The works contract service has always been a subject matter of debate or discussion, either in computation of tax under VAT Act or under Service Tax Act and more importantly after the introduction of reverse charge mechanism, where both service provider and service recipient is the person liable to pay tax.

In this article I would like to discuss on service tax implication on contractor on free issue of material by service receiver if he chooses the composition scheme for payment of service tax on such contracts. Under works contracts, sometimes as per terms of contract, a service receiver may supply materials such as cement or steel free of cost or at reduced cost and contractor uses such materials for the execution of such works contract.

As defined under Valuation rules, the term ‘total amount’ means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting- (a) the amount charged for such goods or services, if any; and (b) the value added tax or sales tax, if any, levied thereon.

The underlined portion of the definition makes it clear that the contractor has to include the fair market value of free issue of materials in the composition scheme while calculating service tax under works contract.

The above provision is hardship on service provider as he may carried out only labor work in connection with works contract service and as such he will have to add the value of free issue of materials to total amount to work out service tax. The service recipient is also a person liable to pay tax under reverse charge mechanism and therefore the above provision may be applicable to the recipient of service also.

However, for paying service tax under works contract services, where both service provider and service recipient is the persons liable to pay tax, the service recipient has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service.

(The above article is authored by Ganeshan Kalyani and he can be reached via email   on

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  1. Deep says:

    Sir, If Cement or Steel which is purchased by paying VAT by SR and the same supply to Service Provider free of cost for construction work. Whether this supply will be included in Works Contract & need to pay RCM on it….but SR have already paid VAT on purchase of cement or steel…please advice…..

  2. ASHOK JANGID says:

    Sir if the manufacturer of excisable goods availing SSI
    Exemption of Rs 150 Lakhs and not paying any excise duty and along with
    this the manufacturer also provide JOB WORK and the receipts from which
    is Rs around 75 Lakhs and the activity which the manufacturer is done
    amounts to Manufacturer as per excise.

    in the above case manufacturer is liable to service tax or excise duty ?

  3. SUJILKUMAR says:

    Dear Sir,
    I provide a cash van to a nationalised bank for carrying currency on rental basis. amount of rent for a month is Rs.46000.00 only. They deducted service tax from this amount. I submit a declaration to them as My total income including this will come below 10 lakhs only. And request to exclude from service tax. They are not agree, because it is statutory.

    Sir, is it correct. Any chance to avoide service tax from bill ? Expect your favourable reply.

  4. Narendra K Agarwal says:

    dear mr Ganeshan Kalyani,

    Sir what i have understood is under;

    If Rs 100 is the value of composite contract plus service receiver provide Rs20 +Re1 VAT= Rs21 and cement Rs20+2.5VAT=Rs22.5 then value of composite contract will be Rs 100+21+22.5=143.5. Is it correct sir?
    if not what is an alternative? sir

    please advise.

    thanks and best regards
    Narendra K Agarwal

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