Introduction –Works Contract Avenue has always been one aspect full of dilemmas for both the professionals and the department. The Complex jargon of Interpretations, Judicial Case Laws and deciphering statutes along with multiplicity of angles makes the work that much more daunting. This Article takes up one angle of Works Contract being Service tax. Though Works Contract is also subject to other statutes like VAT, It will be My Will to come up with VAT perspective at some later stage separately for lucid comprehension of details.
What is Works Contract?
According to Section 65 (105) (zzzza), 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, is a taxable service;
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 commissioning (EPC) projects;
Please Note : It may be noted that under this service only the following works contracts wherein transfer of property in goods involved in execution of such works contract is leviable to VAT/sales tax, are covered, namely :-
(i) works contract for carrying out erection, commissioning or installation
(ii) works contract for commercial or industrial construction
(iii) works contract for construction of complex
(iv) works contract for turnkey projects including Engineering Procurement and Construction or Commissioning (EPC) projects.
Works contract in respect of specified infrastructure projects namely roads, airports, railways, transport terminals, bridges, tunnels and dams are specifically excluded from the scope of the levy.
(D.O.F No. 334 / 1 / 2007 –TRU dated 28-2-2007 – Para 6.4)
CBEC Instruction Letter (File No. B1/16/2007-TRU), dated 22-05-2007.
- Contracts which are treated as works contract for the purpose of levy of VAT/sales tax shall also be treated as works contract for the purpose of levy of service tax. This is clear from the definition under Section 65(105)(zzzza).
- If the gross amount charged for the works contract is inclusive of VAT or sales tax, the value for the purposes of service tax shall be computed as follows:
[Gross amount charged – (Value of transfer of property in goods involved in the execution of works contract and VAT or sales tax paid, if any, on the said transfer of property in goods involved in the execution of the said works contract)].
- Wherever VAT/sales tax on transfer of property in goods involved in the execution of works contract is paid on actual value, the same value is also taken for the purpose of determining the value of works contract service. In other cases, value of works contract service shall be determined based on the actuals.
It has also been explained that value of works contract service shall include:
(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 water, electricity, fuel, used in the execution of the works contract, the property in which is not transferred in the course of execution of a works contract;
(vi) cost of establishment of the contractor relatable to supply of labour and services;
(vii) other similar expenses relatable to supply of labour and services; and
(viii) profit earned by the service provider relatable to supply of labour and services;
Optional Composition Scheme for Works Contract:
Services provided in relation to the execution of a works contract [section 65(105)(zzzza)] is a taxable service. Works contract for the purposes of levy of service tax has been defined to mean 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,
(b) commercial or residential construction and related completion and finishing services, and
(c) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.
Works contract is a composite contract for supply of goods and services. A composite works contract is vivisected and, –
(i) VAT/sales tax is leviable on transfer of property in goods involved in the execution of works contract [Art. 366(29A)(b) of the Constitution of India], and
(ii) service tax will be leviable on services provided in relation to the execution of works contract.
Rule 3(2) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 provides that the provider of taxable service opting to pay service tax under the composition scheme is not entitled to take Cenvat credit of duty on inputs, used in or in relation to the said works contract, under the provisions of the Cenvat Credit Rules, 2004. There is no restriction under Notification No. 32/2007-Service Tax dated 22-05-07 to take Cenvat credit of duty paid on capital goods and service tax paid on input services.
Applicable Notifications & Circulars
|S.No||Notification No.||Notification Reference|
|1||Notification No. 11/2011-S.T., dated 01-03-2011. (Effective from 01-03-2011)||Exemption to works contract service rendered within a port or other port|
|2||Notification No. 10/2011-S.T., dated 01-03-2011. (Effective from 01-03-2011)||Exemption to works contract service rendered within an airport|
|3||Notification No. 06/2011-S.T., dated 01-03-2011. (Effective from 01-03-2011)||Exemption to execution of works contract in relation to Residential Complex Services under Specified Government schemes|
|4||Notification No. 41/2009-S.T., dated 23-10-2009. (Effective from 23-10-2009)||Exemption for services provided in respect of canals|
|5||Notification No. 23/2009-S.T., dated 07-07-2009. (Effective from 07-07-2009)||The rules amended to add more conditions for opting composition scheme for payment of service tax|
|6||Notification No. 32/2007-S.T., dated 22-05-07||The Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007.|
|7||Notification No. 25/2007-S.T., dated 22-05-2007||Exemption Notification Exemption for service in relation to construction of port or other port.|
|S.No||Circular No.||Circular Reference|
|1||CBEC Instruction Letter (F. No. 334/3/2011-TRU), dated 28-02-2011.||Clarification regarding the changes made by the Finance Bill, 2011|
|2||CBEC Circular No. 128/10/2010-S.T., dated 24-08-2010.||Clarification regarding taxability on ongoing works contracts entered into prior to 01-06-2007|
|3||CBEC Circular No. 123/5/2010-TRU, dated 24-05-2010.||Clarification regarding applicability of service tax on laying of cables under or alongside roads and similar activities|
|4||CBEC Instruction Letter (334/13/2009-TRU), dated 06-07-2009.||Clarification regarding the changes made by the Finance Bill, 2009 including those in the Works Contract Services Composition Rules|
|5||CBEC Instruction Letter (File No. 334/1/2007-TRU), dated 28-02-2007.||Explanation regarding changes brought by the Finance Bill, 2007 including design services|
|6||Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007||Provisions governing the composition scheme|
|7||(Determination of Value) Rules, 2006||Rules in relation to valuation of taxable service|
|8||Circular No. 96/7/2007-S.T., dated 23-08-2007.||General Circular|
|9||CBEC Instruction Letter (File No. B1/16/2007-TRU), dated 22-05-2007.||General Circular|
Some Practical Q&A’s
Q. Whether Works Contract Prior to 1-6-2007 should be levied with service tax under clause zzzza?
A. Since the service tax was imposed under this clause from 1-6-2007, No service tax shall be levied in abovementioned case. ( Refer ABB Ltd Vs CST (2010))
Q. Whether Maintainence Contracts on Which Works contract tax has been paid are Subject to Service Tax under this head ?
A. No. ‘Works Contract Service’ covers only defined services. Other works contracts cannot get covered under this definition even if the assessee has paid works contract tax on the same.
Q. There are two ways of paying the service tax , one as per service tax determination of value rules and other by composition scheme. Can the option be choosed for individual contract separately ?
A. Yes , The Option Exists for Each Contract separately.
Q. Is there a Element of Double Taxation in works contract i.e both service and VAT overlapping levy ?
A. In Imagic Creative (P) Ltd Vs CCT (2008) 2 SCC 614 = 12 STT 392 = 12 VST 371 (SC) , it has been held that service tax and vat are mutually exclusive.
Please Share your Views and Opinions.
The Author Mr. Ankit Jain (Gulgulia) is a Practising Chartered Accountant in New Delhi. Specialising in Indirect Taxes, Corporate Laws & Assurance. You Can Contact him at Ankitgulgulia@gmail.com Or +919811653975.