Service Tax on Works Contract for Construction of Canal & Dam

CA Vishrut Shah

This article is drafted with focus to clear our understanding in terms of works contract carried out by the various contractors for government agencies, government and its various departments.

Introduction & Definition:-

With effect from 01/06/2007 works contract was introduced under Section 65 (105) (zzzza) of Finance Act, 1994. Definition of works contract as defined in the section is as per below:

Service 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.

Simplifying Definition:-

Going through above definition it clearly identifies few major components to determine whether a service fall under definition of works contract or not as specified below:

♣ Service has to provided for execution of works Contract

Emphasis is put on works contract and therefore detailed explanation is provided that what is covered under the terms works contract. These terms again break into following primarily requirements for a service to be termed as works contract.

a) There has to be transfer of property in goods which is taxed as sales of good.

[As the definition itself states that the transaction must qualify to be sales of goods and there should be transfer of property from one assessee to other assessee as defined under sales tax act. This is primarily also make it clear that said transaction will be subject to double taxation. Once it is taxed under state sales tax act and second time under service tax act. In order to eliminate the effect of double taxation state as well as service tax department has provided abated rates on works contract transaction]

b) Such Transaction need to be any of the following activities –

• Installation, Erection or Commissioning

[Here it covers

i) Installation of Plant & Machinery or structure of pre fabricated in nature or otherwise.

ii) Installation of Electrical items and electrical devices

iii) Plumbing, Drain Laying

iv) Installation for transport of fluids, heat, ventilation, air conditioning and related piping work

v) Ducting Work & sheet metal work

vi) Thermal or Sound Insulation

vii) Fire or Water Proofing

viii) Lift & Escalator including fire Escape staircase ]

• Construction of New Building or civil structure or part thereof primarily for purpose of Industries or commerce

[Here the essence is it should be primarily for the purpose of industries or commerce. If there is any work carrying out which is not primarily for the focus of industrial or commercial purpose than same is specifically excluded from the scope. Though in order to clarify government stands more clearly on this matter department has issued circular No. 116/10/2009 – ST dated 15^th September,2009 which draw focus on definition of Commercial & Industrial construction Services as defined under Section 65(25b) which states it only includes services which are used, or to be used, primarily for; or occupied, or to be occupied, primarily with; or engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry only, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

In order to further clarify the circular states that

“Thus the essence of the definition is that the “commercial or industrial construction service” is chargeable to service tax if it is used, occupied or engaged either wholly or primarily for the furtherance of commerce or industry. As the canal system built by the Government or under Government projects, is not falling under commercial activity, the canal system built by the Government will not be chargeable to service tax. However, if the canal system is built by private agencies and is developed as a revenue generating measure, then such construction should be charged to service tax.”

Which means purpose shall be primarily focus to determine taxability of said services.

• Construction of a new residential complex or a part thereof
  

• Completion and finishing services, repair, alteration, renovation or restoration of, or similar services in relation with the new construction of building or residential complex.
  

• Turnkey projects including engineering, procurement and construct ion or commissioning (EPC) projects
  

• It excluded service provided in relation to roads, airports, railways, transport terminals, bridges, tunnels and dams
  

[With a view to boost up infrastructural activities it specifically excluded any work related to roads, airports, railways, transport terminals, bridges, tunnels and dams are specifically excluded from the definition. However it will only cover those activities which are not primarily focusing on use by industries and commerce and which specifically levy tax on the activities carried out at industrial estate for the benefit of particular industry only].

Hence Construction of Canal and Dam being work carried out as new civil structure will fall in the definition of works contract and hence all assessee performing said work need to take their registration under works contract.

Taxability on Construction of Canal work before Negative List regime

As stated in the circular no. 116/10/2009 any such work carried out with primarily not in benefit to Industry or Commerce shall be exempt from the levy of the Service Tax. Hence there cannot be any question of service tax liability for any work carried out on or behalf of government which basically for general public at use and not for industry or commerce.

Position of Sub contractor

It is also to be noted that any works contractor carrying out any work which is purely in nature of works contract and whereby the main service is classify as exempt service the sub contractor shall also be exempt from leviability of service tax on the said service provided. In order to clear any ambiguity existing in the said manner department vide circular No. in the said cases vide departmental circular No.

Taxability on Construction of Canal after 20/06/2012

As per the notification issued by department in negative tax regime all the services are taxable except those which are covered under negative list of services and those which are specifically exempt by department through various Notifications issued by them. One of the main Notifications in the said effect is Mega Exemption Notification No. 25/2012 dated 20^th June,2012. As per entry no. 12 of the said notification it specifically exempt any service provided to

• Local Authority

[As per section 2(31) of act, “local authority” means-

(a)  a Panchayat as referred to in clause (d) of article 243 of the Constitution ;

b) a Municipality as referred to in clause (e) of article 243P of the Constitution ;

c) a Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund ;

d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006

(e)  a regional council or a district council constituted under the Sixth Schedule to the Constitution

f) a development board constituted under article 371 of the Constitution; or

g) a regional council constituted under article 371 A of the Constitution:;

The definition of ‘local authority’ is very specific as explained above and only those bodies which fall in the definition comprise ‘local authorities’. It would not include other bodies which are merely described as a local body by virtue of a local law ]

• Government

[Since ‘Government’ had not been defined in the Act, the definition of ‘Government’ as contained in the General Clauses Act, 1897 would be applicable as per which ‘Government’ includes both State Government and Central Government. Further as per the General Clause Act 1897, State includes Union Territory. ‘Government’ would include various departments and offices of the Central or State Government or the U.T. Administrations which carry out their functions in the name and by order of the President of India or the Governor of a State.

However with effect from 1^st April,2015 as amended under clause 26A in section 65B being inserted by the Finance Act, 2015

Government means the Departments of the Central Government, a State Government and its Departments and a Union territory and its Departments, but shall not include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with article 150 of the Constitution or the rules made thereunder”.

Accordingly, the definition of ‘government’ is both, an inclusive and an exclusive definition. The expression, ‘government’ means and includes the following –

-Departments of Central Government,

-State Government and its departments, and

-A Union Territory and its departments ]

• Governmental Authority

[It covers a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government

and

set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution.

However vide notification issued by department vide no. 02/2014 dated 30^th January,2015 the revised definition have make eligibility criteria in the form of set up by an act or parliament or state legislature as option in case the government holds 0% or more equity which can be read as follows :

“governmental authority” means an authority or a board or any other body;

(i) set up by an Act of Parliament or a State Legislature; or

(ii) established by Government, with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution ]

• In nature of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alternation of

a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

b)  a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c)   a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(d)  canal, dam or other irrigation works;

(e)  pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or

(f)  a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act;

[However with effect from 1^st March,2015 clause (a), (c) & (f) is omitted vide Notification No. 06/2015-ST  dated 1^st March,2015 ]

So going through above provision of law if any assessee is engaged in the construction of canal and dam and if providing services to any party that can be classified as Government, Local authority or Governmental authority shall be exempt from applicability of Service Tax as on today also after amendment made in Finance Act, 2015.

Prime facie factors to decide levy of service tax liability shall be –

(1) Service Recipient should be government, governmental authority or local authority

(2) Service has to be in nature of activities prescribed above.