CA Nitin Gupta

1. After the Finance Act 2012 enacted, Clause 54 of the newly introduced section 65B provides definition to works contract, which 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 moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

Analysis of Work Contract Service,

(a)  For execution of a contract

(b)  there should be transfer of Property in Goods,

(c)   such transfer of goods should be leviable to tax as Sale of Goods.

(d)  such contract is for the purpose of carrying out

  • Construction
  • Installation
  • Repair
  • Maintenance
  • Completion
  • Erection
  • Commissioning
  • Fitting out
  • Renovation &  Alteration

(e)  In Relation of :

  • any movable or immovable property or
  • for carrying out any other similar activity or
  • a part thereof in relation to such property;

CASE 1

 WCT 1

CASE 2

Would labour contracts in relation to a building or structure treated as a works contract?

No. Labour Contracts do not fall in the definition of works contract. It is necessary that there should be transfer of property in goods involved in the execution of such contract which is leviable to tax as sale of goods. Pure labour contracts are therefore not works contracts and would be leviable to service tax like any other service and on full value.

CASE 3

Would contracts for erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise be treated as a works contract?

Such contracts would be treated as works contracts if –

(a)        Transfer of property in goods is involved in such a contract; and

(b)        The machinery equipment structures are attached or embedded to earth after erection commissioning or installation.

2.                  Valuation

The manner for determining the value of service portion of a works contract from the total works contract is given in Rule 2A of the Service Tax (Determination of Value) Rules, 2006.

In said Rule 2A, there are two methods provide are as given below:-

a.      As per sub-rule (i) of the said Rule 2A the value of the service portion in the execution of a works contract are as given below:-

Gross amount charged for the works contract XXXX
Less: – the value of transfer of property in goods XXXX
Taxable Value XXXX

Note:

 (i)   VAT or Sales Tax shall be excluded from GAC.

 (ii)   Value of transfer of property in goods shall be the value taken for VAT purposes.

Value of service portion includes:

 (i)   Labour charges for execution of the works

 (ii)   Amount paid to a sub-contractor for labour and services

 (iii)   Charges for planning, designing and architect’s fees

(iv)   Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract

 (v)   Cost of consumables such as works contract water, electricity, fuel, used in the execution of the works contract

(vi)   Cost of establishment of the contractor relatable to supply of labour and services and other similar expenses relatable to supply of labour and services

 (vii)   Profit earned by the service provider relatable to supply of labour and services

b.    As per sub-rule (ii) of the Rule 2A of the Service Tax (Determination of Value) Rules, 2006, the value of the service portion in the execution of a works contract are as given below:-

Where Value Cannot be ascertained as per sub-rule (i) of the said Rule 2A then value shall be worked out as under:

S. No. Nature of contract Taxable Value
1. Execution of Original Works 40%
2. Execution of  contract for maintenance, repair, reconditioning or servicing of any goods 70%
3. Other works contracts not covered by 1 & 2 above (including completion and finishing services such as glazing, plastering,  installation of electrical fittings of an immovable property). 60%

 Explanations

  1. Original works means

(i)    All new constructions;

(ii)  All types of additions and alterations to abandoned or damaged structures to make them workable;

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

  1. Total amount means the gross amount charged plus the value of any material supplied under the same contract or any other contract.  Where supply is free of cost, value shall be determined on FMV

Less:-

(i)                the amount charged for such goods or services provided by the service receiver; and

(ii)              the value added tax or sales tax, if any, levied to the extent they form part of the gross amount or the total amount, as the case may be.

  1. the fair market value of the goods or services so supplied shall be determined in accordance with the generally accepted accounting principles.

 wct 2

3.                 CENVAT Credit on work contract

(a) Input

No input tax credit of excise duty paid on goods, property transferred in execution of works contract.

(b)Capital goods

Taxes paid on capital goods will be available.

