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WCT and Service Tax on EPC Contract

author (ac) (78 Points)

29 July 2009

My Querey is Applicability of Service Tax on EPC Contract (Eng, procurment and construction) , in which amount we would charge the service tax because it is EPC agreement and how can we get the cenvat credit of service tax on material purchased and serivces received from the profesional.

Because there is also liability of Work contract, then how can we identify the liability of service tax and work contract.

Kindly give me some expert advice in the view of WCT and Service Tax

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17 Replies

Poornima Chandran (Tax Consultant) (30 Points)
Replied 29 July 2009

Originally posted by :Manish Sharma
"	My Querey is Applicability of Service Tax on EPC Contract (Eng, procurment and construction) , in which amount we would charge the service tax because it is EPC agreement and how can we get the cenvat credit of service tax on material purchased and serivces received from the profesional. Because there is also liability of Work contract, then how can we identify the liability of service tax and work contract. Kindly give me some expert advice in the view of WCT and Service Tax	"

Dear Manish,

EPC comes under work contracts or WCT for short. Legislature introduced WCT under service tax w.e.f 01.06.2007.

The main problem faced in this service is its valuation.

Under service tax laws, for a works contract, the service provider can opt for either of the following:

1) Calculate value as per Rule 2A of Service Tax (Determination of Value) Rules, 2006 and pay service tax @ 10.30%. In such a case, the assessee can avail CENVAT credit of inputs, input services and capital goods OR

2) Pay service tax under composition scheme at 4.12% under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. As per Rule 3(2) of the scheme, CENVAT credit cannot be availed on inputs. However, assessee can claim credit of input services and capital goods.

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CA. C V SURYAM (Practising Chartered Accountant) (865 Points)
Replied 31 July 2009

Originally posted by :Poornima Chandran

Dear Poornima Chandran and Manish Sharma,

With great respects to the forum, I regret to bring this to your knowledge that there is a small snag in the reply of Poornima chandran which is explained like this.

When a works contractor opts to pay service tax under non-composition scheme (Notification No.29/2007-ST) i.e, under Rule 2A, the entire amount of value of transfer of property in goods involved in execution of works contract gets deducted from the entire value/gross amount charged and the balance left is the value of labour and services i.e, value of taxable service. In such a case, the works contractor is not entitled to the benefit of CENVAT on inputs. He is eligible only for CENVAT on capital goods used in execution of works (but not transferred to client) and service tax on input services used in execution of works contract. Of course, the same provision is also applicable in case if the works contractor opts Composition Scheme as per Notification No.32/2007-ST as amended by Notification No.23/2009-ST dt.07/07/2009.

Readers may please note this.

Thank you.

Originally posted by :Manish Sharma

"
My Querey is Applicability of Service Tax on EPC Contract (Eng, procurment and construction) , in which amount we would charge the service tax because it is EPC agreement and how can we get the cenvat credit of service tax on material purchased and serivces received from the profesional.
Because there is also liability of Work contract, then how can we identify the liability of service tax and work contract.
Kindly give me some expert advice in the view of WCT and Service Tax

"

Dear Manish,
EPC comes under work contracts or WCT for short. Legislature introduced WCT under service tax w.e.f 01.06.2007.
The main problem faced in this service is its valuation.
Under service tax laws, for a works contract, the service provider can opt for either of the following:

1) Calculate value as per Rule 2A of Service Tax (Determination of Value) Rules, 2006 and pay service tax @ 10.30%. In such a case, the assessee can avail CENVAT credit of inputs, input services and capital goods OR

2) Pay service tax under composition scheme at 4.12% under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. As per Rule 3(2) of the scheme, CENVAT credit cannot be availed on inputs. However, assessee can claim credit of input services and capital goods.

author (ac) (78 Points)
Replied 31 July 2009

Sir,

Thanks a lot for your valueable advice, just wanted to know , i have read the rule 2A but it is not clear to me that contractor cannot teke the CENVAT credit on Material purchases except Capital goods and services, is there any para and notificatio or section about the CENVAT Credit .

Please further advice about that sir,

one more thing in the EPC contract ,

how cn we identify the value of material and labour service charges, is there any ratio to divide the value of contract in service tax act and WCT act.

Thanks a lot in advance

CA. C V SURYAM (Practising Chartered Accountant) (865 Points)
Replied 31 July 2009

Hi Manish,

As per the wordings of either Rule 2A or N.No.29/2007-ST, value of materials to be derived from the VAT records i.e., value of transfer of property in goods involved for execution of w.c for the purpose of payment of VAT/Sales Tax. So, when deduction/exclusion is given for value of materials, we cannot expect the availability of cenvat on such materials since you are not paying service tax on that portion. Because you are paying tax on services, you are eligible for set-off of service tax paid on input services and cenvat on capital goods.

