Works Contract Tax

This query is : Resolved

Rajendra Prasad (Querist)
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27 July 2009 Dear Sir,

I am working in a HVAC Works company in Hyderabad. My problem is we are getting works from our customers. In that some customers are issuing orders in Composit Rate, some are issuing order as actual basis.
We are paying directly 4.12% on receipts of Composit works. Other than composit how I have to calculate. As per the act "IF the dealer pays sales tax?VAT on actual value of goods involved in works contract, then service tax will be payable on gross amount charged for the works contract minus value on which VAT/Sales tax has been paid by the dealer(rule 2A(1)(ii) of Service Tax Valuation Rules).

Here we are receiving amount three or four times in upto completion of the project (i.e. it will take upto 4 to 6 months). It is also not possible to calculate the Taxable portion before completion of the Contact. HOw I have to proceed Please help me on this issue.

Rajendra Prasad.

SARATHY RP

SARATHY RP (Expert)
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27 July 2009 1. First of all, your customer cannot decide your method of discharge. You have to decide on the same and show the service tax element in the Invoice and collect the same from the customer. If the contract is inclusive of all taxes and duties, then you have to provide a tentative billing break-up, taxes component and get the client’s approval only to avoid billing related problems.
2. You have to satisfy yourself that the services rendered by you are covered under the definition of Taxable Service as defined under Section 65 (105) (zzzza) Explanation (i) & (ii) either a or e. Then only you have to decide which method of discharge will suit you.
3. Under composition scheme 4.12% service tax is to be discharged on gross receipts. Cenvat Credit on input services can be availed / utilized.
4. Under regular (merit route) scheme, 10.30% ser tax is to be discharged on gross receipts minus transfer of property in goods + VAT. No other deductions permissible. Cenvat credit on input services can be availed / utilized. Here the documents are to be maintained contract wise and to be shown during Audit.
5. Basically the service tax is liable to be discharged on receipt of payment from the recipient of service. Hence it does not matter the number of times that we receive payment from our customer.
6. Considering your typical contract composition (%age of material and %age of labour), you may work out and decide which one is cost effective for your organization.

Hope this gives clarity. Any further questions welcome.