(c) Input Service

Taxes paid on capital goods and input services will be available. However, No credit if this service is used for construction of building/laying foundation or making structure for support of capital goods.

4.                 Service Tax Liability under Partial Reverse Charge

 WCT 3

5.                 In case of Partial Reverse Charge, If the service provider is exempted being a SSI (turnover less than Rs 10 lakhs), how will the reverse charge mechanism work?

The liability of the service provider and service recipient are different and independent of each other. Thus in case the service provider is availing exemption owing to turnover being less than Rs 10 lakhs; he shall not be obliged to pay any tax. However, the service recipient shall have to pay service tax which he is required to pay under the partial reverse charge mechanism.

6.                 Exemption from Service Tax in execution of work contract?

(i)      As per Mega Exemption: Entry No. 12

Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –

(a)  a civil structure or any other original works meant predominantly 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 Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c)   a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an 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; or

(f)    a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act;

(ii)      As per Mega Exemption: Entry No. 13

Service provided by way of Construction, Erection, Commissioning, Installation, Completion, Fitting Out, Repair, Maintenance, Renovation, or 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 Awaas Yojana.

(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.

(e)  A structure meant for funeral, burial or cremation of deceased.

(iii)    As per Mega Exemption: Entry No. 14

Service by way of Construction, Erection, Commissioning, or Installation of Original Works pertaining to –

(a)  An airport, port or railways, including monorail or metro.

(b)  A ‘single residential unit’ otherwise than 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.

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

(The above article is authored by CA Nitin Gupta and he can be reached via email   on nitin.gupta52@yahoo.com)

More Under Service Tax

Posted Under

Category : Service Tax (3289)
Type : Articles (14970)
Tags : Work Contract Tax (19)

28 responses to “Brief Note on Service Tax on Work Contract Service”

  1. p k srivastava says:

    got 2 LOA for supply and another for civil,strl,erec & comm.
    1- can treated civil,strl,erec & comm as works contract whear as supply work treated as supply contract
    2-supply item paid by customer and free issue for erection what will determine service value ,supply value+erection value or only erection value on which service tax to be paid and what %

  2. Mukesh Sethi says:

    I am working in a bank and responsible for furnishing of branc offices. We have got furnished one branch from a vendor who is a proprietorship firm and not having Service tax registration and also raised invoice without any VAT or Service tax. His turnover is more than Rs.10.00 Lacs. My question is whether we can pay his bill without VAT and service Tax. As per guidelines VAT is applicable on 60% of the bill amount and service tax is applicable on 40% of the bill amount. Are we responsible for reverse charge of service tax as recepient of service.

  3. ankit says:

    Dear Sir,
    Please Provide your valuable Guidance.
    I have Supply Solar System and Installed that System.
    I have receive purchase order single and mention Separately Supply value and Installation Charges. and also I have raise invoice separately. I have charge service tax on Installation Charges and not on Supply Material.
    Service Tax Officer tallying that You have wrongly charged service tax, he says that You have to charge service tax on Complete order Value/as per Work oder base on 60% of Total Order.
    Please Provide Evidence for service tax only charged on Installation charges.

  4. ANAND says:

    IF I AM DOING PLUMBING WORK. IN WHICH HEAD I WILL PUT IN ORIGINAL WORK OR MAINTENANCE WORK

  5. dharmendra gajjar says:

    dear sir,
    i come to know from my client that one civil contractor making new factory building in the current year and he submitted bill to the client with 2.80% service tax. when ever i charged service tax @ 12.36 % from this client. now i want to know that why that type difference came in our bill.

    • Amitabha Mukherjee says:

      We are going to set up a manufacturing company. For this we require Electric work. We are going to offer this work as Labour Contract. Electric materials are to be supplied by us(manufacturing company).

      1)Labour payment for electrical work is Taxable Service?
      2)Is this to be paid by us ?
      3)Is this under Reverse charge Mechanism ? % ?
      4)whether we can take credit ?

