Recently I received a query that under the negative list of services regime whether in a works contract service which is exempt from service tax, sub-contractor would also be exempted from payment of service tax?
The answer to the above question is being provided under serial No. 29 sub-clause (h) of the mega Notification, which provides that service provided by following person in respective capacities are exempt from service tax :
(h) sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt[Notification No. 25/2012-ST, dated 20.06.2012]
The above entry makes it clear that if the principal contractor is providing an exempt works contract service [for example providing works contract service to Government] then in such case if some part of the works contract is sub-contracted then the sub-contractor would also be exempt from payment of service tax.
However it should be noted that while executing a works contract, the contractor takes the services from architects, consulting engineers, erection, commissioning or installation agents etc., in such case the services rendered by such person would not be exempt from service tax even though such services are rendered in relation to exempt works contract service.
The reason for it is that clause (h) above exempts sub-contractor of exempt works contract service only if such sub-contractor is also providing services in the nature of works contract services.
For example if a principal contractor gets a contract from Government for constructing road of 100 Km. and he sub-contracts the construction of 10 km. of road then in such case sub-contractor would also be exempt from service tax under clause (h) above as he will be providing services of a works contract nature as a sub-contractor in exempt works contract services.
Similar position also existed before the introduction of negative list of services. Earlier the board in its circular no. 138/07/2011-ST, dated 06.05.2011 clarified that when a principal contractor while providing works contract services obtained the service of various other service providers, such as architect, consulting engineer etc. These are separately classifiable services. Therefore, while the principal contractor would not be liable to pay service tax on the construction of roads, dams, etc. but the consulting engineer, architect etc. who are providing services of design, drawing, engineering etc. for the construction of such road would be liable to pay service tax as their services are separately classifiable and will not be covered under the works contract service.
Thus under the taxation based on negative list, the similar scheme has been carried forward. Therefore the sub-contractor providing works contract service to the contractor who is providing exempt works contract services, would also be exempt from service tax, but services provided by architect, engineer or persons providing services other than works contract service to the contractor providing exempt works contract service, would not be exempt from service tax.