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 gganeshan.k@gmail.com)

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31 responses to “Service tax under reverse charge on works contract service”

  1. chetan papnai says:

    sir i want ti known that if service receiver is registered under society act who will pay service tax for work contract .

  2. jawahar says:

    plz advice whether Railway work contract of signal deppt falls in service tax as in railway works contract has two sch A sch B in sch A material supply is there and sch B execution of work like installation of relays laying cable trenching and commissioning

  3. BABU says:

    I HAVE A WORK CONTRACT OF RS 20,00,000/
    IN BEGING OF THE YEAR I AM NOT FALLING UNDER THE SERVIC TAX EXMPTION ie BUISNESS UP TO RS9,00,000/ YEAR.FOR THIS YEAR I HAVE TO PAY ANY SERVICE TAX.FOR THIS WORK CONTRACT PL GUIDE ME

  4. chandu says:

    21.Individual is providing Works Contract to Company, in this case service Tax to be paid 50-50 or on RCM basis Service Tax to be paid by company @100%??

  5. chandu says:

    1. Individual is providing Works contract to a company, now in this case service Tax to be paid 50-50 or on RCM basis service Tax 100% to be paid by Company??

  6. Rahul says:

    dear sir,
    Under work contract : My contractor is charging vat @14.5% on 90% of basic value and service tax on full after abatement@60% in Original Work Contract.
    Example :
    Basic value 100.00
    then Vat 14.50
    ST 3.00
    total Inv Value-117.50

    Is it correct ?
    please suggest.

  7. Virendra Padalia says:

    sir, i am doing government work of borewell installation. i want to know that this service exempt in service tax or not if yes please tell me notification no. and notificaion dated

  8. suresh says:

    goods contract or service contract.?

  9. pankaj ojha says:

    Sir mera gross receipt 1750000 hai, mera work contract ka kaam hai,
    kya me threshold exemp N. No 33/2012 le skta hu abatement k sath @40%.
    Plz mujhe calculation bataiye. Return bharne k hisab se service tax ki

  10. ROCKY says:

    Sir,

    Doing Civil & Erection works and a single contract.

    On total value material & labour portion are separated and paying taxes are

    WCT @ 3.5% on total value

    Service Tax @ 14.5% on Labour value.

    My boubt is while paying service tax which code is to be selected WCT OR Erection, testing & commissioning.

    Please reply me soon

  11. Ashok Kumar says:

    We are LLP Company how much % service tax bill to Partnership Firm

  12. Puja Sharma says:

    if partnership firm provide job work to pvt co. then what will be the service tax liabilty?

  13. rohit rathor says:

    I am working in Private Ltd company in Delhi, we are given contract to printer for printing of books as per our specification/course content. We are deducting Work Contract TDS as per Delhi VAT Act.
    Is Work Contact Tax as per Service Tax Rules is also applicable on us??

  14. Madhava says:

    XYZ (firm) is having a Quarry (owned), enters into an agreement with ABC (Firm) for operating, excavation (royalty also to be paid by ABC) and stone crushing…..what is the rate of service tax on this contract..

  15. mahadev says:

    we have received WCT bill he was charges of @4.9%. please explain it correct or not

  16. kamesh says:

    Agriculture gardening work contract is applicable for work contract tax or not? If no means is there any notifications for that. Please explain

  17. Shyamal Kumar Pathak says:

    Waht is the service tax liability of a sub contractor of works contract ?

  18. Mukund says:

    Can we take cenvat credit of Service tax paid on part of service receiver in this case of works contract

  19. nimesh shah says:

    we r providing service in coaching class and as per rules we r depositing 14% as a ST on our Income. on second hand we r paid various service tax on aviled the service like Security . we paid security bills with 14% ST.
    In this case how we can adjust in our return. pl explain.
    Nimesh

    • Ganeshan says:

      In fact the security service etc is paid to provide service of coaching. Here nexus of input vs output can be figured out and credit can be availed.

  20. Shvetal Parikh says:

    (1) Partial reverse charge for Works Contract is applicable ONLY when the service provider is Individual, HUF or Partnership firm (including Association of Persons) located in taxable territory and the service recipient is business entity registered as body corporate located in taxable territory. Notification No. 30/2012-ST refers. In all other cases, service provider has to pay full service tax (i.e. not only 50%).

    (2) If all materials have been supplied by the service recipient and the service provider issue invoice only for labor charge, such contract is not Works Contract but, it is a Labor Contract and service is payable @14% on 100% of labor charges (i.e. not on 40% or 70% value). However, value of materials is not includable in such cases.

    These are personal views.

    • Ravinder says:

      Pls keep your person views to yourself.
      You are here

      Service Tax has to be paid on the value of free material supplied by the service receiver, excluding any taxes paid thereon. – Rule 2B of Service Tax Valuation Rules.

      It is mandatory and not at the option of the assessee.

      I suggest you stop giving response to things you arent aware of. It can be harmful for the person raising the quarry

  21. Nitin Mankar says:

    Very Good information. We are working under WCT (Construction Contract). Now we are charging service tax portion on Contract (Material 60% and Labour 40%) by (14%*40%) i.e. 5.6%.

    Although we had paid service tax under WCT to Govt by 5.6%. As per notification have we paid service Tax to govt on 2.8% i.e. 50% or some thing different. Please guide us.

    Once again thanks for valuable information.

    • Parduman Sharma says:

      WCT has no concern with Service Tax. WCT is related to Sales Tax. Works contract is being charged at abated rate @ 5.6% of the Total value of bill. And under abated rate cenvat on input is no allowed only cenvat on capital goods and service input is allowed.

      • Mukund says:

        Mr. Sharma
        But as per definition of input service it specifically excludes works contract for the purpose of input service and cenvat credit.

    • Ganeshan says:

      You are right you should pay @ 2.8% only under WCT.

  22. Hemlata says:

    Whether addition in the owned premises by a company constitutes work contracts by a company and the material was supplied by the service recepient

    Kindly clarify

  23. Sujit Kumar Das says:

    First to decide whether it is a works contract. Material and labour involment is a must for Works contract. If the the contractor provides the service only that is with out any material then it can not be treated as works contract and the question does not arise for the reverse charge mechanism.

    But if the service provider proves the service and any material, either in full or in part, then your point is attracted.
    Regards
    9433036600

  24. Paul says:

    Nice article. But my doubt is – What constitutes Works Contract. For e.g if a party is supplying materials and doing erection work using that materials and raises separate bills for material portion and labour (erection)- will it tantamount to works contract? Or else Vat on material portion and TDS on Labour portion would suffice?

    Shall be grateful if the above is clarified.

    • Ganeshan says:

      As per provision if the vendor is able to issue two separate bill, then on labor bill service tax shall be charged full and VAT shall be levied on material portion in the contract.

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