The works contract service is a taxable service which is defined under clause zzzza of section 65(105) of the Finance Act, 1994, ‘as 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’.
Works contract means a contract wherein transfer of property in goods involved in the execution of works contract is leviable to tax as sale of goods and the service portion in the execution of works contract is liable to service tax. Thus, the consideration for works contract service shall include both the value of material and the value of service provided during execution of the works contract. 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 as – ‘the service portion involved in the execution of Original works is 40% of the total works contract and the service portion involved in the execution of works contract other than original works is 70% of the total works contract.
The works contract service is covered under the reverse charge notification no. 30/2012. The liability of service tax under said service shall be paid equally by the contractor/provider of service and the recipient of the service. That is fifty percent of the service tax liability shall be paid by the contractor and the balance 50% shall be paid by the recipient of the service. In short, the service tax shall be paid at 14% (prevailing rate) on 40% or 70% of the total works contract, as the case may be, by the provider of service and the receiver of the service on equal sharing ratio i.e.50:50 ratio.
In some situation, the recipient of the service supply material free of cost to the contractor to use it in execution of works contract. In such case the contractor only carries out service of execution of works contract. It implies that the invoice raised by the provider of service shall include only the labour/service portion. In such case complication arises as to whether the value of free of cost material should be added to the total works contract for charging service tax as per the provision laid down in the Service Tax (Determination of Value) Rules, 2006. On carefully reading the provision of valuation rule, the value of free of cost material shall also be added to the total works contract service to calculate service tax. The said provision is hardship on the recipient of service and provider of service.
(The above article is authored by Ganeshan Kalyani and he can be reached via email on firstname.lastname@example.org)