  6. n c mohanty says:

    What amount of Service Tax is applicable on maintenance contract for Lifts in residential complex ? Not clarified in the above writ-up. Please reply.

  7. Pradeep Thakkar says:

    Society has given contract for structural repairs to a contractor in 2013-14 along with material than what rate contractor charge as service tax? How he has to charge service tax i.e. NET value including MVAT or on gross amount excluding MVAT?

  8. K C Jain says:

    Sir.
    A individual person involve with a textile process house ( Dyeing Mill ), he doing work of thread stitching and cutting on grey material. and the Process house making payment for the same after deducting Tax at Sources (TDS). but labour contract not charging service tax on his bill. the monthly labour charges ( Approx ) 9.00 Lac.( Yearly will be 108.00Lac) Plz. Clear the Service tax applcable ot not. If yes what precentage will be charge, if any nitification in this regard. plz provide notification no.

  9. kirtik says:

    Does what should be deducted for Service Tax in Construction of BPC Bunk through contract getting by tender

  10. Ketan Patel says:

    Dear Sir,

    Have made a Works Contract regarding the Mazznine Floor(racking system at plant to store the pallets). Have received bill from service provider without charging any service tax.(Basic amount + Excise ONLY).

    Please advise whether he is liable to pay/charge service tax on full amount, if yes then full amount OR 50-50 as per WCT.

  11. resham says:

    Hlo Sir
    Wants to know if the s.tax is fully paid by the contractor company bt in the end of the FY ServiceReceipnt Company Claims S.tax From Service Provider Company .

    Then wts the other optn for the service provider company???

  12. Mahesh choudhary says:

    Hello,
    I am contractor of fire and safety service, and my most of the works done in government sector like pwd, corporation, Ccil(container corporation of india ltd), R&B div, etc please tell me that weather I am liable of service tax if yes than what is the concept of calculation under this work contract, please suggest me sir how can I separate my vat and service tax.

    With regards
    Mahesh Choudhary

  13. Vijay Shukla says:

    As per Contract, Service Tax on Civil work for Substation, Augmentation, Feeder bay, foundation of tower and revetment work shall be paid/reimbursed @ 12.36%(present rate) calculated on 40% of total cost.
    The Service Tax on installation work of substation, Augmentation, Feeder bay and other activities like survey, tower erection and stringing work shall be paid/reimbursed @ 12.36% (present rate) of total cost. But Can we go with Service Tax for installation work in same manner of Civil work (i.e. 60-40 ratio).

  14. Nitin soni says:

    “Taxable Service” means any service provided or to be provided to any person, by
    any other person in relation to the execution of a works contract, excluding works contract
    in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.
    Explanation.—For the purposes of this sub-clause, “works contract” means a contract
    wherein,—
    (i) transfer of property in goods involved in the execution of such contract is leviable to tax
    as sale of goods, and
    (ii) such contract is for the purposes of carrying out,—
    (a) erection, commissioning or installation of plant, machinery, equipment or structures,
    whether pre-fabricated or otherwise, installation of electrical and electronic devices,
    plumbing, drain laying or other installations for transport of fluids, heating, ventilation
    or air-conditioning including related pipe work, duct work and sheet metal work,
    thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator,
    fire escape staircases or elevators; or
    (b) construction of a new building or a civil structure or a part thereof, or of a pipeline or
    conduit, primarily for the purposes of commerce or industry; or
    (c) construction of a new residential complex or a part thereof; or
    (d) completion and finishing services, repair, alteration, renovation or restoration of, or
    similar services, in relation to (b) and (c); or
    (e) turnkey projects including engineering, procurement and construction or
    (f) commissioning (EPC) projects;
    (Section 65 (105) (zzzza) of Finance Act, 1994)

    as per def. 65(105) all type of work is not included in work contract on 2nd part that means ” such Contract” include in work contract and furniture work is not cover in this definition
    only when furniture work is a structures of plant etc than include in work contract
    in short in generally ( special case is that if furniture is structure consider)
    for receiving service – no work contract on furniture work so no 50-50 condition apply
    for service provider – 12.36% charge in bill if no any exemption

  15. Gyanesh Sharma says:

    Hi,

    Only labour charges is charged to the client.
    Service is provided at the location of service provider.

