Service tax on works contracts - scope of
The Joint Secretary (TRU), Tax Research Unit, Department of Revenue, Ministry of Finance, Government of India has issued a letter F. No. B1/16/2007-TRU to all officers of the Central Excise, Customs and Service Tax on the new services proposed to be taxed by the Finance Act, 2007. The new services come under the service tax net from 1 June 2007.
One of the new services brought to tax is “service provided in relation to the execution of a works contract”.
Works contracts are subject to VAT / ST by States and the works contracts under the state acts include any contract involving transfer of property in goods from the contractor to the awarder of the contract. Examples on works contract under state laws include civil works, electrical, refrigeration or air conditioning contracts or contracts relating to supply and installation of plant, machinery, rolling shutters, cranes, hoists,
elevators, escalators, generators, generating sets, transformers, weighing machines, air conditioners and air coolers, deep freezers , laying of certain kinds of tiles, slabs and stones, tyre retreading, annual maintenance contracts, etc.
However, the definition of services in relation to a works contract for the levy of service tax is:
(zzzza) to any person, by any other person in relation to the execution of a works
contract, excluding works contract in respect of roads, airports, railways, transport
terminals, bridges, tunnels and dams.
Explanation.—For the purposes of this sub-clause, “works contract” means a contract
wherein,—
(i) transfer of property in goods involved in the execution of such contract is leviable
to tax as sale of goods, and
(ii) such contract is for the purposes of carrying out,—
(a) erection, commissioning or installation of plant, machinery, equipment or
structures, whether pre-fabricated or otherwise, installation of electrical and electronic
devices, plumbing, drain laying or other installations for transport of fluids, heating,
ventilation or air-conditioning including related pipe work, duct work and sheet metal
work, thermal insulation, sound insulation, fire proofing or water proofing, lift and
escalator, fire escape staircases or elevators; or
(b) construction of a new building or a civil structure or a part thereof, or of a
pipeline or conduit, primarily for the purposes of commerce or industry; or
(c) construction of a new residential complex or a part thereof; or
(d) completion and finishing services, repair, alteration, renovation or restoration
of, or similar services, in relation to (b) and (c); or
(e) turnkey projects including engineering, procurement and construction or
commissioning (EPC) projects;
The letter from The Joint Secretary (TRU), Tax Research Unit, Department of Revenue, Ministry of Finance, Government of India has issued a letter F. No. B1/16/2007-TRU also states that “Contracts which are treated as works contract for the purpose of levy of VAT / sales tax shall also be treated as works contract for the purpose of levy of service tax. This is clear from the definition under section 65(105)(zzzza).”
Thus any contractor who pays VAT / ST on his turnover is eligible for the composition scheme under the service tax rules and need pay only 2% of the gross value instead of 12% of the value of services included in the works contract.
Does this mean that maintenance and repair services treated as works contracts under VAT / ST acts and on which VAT / ST is paid shall also be eligible for the composition scheme? This needs immediate clarification.
The composition scheme is a very welcome step as the simple procedure will eliminate the disputes in arriving at the value of taxable services. It should also be noted that clause (zzzza) contains the word leviable and not paid. This if tax is leviable under the VAT / ST Act, but no tax is paid by virtue of any exemption allowed, the contractor can still opt for composition scheme under the service tax rules.
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Please clarify that in case a works contract is issued by Indian Railways, do we need to pay VAT/ST separately or 2% Service Tax is the only tax payable on the works contract, even in case there is transfer of property. If so, how would the calculation be?
Could you kindly explain the tax structure for the following scenario :
Contactor X in Assam gets works contract for Rs. 1000.00 (Rs. 800.00 property + Rs. 200.00 Service) at Bihar from Railways;
He sub-contracts the entire contract alongwith supply to Y (from West Bengal) for the job where Y is the transferer of the property also;
What would be the tax liability of X and of Y and how would the tax structure of Y look or tax structure of X look.
1) VAT is payable to the state government and service tax is payable to the central government.If you opt for composition scheme, VAT / Service tax will be payable on the gross value of the contract
2) Both X and Y are liable to pay Service tax to the Centre and VAT to the Bihar Government as the property in goods gets transferred in Bihar to the Railways. However, the turnover of the sub-contractor will be reduced from the turnover of the main contractor as provided in the Bihar VAT Rules. In any case, the full value of material will be liable to VAT, unless you opt for compounded rate of tax, in which case tax will be levied on the gross amount of the contract, The AP high court has held that the state cannot levy tax on both the parties for the same taxable event. Please refer mu post of 11th July 2007.
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What is the VAT rate in case of works contract or annual mentainance when material is using for completion of the contract but it is not possible to ascertain the value of material used in the contact.
What is the vat rate in Bihar in case of works contract or annual maintenance comtract when it is not possible to acertain the value of material using during completion of the contact. Particularly when annual maintenance invoice to be raised on the first day of the contract.
Whether contractor can switch between abatement scheme and composition scheme of service tax from contract to contract?
My understanding is that a Contractor needs to be registered under service tax composition scheme before exercising the option and once registered the contractor can not switch over to abatement scheme for certain period. Is it correct?
In respect to VAT, my understanding is the contractor can exercise VAT coposition scheme or VAT only on value of the goods supplied, varying from contract to contract. Is it correct?
We collect 100% S.Tax on Contract under AMC ( HVAC System- AC )from our Client, & Vat will be paid from our pocket on following calcuation basis
Material used + 35% Profit Margin = Amount Chargeble value arried x 12.5% Vat ).
We do not want to collect the Vat tax from client due to increase in the Selling Price under stiff competition.
Kindly suggest wheather :
1) Is it correct to add 35% profit & then pay vat@12.5% on material consumed ?
2) Any other option to Pay & Collect the vat & Service tax under AMC Contrac.
Regards,
Ajay Maurya
What is the rate vat against annual maintenance contract for compouters .
VAT @ 4% will be paid on the value of computers or parts involved in annual maintenance.
Materials used in works contract will be valued for calculation of VAT only after adding freight or landing cost plus profit margin.
Composition Scheme, wherever appliacble, is based on a fixed ceiling of GTO on the whole.
My client is constructing hotel and paying Service tax to contractor under composition scheem. He would be entitled for cenvat credit on service tax which he paid to contractor under composition scheem. If yes than in how many years he can avail the cenvat credit paid at the time of construction or what would be the prosedure.
Thanks
What would be the Service Tax levied on below mentioned work done in Bihar, IOCL.
Nature of work - Shifting of raw petroleum coke by means of labour/machine (Nature of work is without any purchase /sale of meterial & only involve shifting from one place to another place).