13 April 2009
Hii group member's, Can someone give me the combined study of service tax & VAT in case there is a contract of supply of material & services both (Let say i have to install my electric items in clients place with the help of few labour cost and full payment i'll receive is 1000/- which can't be separated in material & labour) - What will be the compliance of WCT which is charged @ 4 percent - What will be the billing format? service tax & VAT both will be charged at the same time or not? - What will be the issue of composition scheme?
14 April 2009
Service Tax - Works Contract The non compliance with service tax by the construction industry in general, added to the conflicting circulars and the decision in the case of Daelim Industries of non applicability of service tax on indivisible contracts has led to this simpler and more importantly lesser impact alternative being proposed to encourage compliance. This entry would be legally valid if the “deemed service” concept can be legally valid. The clarity in this aspect however may take some time if challenged. The service tax on “works contract” would be w.e.f. 1.06.2007. This category seeks to tax those services wherein transfer of property in goods is involved during the execution of works contract. The tax would be on services involved in the execution of a works contract. This category however deals with only certain type of activities wherein the transfer of property in goods is involved and not all type of services wherein the goods are also transferred like Management, Maintenance and repair Services , Business auxiliary etc. Definition “Works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out – 1. 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 relating 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
2. 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
3. Construction of a new residential complex or a part thereof or
4. Completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (2) or (3) above or
5. Turnkey projects including engineering, procurement and construction or commissioning (EPC) projects. The services provided by any person, to any other person in relation to execution of a works contract excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams would be taxable under this head as per section 65(105)(zzzza). The term “turnkey projects” has not been defined and one would have to be understood in common parlance until clarified. Who is liable? To whom applicable? This entry would be applicable to the following existing service providers: 1. Industrial and Commercial Construction 2. Construction of Complex 3. Erection, installation and Commissioning
If there are works contracts which cover activities not coming under the ones specified above, they would have to be taxed under other existing heads and consequently, the composition benefit in such cases would not be available. In such a scenario, the existing notifications such as 12/2003 ST and 1/2006 ST would have to be relied upon to get the any deductions. For pure labour services where there is no material involved the service would continue to be covered under the above categories as the definition of works contract makes it clear as to the requirement of transfer of property in goods for a contract to be liable under this category. Composition Scheme Works contract (Composition Scheme for Payment of Service Tax) Rules 2007 has been notified vide notification 32/2007 ST dated 22.05.2007 by the Central Government for the purpose of specifying the scheme for composition. The person executing works contract has the option to pay tax under the composition scheme at the rate of two percent on the gross amount charged for the works contract. Gross amount shall not include the VAT or sales tax paid on the goods transferred during the execution of such works contract. The option is to be exercised prior to payment of service tax in respect of the said works contract and once exercised, shall be in force till the completion of the works contract. Exemption Services in relation to execution of works contract provided by any person to any other person in relation to construction of ports or other ports has been exempted from service tax. This exemption shall not extend to services of completion, finishing, repair, alteration, renovation, restoration, maintenance or repair. This maybe an unintended omission. Valuation A new Rule 2A has been inserted by notification 29/2007 ST dated 22.05.2007, which prescribes the valuation method in case of works contract service. The value of works contract service shall be equivalent to the gross amount charged for works contract less the value of goods transferred during the course of execution of works contract. The gross amount shall not include the VAT and sales tax paid on the goods transferred. The service provider shall ensure that the value of works contract service as aforesaid shall include the following – • Labour charges for execution of the works • Amount paid to a sub-contractor for labour and services • Charges for planning, designing and architect’s fees • Charges for obtaining on hire or otherwise, machinery and tools used for execution of the works contract • Cost of consumables such as water, electricity, fuel used in the execution of the works contract • Cost of establishment of the contractor relatable to supply of labour and services • Other similar expenses relatable to supply of labour and services and • Profit earned by the service provider relatable to supply of labour and services The above has been cut pasted from the landmark decision of Gannon Dunkerly under sales tax law but may not be legally valid, as some of the components above do not appear to have the characteristics of a service at all. It remains to be seen whether the deduction for CST paid on transfer of property would be allowed. At present, it appears to be deductible. It is to be noted that the rules specifically allows for deduction of the amount on which Sales Tax/VAT is paid if it is on actuals. On the other hand if it is on notional basis or tax is paid under composition scheme the rules is silent as to how the value of the goods has to be determined. In view of the paper writers, the value of the goods added with the normal Gross Profit ratio would be proper methodology to arrive the value of the goods transferred. The said value can be claimed as deduction while arriving the value of service in the works contract as per the valuation rules. Cenvat credit Where the service provider opts for the composition scheme for the purpose of payment of service tax, he shall not take cenvat credit of duty and cess paid on inputs used in relation to such works contract. However the credit on capital goods used for providing the service as well as the input service credit ( sub contractors , insurance, telephone, manpower supply, architect etc) would be available. Where the service provider does not opt for composition scheme, he should be entitled to cenvat credit on inputs, input services and capital goods used in execution of such works contract. Possible Issues 1. Whether the works contractor can continue under the existing entries for ongoing contracts? Comments: Since there is a new entry it is presumed that service providers may have to choose considering the principles of Section 65A on classification. However if they do not transfer any materials they would continue under construction or erection categories. Herein it is important to note that the department letter F.No. B1/16/2007 TRU dated 22.05.2007 goes on to say that contracts which are treated as works contract for levying VAT/sales tax shall also be treated as works contract for levying service tax. However, this letter would have to be seen in the light of the explanation to section 65(105)(zzzza), which deals with the contracts which can be regarded as works contract under this category. This has already been discussed under the head definition given earlier. This leads us to the conclusion that under the specified categories of activities, if the definition of works contract were satisfied, the assessee would be liable under this head.
