Service tax on sub contractors

This query is : Resolved

M P Arun (Querist)
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28 December 2007 Sir,
Thanks for your earlier replies
I wish you all a very happy, peaceful and prosperous New Year 2008
I have a query on Service tax on Works contract
A contractor executing a works contract also utilizes the work of a sub contractor.
Both main contractor and the sub contractor does the work involving labour, materials etc.
As per the new rules the value of works contract excludes the value of transfer of property involved in materials.
Now the situation is like this
The value of Works contract is Rs.50,00,000
The value of materials is Rs.20,00,000
The amount paid to Sub Contractor Rs.25,00,000

If I am correct, the taxable value of service for the main contractor is Rs.30,00,000 (50-20)
My query now is
1.If the amount paid to sub contractor also includes the value of materials involved, how to claim that exemption
2.Very importantly, is sub contractor also liable to pay service tax under the new rule?
3.If the sub contractor is liable, whether main contractor or the sub contractor can input tax credit in any possibility?
4.Is there any mention that even the sub contractor also liable for works contract service tax in the new rules?

Pls clarify the same.

Regards,
M.P.Arun

annapurna

annapurna (Expert)
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28 December 2007 with effect from 01.06.2007 the works contract service has been notified as taxable service.The law has not specified about the liability of service tax to sub contractor. When the works contractor takes the service of the sub contractor, the sub contractor will also be liable to pay the service tax if it exceeds the specific exemption of eight lakhs for the year 2007-2008. The contractor can collect the service tax from the sub contractor and the sub contractor can claim the input tax credit for the tax paid to the contractor. In the given case the contractor is liable to pay the service tax on Rs. 5,00000 and the sub contractor can pay the tax either on actual labour basis or by notification 1/2006 of availing the abatement of 67%.

R.V.RAO

R.V.RAO (Expert)
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28 December 2007
THE MAIN CONTRACTOR IS LIABLE FOR SERV. TAX ON RS. 50 LAKHS. BUT THEN SUBCONTRACOTOR NOT LIABLE FOR ANY TAX AS PER CASE LAW STATED BELOW.
AS PER WORKS CONTRACT -SERVICE TAX RULES 2007, GROSS VALUE OF CONTRACT IS ON WHAT THE MAIN CONTRACTOR NEEDS TO PAY SERV. TAX.
GROSS INCLUDES LABOR AND EVEN PAYMENTS MADE TO SUB CONTRACTOR.
2007 -TMI - 782 - CESTAT, BANGALORE ,
Other Citation - 2006 (4) S.T.R. 475 (Tri. - Bang.)
SEMAC PVT. LTD. versus COMMISSIONER OF SERVICE TAX, BANGALORE
Issue
Service Tax – Consulting Engineer – Sub-contractor/sub-consultant not required to discharge service tax liability as main consultant discharged the same –

THE NEW WORKS CONTRACT- SRVICE TAX RULES ONLY IN BRIEF ARE STATED BELOW:
The Joint Secretary (TRU), Tax Research Unit, Department of Revenue, Ministry of Finance, Government of India has issued a letter F. No. B1/16/2007-TRU to all officers of the Central Excise, Customs and Service Tax on the new services proposed to be taxed by the Finance Act, 2007. The new services come under the service tax net from 1 June 2007.

One of the new services brought to tax is “service provided in relation to the execution of a works contract”.

Works Contracts attract Value Added Tax / Sales Tax levied by State Governments. The State laws provide for deduction of certain expenditure relating to labour and services, architect fees, planning and design charges, etc. Where the expenses under these heads cannot be arrived at from the books of accounts, the dealer can opt for a lumpsum deduction and pay VAT / ST on the balance.

The Service Tax will now be levied on the Labour / Service part of the contract, after deducting the value of property in goods transferred in the works contract and the VAT / ST paid on the contract from the gross amount of the contract.

The contractors also have the option under the VAT /ST laws to pay a percent of the gross value of the contract, called the compounded rate of tax. In such cases, the value of the property in goods transferred and the value of services are not segregated.

The Central Government has introduced the compounded rate of tax on works contracts by proving that the contractor can opt to pay a 2% service tax on the gross value of the contract. The gross value of the contract shall not include VAT / ST paid on the contract. The contractor opting for the composition scheme shall not be entitled to CENVAT credit of duties or cess paid on any inputs in relation to that contract.

Please refer Notification No 32/2007 dated 22 May 2007.
SOURCE:WWW.GSTAXINDIA.COM
R.V.RAO

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