works contract

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R.PADMANABHAN (Querist)
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20 February 2009 Hi,
can u please send the entire details of "SERVICE TAX ON WORKS CONTRACT" and the related features. Specifically about the composition scheme and its method of computation.

Dayal

Dayal (Expert)
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20 February 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.