Amit Mundhra, FCA, ISA(ICAI)

Service tax provisions in respect to “Works Contracts” have undergone major changes after introduction of new service tax regime. Works contract in itself is a very lengthy subject and law relating to Works Contract in Service Tax is available in a very scattered way. I am trying to summarize all the legal provisions relating to Works Contract in this new service tax regime in a series of articles. This article is the first one in the series.

Following points are covered in this article.

  • Definition of Works Contract
  • Works Contract as Declared Services
  • Works contract in Negative List
  • Works contract in Mega Exemption Notification.

DEFINITION OF WORKS CONTRACT

Section 65B(54) defines “Works Contract” as

“Works contract means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property”

There are 2 parts of this definition

  1. A contract where transfer of property in goods involved is leviable to tax as sale of goods, AND
  1. Such contract is for carrying out certain specified activities in relation to Movable Or Immovable property.

By this definition, the scope of “Works Contract” has been vastly increased by inclusion of “Movable Property” in the definition. Earlier, service tax works contract is restricted to construction related activities, but now all kinds of works contract activity is liable to be taxed under Service Tax.

INCLUSION OF “WORKS CONTRACT” IN DECLARED SERVICES

Works contract is also included in the “Declared Service” under section 66E, which states as under

Section 66E : Declared Services

“The following shall constitute declared services, namely ………

(h)        Service portion in the execution of a works contract.”

By this inclusion, the service portion in a works contract has become taxable under the Service Tax provisions.

“WORKS CONTRACT” IN NEGATIVE LIST OF SERVICES

Though, “Works Contract” is not expressly found in Section 66D “Negative List of Services” but there is one indirect reference to “Works Contract”.

Following is the sub clause (a) of Section 66D.

(a)    Services by Government or a local authority excluding the following services to the extent they are not covered elsewhere-

(i)……. (ii)……. (iii) ……….

(iv)       Support services, other than services covered under clauses (i) to (iii) above, provided to business entities.

Here services provided by Government or a Local Authority is included in negative list but there is exclusion related to Support Services.

What is a “Support Services”

Section 65B defines “Support Services” as follows.

“Support services” means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or Works Contract, renting of immovable property, security, testing and analysis.”

The whole text above means that if Government or a Local authority is providing Works Contract Service to any Business Entity, then it will be taxable.

Though, I could not think of any practical example of this case where Government or Local authority is doing any works contract for anyone. So in my view, practically “Works Contract” is not in Negative List of Services.

“WORKS CONTRACT” IN EXEMPTION NOTIFICATIONS

Service tax Notification No. 25/2012 dated 20.06.2012 covers all the exemptions available under the Service tax provisions. Point number 12, 13, 14, 25 and 29(h) covers the exemption related to Works Contract. I am trying to summarize the exemptions related to “Works Contract” in a simple way.

POINT NO. 12 OF MEGA EXEMPTION NOTIFICATION

Services Provided TO

 

Government – Local Authority or Governmental Authority

 

By Way of

 

Construction – Erection – Commissioning – Installation – Completion – Fitting out – Repairs – Maintenance – Renovation – Alteration

OF

 

(a)                A Civil Structure or other original works, meant for use other than for commerce, industry, or any other business or profession.

 

(b)               A historical monument / archaeological site, or remains of national importance, archaeological excavation or antiquity specified under the Archaeological Act, 1958.

 

(c)                A structure meant predominantly for use as Educational, clinical, art or cultural establishment.

 

(d)               Canal, dam or other irrigation works.

 

(e)                Pipeline, conduit or plant for (i) water supply (ii) water treatment or, (iii) sewerage treatment or disposal

 

(f)                A residential complex meant for self use or for use of their employees or other persons specified in explanation 1 of section 65B(44).

 

 Important Points in point no. 12 :

1.      Service Receiver based exemption:

For claiming exemption under this point, Service receiver must be Government, Local Authority or Governmental Authority. If the service receiver is not Government, Local Authority or Governmental Authority then this exemption is not available.

2.      Relevant Definitions under point No. 12

Following are the relevant Definitions under this point.

TermDefinition
GovernmentGovernment is neither defined in this notification nor in the Finance Act. As per section 3(23) of General Clauses Act,“Government” includes Central Government and State Government.

 

Local AuthorityAs per Section 65B(31) of the Finance Act “Local Authority” means;(a)   A panchayat as referred to in clause (d) of article 243 of the constitution.(b)   A municipality as referred to in clause (e) of article 243P of the constitution.

(c)    A municipal committee and a district board, legal entitled to, or entrusted by the government with, the control or management of a municipal or local fund;

(d)   A cantonment board as defined in section 3 of the Cantonments Act, 2006

(e)    A regional council or a district council constituted under the Sixth Schedule to the constitution.

(f)     A development board constituted under article 371 of the constitution.

