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
(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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