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Charging of Service Tax

Anubhaw Garg (Chartered Accountant in Practice) (101 Points)

09 June 2016

A Contractor is providing services to a manufacturing company ( producing bags) like contractor is charging his bill onbasis of production of no. of bags by providing labour to company.
The question is whether service tax provision will apply here or not?

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Harshit Kabra (INVESTOR) (Student CA final) (1113 Points)
Replied 09 June 2016

The works contract serviceis a taxable service which is defined under section 65(105) of the FinanceAct, 1994,‘as any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams’.Works contract meansa contract wherein transfer of property in goods involved in the execution of works contract is leviable to tax as sale of goods and the service portionin the execution of works contract is liable to service tax. Thus, the consideration for works contract serviceshall include both the value of material and the value of service provided during execution of the workscontract. The manner for determining the value of service portion of a works contract from the totalworks contract is given in Rule 2A of theService Tax (Determination of Value) Rules, 2006 as – ‘the service portion involved in the execution ofOriginal works is 40%of the total works contract and the service portioninvolved in the execution of works contractother than original works is 70%of the total works contract.The works contract service is covered under the reverse chargenotification no.30/2012. The liability of service tax under said service shall be paid equally by the contractor/provider of service and the recipient of the service. That is fifty percent of the service tax liability shall be paid by the contractor and the balance 50% shall be paid by the recipient of the service. In short, the service tax shall be paid at 14% (prevailingrate) on 40% or 70% of the total works contract, as the case may be, by the provider of service andthe receiver of the service on equal sharing ratio i.e.50:50 ratio.In some situation, the recipient of the servicesupply material free ofcost to the contractor to use it in execution of works contract. In such case the contractor only carriesout service of execution of works contract. It implies that the invoice raised by the provider of service shall include only the labour/service portion.In such case complication arises asto whether the value offree of cost material should be added to thetotal works contract for charging service tax as per the provision laid down in the Service Tax (Determination of Value) Rules, 2006. Oncarefully reading the provision of valuation rule, the value of free of cost material shall also be added to the total works contract service to calculate service tax. The said provision is hardship on the recipient of service and provider ofservice.

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karan jit singh (Consultant) (1299 Points)
Replied 10 June 2016

Originally posted by : Anubhaw Garg
	A Contractor is providing services to a manufacturing company ( producing bags) like contractor is charging his bill onbasis of production of no. of bags by providing labour to company.The question is whether service tax provision will apply here or not?

service tax provision will apply here

Harshit Kabra (INVESTOR) (Student CA final) (1113 Points)
Replied 10 June 2016

see since, material is used by manufacturer not provided by contractor, so question of VAT is not arising here from such contractor.Now for service tax here is depending upon 2 case.
Case -1.
if the wages to labour is providing by the Contractor and contractor charge lumpsun amount from manufacturer for providing labour then service tax will be applicable.

Case -2
if wages of labour is soloy providing by manufacturer then only TDS provision will be applicable no any question of S.tax will be applicable.

Hope this will helped u

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