    (Nature – Client brings the metal plates/steel plates in sheet form at service provider place. Sheets are bend in round shape/cone shape etc… as per diagram given by the client.)

    Need to know under which “Taxable Category” Service tax is taxable.

    Regards
    Gyanesh

  16. jagdish says:

    is service tax applicable?

    we are furniture maker some time we take contract for make fixture and furniture in our customer site the furniture both movable and immovable and we get a composite amount of Labour and Material than in that case which service is applicable and how to make treatment in service tax laws

  17. Anmol Agrawal says:

    If a service provider is providing construction service to railwys and paying service tax under RCM on GTA services…can the provider can claim CENVAT Credit for those Service Tax….
    I think company can’t claim the same but why not..??? Company is incurring expenses due to the railway(Government) and that to it involves a huge amount…
    plz suggest..any case law or any suggestions..

  18. dinesh says:

    if service provider & service recipient both are under exemption limit of Rs.10 lacs, who is liable to pay service tax.

  19. Nitin says:

    Dear Anand

    I agree with u……
    CENVAT Credit of such service is allowed only to same business line person, not for other person.

  20. GAUTAM JOSHI says:

    Dear Anand,

    The CENVAT Credit of works contract input services are available to works contract service providers or those who provide other construction services e.g. construction of residential complex, commercial construction etc. (List has been specified). The logic behind framing such legal provision is that the construction industry can take credit of construction services received or outsourced to other businessmen and the same is not allowed to other service providers or manufacturers. For example, a manufacturer producing pharma goods if receives services of construction of factory then credit of such construction services are not available to him.

    Best Wishes.

  21. Nitin says:

    Dear Anand

    Please refer definition of input service.
    RULE 2(l)of CENVAT Rules,2004:- Input service
    “input service” means any service,-
    (i)__
    (ii)__
    and includes services____
    but excludes,
    (A) service portion in the execution of a works contract and construction services including service listed under clause (b) of section 66E of the Finance Act (hereinafter referred as specified services) in so far as they are used for –
    (a) construction or execution of works contract of a building or a civil structure or a part thereof; or
    (b) laying of foundation or making of structures for support of capital goods,
    except for the provision of one or more of the specified services; or

  22. Nitin says:

    Dear Nilesh

    Finance Act,1994 is a Central Level act not a state level act.

  23. Nitin says:

    Dear Jainam

    In modular kitchen designing busniess,
    1.material and labour are involved
    2.material is a not consumable item and Such Material is considered as transfer of Property in Goods + Leviable to tax as sale of goods
    3. material is provided by service provider
    4.such contract is for the purpose of carrying out Fitting out ,Renovation & Alteration

    therefore all the condition are fulfill for work contract, hence such activity is considered as work contract service.

  24. Anand says:

    Please refer to your point 3 (c). To my knowledge credit of service tax paid on Input services is indeed available to construction activity. Please give your opinion on this.

  25. Nilesh says:

    could you please clarify that where the state laws has determine the service value and goods where can we pay the service tax as per the determination of state laws.

    example :-

    In the state of Maharshtra, there is an ratio of 70:30 in some cases. so can we adopt this ratio rather than as per service tax ratio. becoz ultimate we are paying tax to goverment on full value in the way of vat and service tax so why should we pay the tax more.

  26. c.n.shah says:

    apprciate

  27. Jainam says:

    will this be applicable to a person engaged in the business of MODULAR KITCHEN DESIGNING ????

Leave a Reply

Your email address will not be published. Required fields are marked *