Tuesday, October 6, 2015

Service Tax Work Contract FAQ


How tax on work contact is imposed?
Clause (h) of Section 66E (Declared List) of the Finance Act 1994 (here-in-after referred as `the Act’) is as follows: “service portion in the execution of a works contract”.

What do you mean by works contract?
As per clause (54) of section 65B of the Act, “works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.’

What is the scope of this entry?
This entry of declared services provides that service portion in the execution of a works contract by one person for another for a consideration would be liable for service tax. Works contract for the purpose of this entry means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out:
  1. Construction,
  2. Erection, commissioning, installation,
  3. Completion, fitting out,
  4. Repair, maintenance, renovation, alteration of any movable or immovable property, or
  5. For carrying out any other similar activity or a part thereof in relation to such property i.e immovable or movable property. 


What is the difference between works contract and sale of goods?
The difference between works contract and sale of goods are as follow;

In case of works contract primary function is to provide work or service and materials supplied are secondary, whereas in case of sale of goods primary function is supply of materials and providing work or service is incidental.

In case of works contract articles produced becomes the property of buyer, property in goods passes by accession and accretion during the possession of work, where as in case of sale of goods “goods” are sold as “goods”.

Works contract is taxed as deemed sale, while sale of  goods is taxed as actual sale.

Whether contract for labour is works contract?
 No. Contract for labour is different from works contract and labour contracts do not fall in the definition of works contract. In order to come within the ambit of works contract, it is necessary that there should be transfer of property in goods involved in the execution of such contract which is leviable to tax as sale of goods. Pure labour contracts are therefore not works contracts and would be leviable to service tax like any other service and on full value.

Would contracts for repair or maintenance of motor vehicles be treated as ‘works contracts’? If so, how would the value be determined for ascertaining the value portion of service involved in execution of such a works contract?
Yes. Contracts for repair or maintenance of moveable properties are also works contracts if property in goods is transferred in the course of such a contract. Service Tax has to be paid in the service portion of such a contract.

Would contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under works contract?
Yes, if such contracts involve provision of materials as well. Else it will be a construction contract only for service portion, liable for service tax in the head of construction service. Construction service are of two type Commercial Construction or Construction of Residential Complex.
Q.8 Is the definition of ‘works contract’ in line with the definition of

‘works contract’ in various State VAT laws?
The definition of ‘works contract’ in clause (54) of section 65B of the Act covers such contracts which involve transfer of property in goods and are for carrying out the activities specified in the said clause in respect of both moveable and immoveable properties.

This is broadly in consonance with the definition of ‘work contract’ in most of the State VAT laws. However, each state has defined ‘works contracts’ differently while dealing with works contract as category of deemed sales. There could, therefore be variations from State to State.

What is the way to segregate service portion in execution of a works contract from the total contract or what is the manner of determination of value of service portion involved in execution of a works contract?
As per rule 2A of the Service Tax (Determination of Value) Rules 2006 (here-in-after referred as `Valuation Rules’), two methods are available to compute value of services portion in execution of works contract. They are:
  1. Value of Service Method
  2. Composition Method
The provisions of said rule are as follows:

“Determination of value of service portion in the execution of a works contract.-Subject to the provisions of section 67, the value of service portion in the execution of a works contract, shall be determined in the following manner, namely:-

Value of Service Method

Value of service portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods involved in the execution of the said works contract.

