Service tax on on-going works contracts entered into prior to 1 June 2007

Clarification regarding classification of long term works contracts i.e those that are entered into prior to 1 June 2007 and continue beyond that date.

Classification of service as a ‘works contract service’ in case of a long term contract

• Works contract service made taxable with effect from 1 June 2007.
• Thus, services such as construction, erection, commissioning or installation, repair services provided prior to 1 June 2007, to be classified as a works contract service in case subsisting beyond 1 June 2007.

Applicability of Composition Scheme on a long term contract

Rule 3(3) of the Works Contract Rules, 2007, casts an obligation on the assessee to choose the composition scheme prior to payment of service tax in respect of a particular works contract. Once option is exercised, the same is to apply for the entire works contract and cannot be altered.

Applicability of Rule 3(3) of the Works Contract Rules, 2007 in the following situations:

• In case a works contract commenced prior to 1 June 2007 and service tax payment is also made before 1 June 2007, composition scheme would not be available. This is because Rule 3(3) of the Works Contract Rules, 2007 would not be satisfied.
• In case a works contract commenced prior to 1 June 2007 but payment of service tax is not made until 1 June 2007, then the assessee would be eligible to choose the composition scheme. This is because Rule 3(3) of the Works Contract Rules, 2007 would be satisfied.

Source: Circular No.128/10/2010-ST, 24 ^th August, 2010.