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 email@example.com)