Clarification on Point of Taxation for Works Contract Services & open issues

The TRU has issued Circular No. 162/13/2012-ST, Dated: July 6, 2012 to clarify the following issues but still left out with open issues:-

Query:- What is the option open to the Assessee following Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 which is rescinded vide Notification No. 35/2012-ST dated 20-6-2012, w.e.f 1-7-2012.

Answer:- Change in the manner of payment of tax from composition scheme under erstwhile the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 will change either to make payment of service tax on actual value under clause (i) of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 or under clause (ii) of Rule 2A – Composite rate:-

In case of Original Works, Works contracts earlier paying service tax @ 4.8% under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and now required to pay service tax @12% on 40% of the total amount charged, keeping the effective rate again at 4.8%.

In case of Works Contract other than Original Works, the change in the portion of total value liable to tax from @ 4.8% earlier to @ 12% on 60% of the total amount charged, or effectively @ 7.2% now.

Query:- What happen for Works contract which were outside the scope of taxation (and not merely exempted) but have become now taxable e.g. construction of residential complex comprising of more than 1 residential units, construction of buildings meant for use by NGOs etc.

Answer:-  Rule 5 of the Point of Taxation Rules, 2011 shall apply to such service as if new service becomes taxable from 1-7-2012 and Rule 5 states – Payment of tax in case of New services.— Where a service is taxed for the first time, then,—

 (a) No tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable;

(b) No tax shall be payable if the payment has been received before the service becomes taxable and invoice has been issued within 14 days of the date when the service is taxed for the first time.

Query:- Whether provisions of partial reverse charge would be applicable for Service provider for specified 3 services under the Reverse charge mechanism vide Notification no. 30/2012–ST dated. 20-6-2012

Answer:- It is clarified that the provisions of partial reverse charge would also be applicable in respect of such services where point of taxation is on or after 01.07.2012 under the applicable rule in respect of the service provider.

Open Issues even after these clarifications:-

The CBEC should clarify to avoid confusion & future litigation and their intention:-

1. Why Commercial or industrial Construction services, etc., as envisaged under Section 66E(b) of the Finance Act is excluded in the substituted Rule 2A of the Determination of Valuation Rules as per Notification no. 24/2012-ST dated 6-6-2012; and

2.  Why no abatement rate is being prescribed where value of land is not included in total consideration vide Notification No. 26/2012-ST dated 20-6-2012 for Commercial or industrial Construction services, Construction of Residential complex.

3. No Service tax should be leviable on Percentage of completion of activities as on 30^th June, 2012 for ongoing construction of residential complex up to 12 units in the light when the service is taxed first time i.e. Construction of residential complex comprising of more than 1 residential unit w.e.f 1/7/2012.

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Bimal Jain
FCA, ACS, LLB, B.Com (Hons)
Mobile: +91 9810604563
email: bimaljain@hotmail.com