Question: What would be the rate of service tax on contract entered after July 7th, 2009 where the developer supplies steel and cement free of cost to contractor? CA Madhur Khandelia

Reply: –

The Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 has been amended vide Notification No. 23/2009-ST, dated 07.07.09. The Explanation to sub-rule (3) was amended to provide that the composition scheme would be available only to such works contracts where the gross value of works contract includes the value of all goods used in or in relation to the execution of works contract whether received free of cost or for construction under any other contract.

It is further provided that this condition will not apply to those works contracts, where either the execution of works contract has already started or any payment (whether in part or in full) has been made on or before the date of the amendment, i.e. 07.07.09, from which the said amendment becomes effective.

The said explanation is reproduced hereunder for ready reference: –

“Explanation.-For the purposes of this sub-rule, gross amount charged for the works contract shall be the sum,-

(a) including-

(i)      the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and

(ii)     the value of all the services that are required to be provided for the execution of the works contract;

(b) excluding-

(i)      the value added tax or sales tax as the case may be paid on transfer of property in goods involved; and

(ii)     the cost of machinery and tools used in the execution of the said works contract except for the charges for obtaining them on hire:

Provided that nothing contained in this Explanation shall apply to a works contract, where the execution under the said contract has commenced or where any payment, except by way of credit or debit to any account, has been made in relation to the said contract on or before the 7th day of July, 2009.”;

From perusal of the above provisions, it is clear that the steel and cement supplied free of cost will be included in the value of works contract. The service tax has been imposed on free supply of material.

Therefore, the rate of tax will be 4.12% which will include the service tax on steel and cement supplied free of cost.

Replied by : CA Pradeep Jain

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