For the purposes of this clause –
  • Gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract;
  • Value of works contract service shall include,-
  1. Labour charges for execution of the works;
  2. Amount paid to a sub-contractor for labour and services;
  3. Charges for planning, designing, and architect’s fees;
  4. Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
  5. Cost of consumables such as water, electricity, fuel used in the execution of the works contract;
  6. Cost of establishment of the contractor relatable to supply of labour and services
  7. Other similar expenses relatable to supply of labour and services; and Profit earned by the service provider relatable to supply of labour and services.
  • Where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of the said works contract.
Composition Method
Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:- 
  • In case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent of the total amount charged for the works contract;
  • In case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods, service tax shall be payable on seventy per cent of the total amount charged for the works contract;
  • In case of other works contracts, not covered under sub-clauses (A) and (B) , including maintenance , repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property, service tax shall be payable on sixty per cent of the total amount charged for the works contract.”
However, w.e.f. 01.10.2014 above clauses (B) and (C) has been replaced by the following clause:

“In case of works contract, not covered under sub-clause (A), including works contract entered into for,-
  1. Maintenance or repair or reconditioning or restoration or servicing of any goods; or
  2. Maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or  installation of electrical fittings of immovable property,
Service tax shall be payable on seventy per cent of the total amount charged for the works contract.”

What do you mean by the term “total amount” mentioned above?
The term “total amount” means the sum total of 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-
  1. The amount charged for such goods or services, if any; and
  2. The value added tax or sales tax, if any, levied thereon; Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.

Whether composition method is optional?
Yes. As clause (ii) of rule 2A of Valuation Rules opens with the words “Where the value has not been determined under clause
(i)…” The words used are “has not been”. They are different from the words “cannot be”. Thus, even if value can be determined under value of service method (clause (i) of rule 2A of the Valuation Rules) the person liable to pay service tax may choose to determine value under composition method (clause (ii) of rule2A of the Valuation Rules).

Whether non–payment of VAT/Sales Tax by service provider would not amount to works contract services?
In order to classified under the Works Contract services, the property in goods transferred in execution of works contract must be leviable to VAT/Sales tax. As some of the State VAT laws provide exemption to small scale dealers and they are not required to pay VAT/Sales tax if their turnover does not exceed the prescribed limit. This does not mean that Sales tax/VAT is not leviable, it means that tax is levied but exempt from the payment. Thus, non-payment of sales tax or VAT by the service provider, owing to exemption or otherwise, cannot be the basis for concluding that the contract is not a works contract.

Whether any exemption is available in relation to this entry?
Exemption under Serial Nos. 12,13 & 14 of Notification No.25/2012-ST, dated 20.06.2012 would be available. The lists of such exemption are given below:
  1. Construction service provided to Government, a local Authority, and Governmental Authority (Entry No.12 of Notification No.25/2012–ST, dated 20.06.2012)
  2. Exemption to various construction or related service (Entry No.13 of Notification No.25/2012–ST, dated 20.06.2012)
  3. Exemption to some of the infrastructure projects (Entry No. 14 of Notification No. 25/2012–ST, dated 20.06.2012)
  4. Works contract service provided by sub– contractor(Entry No.29(h) of Notification No. 25/2012–  ST, dated 20.06.2012)

Who will be liable to pay service tax for works contract services?
As per Notification No. 30/2012-ST dated 20.06.2012, in respect of services provided or agreed to be provided in service portion in execution of works contract, service provider and service receiver will be equally liable to pay service tax. The provisions shall apply only in following cases:

1.  Service provider should be located on taxable territory.
2.  Service provider should be either of the following; 

a)  Individual
b)  Hindu undivided family;
c)  Association of person;
d)  Partnership firm, whether registered or not 

 3.  Services should be provided to business entity registered as body corporate, located in taxable territory.

If all three condition satisfied service tax is payable in partial reverse charge or joint charge. And the service provider and service receiver both are liable to pay 50% of service tax separately.

Thanking you
SOURCE:
CA Sushil Kumar Goyal
M/s Goyal Tax Services Pvt. Ltd
Stephen House
Room No. 64, 4th Floor
4, B.B.D. Bag (East) Kolkata - 700001
Phone : 2262 4632/33

www.gstpeople.com

0 comments:

Post a Comment

Copyright © 2015 Accounting & Taxation All Right Reserved
Subscribe by Email Get Free Updates
Don't Forget To Join US Our Community
×
blogger