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All about Service Tax on Works Contract


CA Pulkit Sharma

2014-02-25

Are Services provided on Works Contract basis Taxable?

Clause (h) of section 66E specifies service portion in execution of works contract as taxable services. Tax is leviable only on the value of service portion of works contract and not on the entire works contract.

The manner of determining the value of service in works contract is provided in rule 2A of Service Tax (Determination of Value ) Rules, 2006.

None of the services provided in clause (a) to (g) of negative list (Section 66D) relate to works contract service. Therefore, all services relating to works contract are taxable except the ones specified in Notification no. 25/2012-ST, dated 20-6-2012.

What is the meaning of Services, taxable on Works Contract basis?

Works Contract is defined in section 65B(54), which read as follows:

Works contract means a contract wherein transfer of property in goods involved  in the excution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out contruction, erection, commissioning, installation, completion, fitting out, repair, maintainance, 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.

Valuation of Service Portion in Works Contract

The valuation is determined as per Rule 2A of Service Tax (determination of Value) Rules, 2006.

Rule 2A (i): 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 transfered in the execution of the said works contract. (or)

Rules 2A (ii): Three different methods are provided in this rule to determine the value of taxable services:

  1. In case of works contracts entered into for execution of original works, service tax shall be payable on the forty percent (40%) of the total amount charged for the works contract
  2. In case of works contract entered into for the maintainance or repair or reconditionaing or restoration or servicing of any goods, service shall be payable on the seventy percent (70%) of the total amount charged for the works contract
  3. In case of other works contract, not covered under above, including maintainance, repair, completion and finishing services such as glazzing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property, service tax shall be payable on sixty percent (60%) of the total amount charged for the works contract.

Cenvat Credit (Input Credit) provisions on Works Contract Services

Input credit is available only in case value of service portion is determined as per Rule 2A(i), and that too, only in relation to inputs forming part of value of works contract services.

If service portion is determined as per Rule 2A(ii), than input credit is not available.

Vedanta Deshika

2014-02-25

It is also worthwhile to know that Reverse charge is applicable to Works contract service when

1. Provider of WC Service is an Ind/HUF/Partnership firm and

2. Service reciever is a body corporate located in taxable territory Eg:- Company

 

The effective rates of Service tax under Reverse charge mechanism would be as follows 

1. Original works  - 2.472% each for Service provider and Service reciever

2. Servicing, repairs and reconditioning -  4.326% each for SP & SR

3. Other Works incl Electrical installation , glazing and plastering etc-  3.708% each for SP & SR

 

 

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Rahul Rai

2014-02-25

@vedanta

Service tax is chargeable at 12.36% and composition scheme at around 4%.

What is this:

[Quote]Original works  - 2.472% each for Service provider and Service reciever 2. Servicing, repairs and reconditioning -  4.326% each for SP & SR 3. Other Works incl Electrical installation , glazing and plastering etc-  3.708% each for SP & SR[/quote]

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Vedanta Deshika

2014-02-25

@Rahul Rai

You are absolutely right.  

The rates of 2.472%, 3.708% , 4.326% are the rates applicable to Works contract in case reverse charge is applicable.

The effective rates are derived as follows

Lets take the case of original works. ST is chargeable on 40% of the bill value.

Service tax rate is 12%. 40% on the same comes to 4.8%

Now, Reverse charge applicable  incase of Woeks contract is 50%. 

Hence the effective rates of Service tax for Service provider and service reciever would be

50% of 4.8% = 2.4%.

Add 3% cess = 0.072%

Hence the effective rate is equal to 2.4+ 0.072 = 2.472%

Hope your doubts were clarified

 

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Vedanta Deshika

2014-02-25

@ Rahul Rai & @ Pulkit Sharma

It is to be noted that the composition scheme of 40%/70%/60% is only optional. The valuation rule 2A (ii) is easy to follow for the works contractors as they dont have to maintain detailed records for material and services as prescribed under rule 2A(i)

 

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