(g)   A regional council constituted under article 371a of the constitution

 

Governmental AuthorityAs per Notification No. 25/2012 dated 20.06.2012 “Governmental Authority” means;A board, or an authority or any other body established with 90% or more participation by way or equity or control by government and set up by an act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution.
Original WorksAs per definition given in “Service Tax (Determination of Value) Rules 2006, “Original Works” means;        i.            All new constructions; or

      ii.            All types of additions and alterations to abandoned or damaged structures on land that are required to make them workable.

iii.            Erection, commissioning or installation of plant, machinery or equipment or structure, whether pre-fabricated or otherwise.

Residential ComplexAs per Section 65B(24) of the Finance Act, “Residential Complex” meansAny complex comprising of a building or buildings, having more than one single residential unit.
Other Persons specified in Explanation to Clause 44 to Section 65B of Finance ActExplanation to clause 44 of section 65B of the finance act.1.      Members of parliament, members of state legislative assembly, members of panchayats, members of municipalities and members of other local authorities
2.      Any person who holds any post in pursuance of the provisions of the constitution in that capacity
3. Any person as a chairperson or a member or a director in a body established by the central government or state governments or local authority and who is not deemed as an employee before commencement of this section.

 POINT NO. 13 OF MEGA EXEMPTION NOTIFICATION

Services Provided

 

By Way of

 

Construction – Erection – Commissioning – Installation – Completion – Fitting out – Repairs – Maintenance – Renovation – Alteration

OF

 

(a)                A road, bridge, tunnel, or terminal for road transportation for use by general public.

 

(b)               A civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaaas Yojna.

 

(c)                A building owned by an entity registered under section 12AA of the Income tax act, 1961 and meant predominantly for religious use by general public.

 

(d)               A pollution control or effluent treatment plant, except located as a part of a factory; or a structure meant for funeral, burial or cremation of deceased;

 

 Important Points in Point No. 13:

1.      Status of Service Receiver is not important

Under this point, the status of Service receiver is not important. Only the specified services are eligible for exemption.

2.      Relevant Definitions under Point 13

Following are the relevant Definitions under this point other than already discussed in point no. 12.

TermDefinition
General PublicAs per Notification no. 25/2012 dated 20.06.2012 “General Public” means;The body of people at large sufficiently defined by some common quality of public or impersonal nature.

 

 POINT NO. 14 OF MEGA EXEMPTION NOTIFICATION

Services Provided

 

By Way of

 

Construction – Erection – Commissioning – Installation –

 

of

 

Original works

Pertaining To

 

(a)                Airport, port or railways, including monorail or metro,

 

(b)               Single residential unit otherwise as a part of a residential complex,

 

(c)                Low cost houses up to a Carpet Area of 60 square meters per house in a housing project approved by competent authority empowered under the “Scheme of Affordable Housing in Partnership” framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India,

 

(d)               Post harvest storage infrastructure for agricultural produce including a cold storage for such purposes; or

 

(e)                Mechanized food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages

 Important Points in Point no. 14:

1.      Status of Service Receiver is not important

Under this point, the status of Service receiver is not important. Only the specified services are eligible for exemption.

2.      Some activities omitted

In these point activities of Completion – Fitting out – Repairs – Maintenance – Renovation – Alteration has been omitted as compared to point no. 12 & 13. This omission is worth giving attention.

3.      Relevant Definitions under Point 14

Following are the relevant Definitions under this point other than already discussed in point no. 12.

TermDefinition
Single Residential UnitAs per Notification no. 12/2012 dated 17.03.2012 “Single Residential Unit” means;An independent residential unit with specific facilities for living, cooking and sanitary requirements.

 POINT NO. 25 OF MEGA EXEMPTION NOTIFICATION

Services Provided TO

 

Government – Local Authority or Governmental Authority

 

 

By Way of

 

(a)                Carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and up gradation; or

(b)               Repair or maintenance of a vessel or an aircraft.

 Important Points in point no. 25 :

1.      Service Receiver based exemption:

For claiming exemption under this point, Service receiver must be Government, Local Authority or Governmental Authority. If the service receiver is not Government, Local Authority or Governmental Authority then this exemption is not available.

POINT NO. 29(h) OF MEGA EXEMPTION NOTIFICATION

Sub Contractor

 

Providing Services

 

 

By Way of

 

Works contract to another contractor providing works contract services which are exempt.

 

 

 Important Points in point no. 29(h) :

1.      Only sub contractor providing works contract service is exempt:

For claiming exemption under this point, Sub Contractor providing services by way of Works contract is exempt. If sub contractor is providing services other than works contract, then exemption is not available

Exemption from Service Tax is a very important subject. It is to dealt with utmost care and after understanding the true intention of the legislature to avoid any legal complications.

Amit Mundhra FCA

Author is a Fellow member of the ICAI and he can be reached at amit.mundhra@gmail.com

More Under Service Tax

Posted Under

Category : Service Tax (3135)
Type : Articles (10116) Featured (3548)
Tags : CA Amit Mundhra (8)

Search Posts by Date

July 2016
MTWTFSS
« Jun  
 123
45678910
11121314151617
18192021222324
25262728293031