Regarding the availability of such credit, we have to derive the meaning from Cenvat Credit Rules, 2004 wehreas in case of composition scheme of service tax (N.Np.32/2007-ST), the notifications itself specifies such facility. That is LAW where clarity LACKS.

Thank you.

author (ac) (78 Points)
Replied 31 July 2009

Sir,

Thanks a lot for this clairty, but still i have not found the ratio in which we identify the value of material or labour charges , or we can take any assumpetion for payment of service tax and VAT/WCT tax on contract value

Regards

Manish Sharma

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author (ac) (78 Points)
Replied 31 July 2009

Sir,

Can u help me on the following problem respectively

If "B" got the contract from “A” (EPC-Engineering ,Procurement and Construction) of Rs.100.00 and “B” is having the 0% deduction approval certificate of WCT-TDS from department after that he Subcontract the same in Rs.95.00 to "C"

So the Queries is :-

1) In the EPC there is any scenario that 85% value of contract is taxable under WCT and the 15% amount is taxable in serivce tax. How is the treatment of the same in VAT and Service Tax.

2) If “C” has charge the WCT/Service on Rs.95.00 to “B” , “B” will able to get the Input Benefit of WCT / Service Tax.? Pls guide me weather he has charge WCT on 85% and Service Tax on 15% or any other option.

3) In the above case , when "B" billed to his customer, what is the treatment of Rs.5 in WCT which is his profit because there is no material and labor cost.

4) Please guide us about the Service Tax and WCT / VAT Implication on the above case.

Regards

Manish Sharma

Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 01 August 2009

The requirement under regular scheme of VAT is that there is a deduction for a notional labour components. for EPC in Karnataka it is 15%.

In such a secenrio the payment of VAT on 85 % and servic etax on 15% is ok.

The sub contractor could do the same on 85 % of 85. The main contractor would get the set off in VAT if in the same state and ST anyway.

author (ac) (78 Points)
Replied 01 August 2009

Sir,

Thank u very much, as per VAT for work contract 85% Value for VAT and 15% ST, some one told me in Service Tax It is 67 % and 33 % ratio for the same in normal scheme.

It is true if yes, any relevent reference for the both scanerio.

Thanks

Manish Sharma

Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 05 August 2009

The 67% abtaemnet is under not.1/2006 which is an option for commercial / industrial construstion. Option under Not. 12/2003 is better payment then on 15% only.

1 Like

author (ac) (78 Points)
Replied 06 August 2009

Sir,

I did not get you in the second line

Thanks

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Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 08 August 2009

Under the works contract valuation options - 1) comnposition @ 4.12% 2) is on value of services after deduction of value of materials transferred. Therefore if VAT has been paid on 70% value then on 30 % ST can be charged. This is in line with 12/2003 and logic confirmed by Tribunal. If value not ascertainable then the actual value + GP on the same can be taken as a deduction for the materials involved in the WC in terms of Adlabs/ Shilpa coplor labs decisions.

Anupam Majumder (officer sales tax) (28 Points)
Replied 01 September 2009

My query is, in Composite scheme, should WCT be charged on the basic value or Basic value + Service Tax?

Regards.

Anupam Majumder

Alka Agarwal (fresher) (22 Points)
Replied 01 October 2009

Hello Sir

I want to ask a question relating to the above Work contract Services.

Issue -1

We are in the real estate , we outsource the work to contractor who purchases all material on his own. And charges the service tax under the composite scheme and we deduct WCT/DVAT accordingly.

We pay service tax on renting of the immovable property , and avail the cenvat credit of service tax paid to Work contractor completely . so are we required to bifurcate ????? What is the issue of cement and steel.

Issue-2

If we purchases the material i.e cement and steel on our own then wt would be the treatment , how the Contractor will raise the bill and charge service tax and secondly wt is about the cenvat availment on cement & steel.

Please solve out the issue.

Regards

Alka Agarwal

Madhukar N Hiregange (Chartered Accountant) (39034 Points)
Replied 03 October 2009

Originally posted by :Manish Sharma
"	My Querey is Applicability of Service Tax on EPC Contract (Eng, procurment and construction) , in which amount we would charge the service tax because it is EPC agreement and how can we get the cenvat credit of service tax on material purchased and serivces received from the profesional. Because there is also liability of Work contract, then how can we identify the liability of service tax and work contract. Kindly give me some expert advice in the view of WCT and Service Tax	"