Satish Bhanushali

The Union Budget 2011-12 has already had an impact on the infrastructure sector by way of restricting the CENVAT Credit available to Works Contractors.

Further to this, a recent clarification issued by the Central Board of Excise and Customs (‘CBEC’), in respect of the levy of service tax on services provided by Sub-contractors to the Main-contractor, necessitates special consideration so as to derive an alternative way to mitigate the burden of service tax on the infrastructure sector in India.For India, as a growing economy, infrastructure plays a critical role in the economic development. In past, the Central Government has provided numerous indirect tax exemptions. Few of them are listed below:

  • Customs duty exemptions for setting up of Mega Power Project, Construction of road etc
  • Deemed export benefits to goods supplied to the notified project including infrastructure projects.
  • Service tax exemptions in respect of services required for the construction of roads, dams, tunnels, bridges etc.

Thus, infrastructure sector is clearly on top of the Central Government’s agenda so as to promote the development of infrastructure sector by way of providing various tax incentives, permission for foreign direct investment, public private partnership, etc.

It would be prudent to note that such projects are undertaken on a very large scale and hence developers of such projects outsource certain portions of the contract to Sub-contractors because of their specialisation in those portions, which may involve the supply of goods as well as the supply of services.

Typically, goods required for such projects are exempt from Customs duty, Excise duty etc. upon the production of a necessary Certificate from the relevant Government Authority. For Eg. for power project, certificate require from Central Electricity Authority for claiming Customs duty exemption etc.  Such exemption is not only available to the goods supplied by the Main-contractor to the project but also extended to the goods supplied by the Sub-contractor to that Main-contractor/project. Further, even the deemed export benefits have been extended to the goods supplied by the Sub-contractor to the notified project.

However, the same principle has not been extended in the case of services. The Works Contract service (WCS) in respect of construction of dams, tunnels, roads, bridges etc. is exempt from service tax. WCS providers engage Sub-contractors who provide services such as Architect’s Service, Consulting Engineer’s Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc.

Thus, the issue for consideration is whether Sub-contractors providing various services to the Main-contractor undertaking the exempted infrastructure projects would be required to pay service tax or whether such services would be exempted from service tax.

It is a well-known fact that the intention of providing the exemption is not to tax the WCS used for construction of specified infrastructure projects in India and hence if the services provided by the Sub-contractor to the Main-contractor are charged to service tax, benefits of exemption will be nullified.

Accordingly, divergent practices are being followed in the Industry on the view that if the Main-contractor is exempted from the provision of such services to the particular infrastructure project then even the Sub-contractor providing services to the Main-contractor for that project would get exemption from service tax.

However, the CBEC vide Circular No. 138/07/2011-ST dated 6 May 2011 has yet again clarified that a Sub-contractor providing its services has to be classified under the taxable service category which gives the most specific description and not to the taxable service category which gives a general description and accordingly services provided by the Sub-contractor would be subject to service tax. It may be noted that exemption to a Sub-contractor would still be available if the service provided by them is classified under the taxable service category i.e. WCS, notwithstanding that services are provided to the Main-contractor or to the project.

The effect of the above Circular is that service tax, which is currently charged at 10.3%, will have to be paid even on exempted sectors such as construction of dams, tunnels, roads, bridges etc. resulting in an increase in the overall cost of projects.

In view of the above and considering the fact that such levy increases the overall cost of basic infrastructure in India, the Industry should make a representation to the Central Government to have a mechanism such as a Certificate from the relevant Government Authority, like in the case of goods as stated above, whereby the list of services required by the Main-contractor for the completion of the particular infrastructure project would get included in it so as to extend the service tax exemption to the services provided by the Sub-contractors.

However, from an administrative convenience, providing direct service tax exemptions to services required for completion of such infrastructure would be difficult to trace, the mechanism of giving refund of services tax paid on services provided by Sub-contractors to the Main-contractor for such exempted infrastructure projects would seems to be good proposition. These will further ensure the necessary compliance and overall objective of giving service tax exemption to the infrastructure project.

(The author is associated with one of the big four and view stated above is personal)

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June 2021