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Service Tax on Work Contract

Ankit Kukreja (Student) (40 Points)

29 April 2011

Hi all,

I'm auditing in an infrastructure company where the major work is of work contract(supply and apply of the goods), therefore they are generally charging service tax @ 4.12% and the VAT(as per their composition scheme). However, I've come accross a few invoices raised only for installation of a particular product and still they are charging S.Tax @ 4.12%. My view is that on these invoices S.Tax should be charged @ 10.3% as these are only for the service part and no VAT shall be charged. The company's view is that as they are registered under WCT, they'll charge S.Tax @ 4.12% and the applicable VAT as well.

Please bring clarity to the matter so as to what S.Tax should be charged on these particular invoices.

Thanks

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12 Replies

Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 29 April 2011

Only composite contracts involving material and labour which are classified as Works contract under local VAT law would be classifiable as WC under ST.

If no material is there the ST would have tobe at 10.3%. The lack of registration is a fault of the tax payer. Say one does not get registered at all, will the liability stop?

Input services credit wouldbe available for both options.

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Ankit Kukreja (Student) (40 Points)
Replied 29 April 2011

Originally posted by : Madhukar N Hiregange
	Only composite contracts involving material and labour which are classified as Works contract under local VAT law would be classifiable as WC under ST. If no material is there the ST would have tobe at 10.3%. The lack of registration is a fault of the tax payer. Say one does not get registered at all, will the liability stop? Input services credit wouldbe available for both options.

Sir, the company is registered, as I've mentioned in the initial query and they are charging S.Tax as per their composition scheme in most of the cases as they are providing both goods and services in most cases. But the problem is, that I've come accross a few invoices which are only for services and not for providing goods, so for these particular invoices will the company again charge S.Tax and VAT as per their compostion scheme or S.Tax @ 10.3% will be charged as the invoice is for service only..???

Ankit Kukreja (Student) (40 Points)
Replied 29 April 2011

And sir as per my knowledge, if the company is charging S.Tax as per composition scheme i.e. S.Tax @ 4.12% or 10.3% on 33% of total value, input credit for any S.Tax will not be available to the company. Please confirm.

anandraj (Article trainee) (45 Points)
Replied 30 April 2011

The provider of taxable service has the choice to opt for service tax @ 4% on entire contract value or 10% on service portion of the contract. The option elected will be applicable till the completion of the contract and cannot be withdrawn. So in my opinion payment of 4% is correct. With regard to input tax credit, the rule (Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007) states that CENVAT credit of duties paid on any inputs will not be available. The rule is silent about payment input services and hence credit of tax on input services can be availed.

Ankit Kukreja (Student) (40 Points)
Replied 30 April 2011

Originally posted by : anandraj
	The provider of taxable service has the choice to opt for service tax @ 4% on entire contract value or 10% on service portion of the contract. The option elected will be applicable till the completion of the contract and cannot be withdrawn. So in my opinion payment of 4% is correct. With regard to input tax credit, the rule (Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007) states that CENVAT credit of duties paid on any inputs will not be available. The rule is silent about payment input services and hence credit of tax on input services can be availed.

Sorry mate, but I disagree to your thought, It's clearly stated in the Work Contract Service Portion of the Service Tax Rules,1994 that if the composition scheme is availed, the company cannot take any input credit of service tax paid by them.

And do u mean that even if an invoice is raised for providing service only, both VAT and Service Tax will be charged as per the scheme? Although the invoice is for service only(given that the contract is a work contract and only this particular bill is for service).

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Tejas Shah (Partner) (24 Points)
Replied 05 May 2011

Under the ' Works Contract Category ' (Awailing Composition Scheme) - It is clearly mentioned that CENVAT credit of Input can not be availed.

But CENVAT credit of Iputl Services / Capital Goods Can be availed.

U S Sharma (glidor@gmail.com) (21063 Points)
Replied 05 May 2011

Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007

Rule 1. Short title and commencement –

(1)	These rules may be called the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.
(2)	They shall come into force with effect from the 1^st day of June, 2007.

Rule 2. Definitions –

(1)	In these rules, unless the context otherwise requires,-
	(a)	“Act” means the Finance Act, 1994 (32 of 1994);
	(b)	“section” means the section of the Act;
	(c)	“works contract service” means services provided in relation to the execution of a works contract referred to in sub-clause (zzzza) of clause (105) of section 65 of the Act;
	(d)	words and expressions used in these rules and not defined but defined in the Act shall have the meanings respectively assigned to them in the Act.

Rule 3.

(1)

Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to [Four]¹per cent. of the gross amount charged for the works contract.

Explanation.- For the purposes of this rule, gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid on transfer of property in goods involved in the execution of the said works contract.

(2)

The provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

(3)

The provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract.

Superscriptts indicating amendments

¹. Substituted vide Notification No. 7/2008 - ST, dated 01-03-2008

(The principal rules were notified vide notification No. 32/2007-Service Tax, dated the 22nd May, 2007)

U S Sharma (glidor@gmail.com) (21063 Points)
Replied 05 May 2011

as per above the works contract bar cenvat credit in total, either input materials, input service or input capital goods, used for works contract.

Tejas Shah (Partner) (24 Points)
Replied 05 May 2011

In the Highlighted Portion - It clearly specified that Only On INPUTS it is not allowed. and on the Input services / Capital Goods - it is silent. so it is implied that it is allowed.

Tejas Shah (Partner) (24 Points)
Replied 05 May 2011

In the Highlighted Portion - It clearly specified that Only On INPUTS it is not allowed. and on the Input services / Capital Goods - it is silent. so it is implied that it is allowed.

i.e. As per Rule 3 sub rule 2.

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U S Sharma (glidor@gmail.com) (21063 Points)
Replied 05 May 2011

Originally posted by : Tejas Shah
	In the Highlighted Portion - It clearly specified that Only On INPUTS it is not allowed. and on the Input services / Capital Goods - it is silent. so it is implied that it is allowed.

if i dont misinterpretate, then "input" here is combination of input materials as well as input service.

coz input for works contract is both, and here both are not needed to be detailed.

U S Sharma (glidor@gmail.com) (21063 Points)
Replied 06 May 2011

Notification New Delhi, the 1st March, 2006.

No. 1/2006-Service Tax 10 Phalguna, 1927 (Saka)

Provided that this notification shall not apply in cases where, -

(i) the CENVAT credit of duty on inputs or capital goods or the CENVAT credit of

service tax on input services, used for providing such taxable service, has been

taken under the provisions of the CENVAT Credit Rules, 2004; or

(ii) the service provide r has availed the benefit under the notification of the

Government of India in the Ministry of Finance (Department of Revenue), No.

12/2003-Service Tax, dated the 20th June, 2003[G.S.R. 503 (E), dated the 20th

June, 2003].

Explanation.- For the purposes of this notification, the expression “food” means a substantial and

satisfying meal and the expression “catering service” shall be construed accordingly.

[F. No. 334/3/2006-TRU]

(G. G. Pai)

Under Secretary to the Government of India

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