CA Ashish Gupta
Background: It is very common practice in the construction or infrastructure related industries that the contract prices agreed between the parties are inclusive of taxes applicable on such construction/maintenance/repair/renovation or related activities. In such circumstances, the service provider can not levy service tax over and above the contract price and is bound to discharge its liability of service tax from the price charged. As we all know that the recent amendments in service tax regime have drastically changed the system of taxation on services. Through this article, we have made an attempt to assess the post amendment position under law with respect to taxability of inclusive rate works contracts.
Section 67(2) of Finance Act, 1994 provides that “where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.”
It can be easily infer from above that where contract price of any works contract is inclusive of all taxes then taxable value of such service under such contract shall be computed in a manner that the value of service and service tax thereon shall be equivalent to the contract price. Valuation of works contract services shall be determined in accordance with the rules framed for the said purpose i.e. Rule 2A of Service Tax (Determination of Value) Rules, 2006. In terms of this rule, value of service portion in the execution of a works contract can be determined by following two options:
Option – 1: Actual Cost Method
Under this method, service provider shall compute the value of services by reducing the value of goods transferred in the execution of the works contract and sales tax thereon from the gross amount of charged. Further, service provider is eligible to utilize CENVAT Credit on eligible inputs, input services and capital goods for the payment of its liability of service tax on its output services.
*Value of service shall include labour cost, fuel/electricity cost, hire charges, planning/designing cost used in the execution of said works contract. [Refer Rule 2A(i)(b) of ST (Valuation) Rules, 2006]
AAA Ltd has entered into a contract with BBB Ltd for construction of an office of BBB Ltd for a consideration of Rs.50,00,000/- (inclusive of all taxes and cost involved in it). The execution of such contract involves transfer of property in goods worth Rs.30,00,000. ABC Ltd has adopted same value for the purpose of payment of VAT of Rs.3,50,000 (approx). In this case, the valuation of service and service tax thereon shall be determined in following manner:
Contract Value : 50,00,000
Less: Value of Material transferred & VAT : 33,50,000
Gross Amount Charged : 16,50,000
(inclusive of service tax)
Taxable Value of Service : 14,68,494
Service Tax Payable : 1,81,506
Option – 2: Fixed percentage method
Under this method, the value of service portion in the execution of various types of works contract shall be computed at a fixed percentage of the total amount charged for the provision of such service. Service provider is not allowed to take CENVAT Credit on inputs used in or in relation to said works contract. Valuation of various types of works contract is tabulated herein below:1
Purpose of the Works
Taxable Value of Service
|Execution of Original Works||40% of Total Amount Charged*|
|Maintenance or Repair or Reconditioning or Restoration or Servicing of any Goods||70% of Total Amount Charged*|
|Any purpose other than mentioned in (A) & (B) above, including Maintenance, Repair, Completion and Finishing Services [such as Glazing, Plastering, Floor and Installation of Electrical Fittings] of an immovable property.||60% of Total Amount Charged*|
*Total amount charged shall include the value of goods or services supplied in or in relation to any works contract after deducting amount charged for such goods or services and VAT levied thereon.
AAA Ltd has entered into a contract with BBB Ltd for construction of an office of BBB Ltd for a consideration of Rs.50,00,000/- (inclusive of all taxes). During the execution of the contract BBB Ltd provides the services of interior decorator along with some material to be used in construction of such office to AAA Ltd at a price of Rs.10,00,000 while the market value of such service and material is Rs.20,00,000/-. Now the valuation of service and service tax thereon under such contract shall be determined in following manner:
|Add: Value of Material / services supplied||20,00,000|
|Less: Amount paid to service receiver||10,00,000|
|Total Amount Charged (A)||60,00,000|
|Taxable Value of Service (40% of A) (inclusive of service tax)||24,00,000|
|Taxable Value of Service||21,35,991||(24,00,000/112.36*100)|
|Service Tax Payable||2,64,008||(21,35,991*12.36%)|
This is how the service tax shall be computed under the two available options where contract price is inclusive of service tax. Service provider may choose different option for valuation of taxable service & computation of service tax for different contracts.
Position of Inclusive Rate Contracts under Reverse Charge:
As we all know that “Reverse Charge Provisions” under service tax regime have been widened w.e.f. 01st July, 2012 and is now applicable on works contract services also. In terms of these provisions, where works contract services are being provided by a non-corporate person to a corporate entity then liability of service tax shall be discharged by service provider and service receiver in equal proportion. Thus, in such arrangements the service provider (i.e. Individual, Firm, HUF, AOP etc) has to deposit only 50% of the total service tax liability and rest 50% shall be paid by service receiver (i.e. Body Corporate).
Now cases where inclusive rate contracts are being entered between a body corporate and a non-body corporate assessee for providing works contract service then service receiver will recover the amount of service tax payable by him under reverse charge from the payments due to service provider. Therefore, in such cases service receiver has to make a deduction of 50% of total service tax liability (like TDS under Income Tax Act) from the payment made to service provider and the same shall be deposited to the Government within the prescribed time limit. Every such deduction will largely affect the cash flows of the service provider since CENVAT credit available with the service provider will be utilized against 50% of the service tax liability only.
Undue Hardship on Small Service Provider:
It is amply clear from the provisions of Reverse Charge that such provisions will be applicable irrespective of the size of the business of service receiver as no threshold exemption is available to them under such provisions. Further, service receiver shall remain be liable to pay his part of service tax liability on notified services even if service provider is availing benefit of threshold exemption of Rs.10 Lakhs and is not charging/depositing any service tax.
Let’s assume a small service provider, who is not liable to pay service tax, enters into a works contract where prices are inclusive of all taxes and provisions of Reverse Charge also applies. Even in such cases, the service receiver shall be liable to pay 50% of total service tax liability under reverse charge. Since the contract price includes service tax also, service receiver will recover such amount from the value of contract itself by way of deduction. Under such circumstances, any deduction made by service receiver, from the amount payable to service provider, on account of service tax will adversely affect the return of service provider.
In view of above, it is suggested to every service provider (other than body corporate) that inclusive rate contracts should be avoided where recipient of service is a body corporate. However, in case such contracts cannot be avoided, service provider should consider the service tax deduction to be made by receiver while determining the cost of the work involved.
I hope this article will help people working for this industry at large. Please share your feedback at [email protected] .