Lump sum scheme for payment of service tax in works contract

Budget 2012 Introduces Lump sum scheme for payment of service tax in works contract

In works contract service lump sum scheme for payment of service tax in a works contract has been introduced by amendment in Rule 2A of the Service Tax (Determination of Value) Rules, 2006 vide Notification No. 11/2012 – Service Tax dated 17-03-2012. In works contract service there were two types of schemes which were earlier available i.e payment of service tax on actual service involved and the composite scheme.

In the composite scheme service tax @ 4.8% is required to be paid on the total value of the whole contract including material part, while in the other case service tax is required to be paid on the actual value of labour and services incorporated in works contract(which can be possible where proper books of accounts are being maintained).

If the contractor has not maintained any regular books of account so as to determine the actual value of the labour and services incorporated in works contract then such contractor earlier had the only option to go for the composite scheme.

Now another way to pay service tax in works contract service(which can be called lump sum scheme since service part in works contract is being determined in a lump sum percentage) has been provided by amending Rule 2A of the Service Tax (Determination of Value) Rules, 2006. Rule 2A(ii) dealing with such manner of lump sum payment of service tax as under:

Where the value has not been determined under clause (i), the person liable to pay tax on the taxable service involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-

(A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract:

Provided that where the gross amount charged includes the value of the land, in respect of the service provided by way of clause (8) of section 66E of the Act, service tax shall be payable on twenty five per cent. of the total amount including such gross amount;

in case of other works contracts including completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings not covered under sub-clause (A), service tax shall be payable on sixty per cent. of the total amount charged for the works contract;

For this purpose the terms original works, and total amount have been defined as follows:

(I) “original works” means-

(i) all new constructions;

(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

(II) “total amount” means the sum total of gross amount and the value of all goods, excluding the value added tax, if any, levied on goods and services supplied free of cost for use in or in relation to the execution of works contract, under the same contract or any other contract:

Provided that where the value of goods or services supplied free of cost is not ascertainable, the same shall be determined on the basis of the fair market value of the goods or services that have closely available resemblance;

Explanation 2.of the said rule 2A provides that duty of excise paid on any goods, property which is transferred (whether as goods or in some other form) in the execution of works contract, shall not be availed as CENVAT credit.”.