Service Tax. Any contractor charging at that rate will be made to pay the differential 6.67% from his own resources.
The charging of this rate is a mistake on the part of the contractor, because most assessees and (I am sorry to say) most so called expert practitioners are not aware of the provisions of the relevant statute and from experience in direct taxes and VAT/CST advise wrongly. The VAT Acts of most states in India levy VAT on works contract on 66.67% of the invoice amount treating that as the deemed sales. These contractors have followed the same principle for Service Tax which is wrong.
Kapilji, I hope I have been able clarify your query. Please feel free to ask for any further clarifications on this matter if required.
CAclubindia