2. Whether the works contracts involving materials in progress can also opt for the new entry though earlier they were registered under the old entries? Comments: The intention of the legislature in bringing about this entry and the definition itself allows ongoing construction and erection contracts to be reclassified under the WC entry. Therefore such contractors can opt for the entry by intimating the department for inclusion of new category in the registration certificate.
3. What is a turnkey contract? Comments: The expression has not been defined and the common understanding may have to be adopted. It may indicate contracts of bigger size having a number of sub contracts or differing nature such as erection of a plant or a town itself. These contracts earlier were covered under erection head.
4. Whether the option of availing the credit on all the inputs (cement, steel, glazing, tiles etc) and paying the service tax on the gross amount is still available? Comments: The composition scheme is optional and the works contractor can even pay service tax on a value arrived at as aforesaid at the normal rate. The law as it stands today is silent regarding the cenvat credit on inputs in such a scenario as the credit has been expressly barred only in case of an assessee opting for composition scheme. Where the amount subject to VAT/sales tax has been deducted from the gross value to arrive at the taxable value, it is hard to imagine that credit would be available on inputs when the material value is not considered for paying service tax. This aspect might have to be clarified in future. Service providers who claim this may face litigation and possible retrospective amendment.
5. Whether the option chosen under VAT law has any bearing for the classification or valuation under this new entry? Comments: The WC option provides for the option of deducting the value of goods transferred.. The Rules provides that the value which is adopted for Sales Tax/VAT would be accepted if it is actuals. However for the purpose of sales tax/VAT ad hoc method of value of materials is adopted or composition payment of tax is opted under Sales Tax/VAT, then the deduction of value would be dependent upon the actual value of goods transferred. This may have to be arrived based on the supporting evidence/document.
6. What is the value of service for the purpose of computing Rs. 8 lakhs exemption limit under the WC entry? Comments: The value of service would be the Gross amount determined in terms of Valuation Rules. In other words Gross value of the works contract less value of the goods transferred less Sales Tax/VAT. However the contracts executed upto 31.5.2007 would not be reckoned.
7. Whether the service providers under the specified categories were not liable for works contracts earlier to this entry? Comments: The entry read with the department circular indicates that works contracts were not earlier covered. The purpose for which this entry was bought in also is favorable to this interpretation. Therefore it can be construed that there was no liability earlier. This view is also confirmed in the case of Dr. Lath Path Labs P Ltd. { 2006 (3) STR (711(T- Bom). This could lead to a situation where the service provider who has paid the service tax from their pockets ( not recovered from the customers) could go for a refund especially if the same was done in pursuance of an investigation.
8. Whether the sub contractors would be exempt as the main contractor is paying the service tax? Comments: The sub contractors would also have to discharge the ST under works contract or other categories and would be liable for the tax unless they are below Rs. 8 Lakhs.
9. Whether the option of 2% allows for cenvat credit on capital goods and inputs? Comments: The cenvat credit on inputs is barred. However there is no bar on the credit on capital goods and input services though the budget clarifications had included such a restriction. These are some of the important issues, which have been covered in this article. The important gleaning from this entry is that instead of litigation this option maybe preferable from a practical viewpoint and it is expected that most of the service providers in these three categories would be opting for this scheme.
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