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Works contract

Saket Agarwal (Chartered Accountant) (274 Points)

05 June 2015

As per Rule 2A if the Service Tax (Determination of Value) Rules: For "Works Contract" we take only 40%/70% of the Total Amount Chanrged as the Value of Service Portion. This is more like an abatement in disguise.

Further whether the abatement mentioned in Entry 12 of Notification No. 26/2012 will also apply to "Works Contract" cases - Which provides for taking only the 25% of the Total Amount Charged?

Whether "Construction Service" always falls under "Works Contract" is my primary doubt. Whether there is any difference between the two when it comes to the building of apartments or houses etc?

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9 Replies

Sowmya.G (CA) (504 Points)
Replied 05 June 2015

Yes I'm having the same query. A builder/developer sells the land to the buyer and then enters into a agreement for construction of property in the land. Under which head service tax liablilty arises - WORKS CONTRACT or CONSTRUCTION OF RESIDENTIAL COMPLEX. Friends please clarify

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CA. Ankit Chandrakar (chandrakar.ankit@gmail.com) (1082 Points)
Replied 05 June 2015

When a builder enters in an agreement with the ultimate buyers to sell the units after construction, he will fall under "Construction Services" head. He shall charge service tax at abated rates of 25% or 30% as the case may be (25% if it is a residential unit having carpet area of less than 2000 sq. ft. and costing less than 1 crore to the buyer, otherwise 30%).

However, a contractor, entering into a contract with that builder to construct the units providing his labour/material etc., shall fall under "Works Contract Services". In this case, he can pay service tax at 40% (original works) or 70% (other than original works) of the value.

The the abatement mentioned in Entry 12 of Notification No. 26/2012, shall not apply to "Works Contract Services".

I hope the distinction gets clear somewhat.

Thanks!!!

Saket Agarwal (Chartered Accountant) (274 Points)
Replied 05 June 2015

Thanks for replying to my query Ankit.

However the Supreme Court judgments are taking an opposite stand. In both the landmark judgements of K. Rajeha and L&T:

1. There were 3 parties - The land owner, Builder and Contractor.

2. It was held that the amount paid by final buyers to the builders shall be taxed as "Works Contract".

Whereas as per your opinion it should have been taxed as "Construction Service".

CA. Ankit Chandrakar (chandrakar.ankit@gmail.com) (1082 Points)
Replied 05 June 2015

As far as I am concerned, this judgment has indeed created a scenario where a transaction could be treated differently under different laws (i.e. VAT and Service Tax).

However, one can consider the same (development by builders for sale) under "Construction Services" as this service has been given Constitutional Validity by being under the "Declared Services" category.

Saket Agarwal (Chartered Accountant) (274 Points)
Replied 05 June 2015

I am not sure I follow your logic here. Even the service portion of Works Contract is a declared service. How does being a declared service help in deciding whether its a "Construction Service" or "Works Contract"...?

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CA. Ankit Chandrakar (chandrakar.ankit@gmail.com) (1082 Points)
Replied 05 June 2015

Well,you have to go by the logic that if a service has been specifically mentioned as a taxable service it should fall in that category rather than in the general definition, and accordingly "Construction Services" and "Works Contracts" are specifically defined services.

I expect that there is going to be a clarification soon in this regard by the Government and then the scenario will be more clear.

But, I would, till then, take the above-mentioned side.

dig vijay (ok) (151 Points)
Replied 06 June 2015

There is a quite a difference between the two. Construction service requires Land , Material & Labour all to be provided by Service Provider. If anyone is missing then it will be a Works Contract. If either of Material or Land only is provided then it will be a Sale contract and not a service contract.