Service portion in the execution of a works contract has been declared as service u/s 66E after the introduction of negative list. That means works contract service per se is not a service but it is a service because it has been declared to be a service u/s 66E. Here an attempt has been made to elaborate on the works contract service after the introduction of negative list.
What is works contract for the purpose of service tax: It is important to understand the concept of works contract before understanding the taxation on it. Works contract is a contract of some work to be done which involves both transfer of property in goods and also an element of work or service rendered.
Works contract may exist in relation to an immovable property for example construction contract or movable property like repair to vehicles or printing contracts etc.
Section 65B(54) defines works contract as follows:
"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 moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.
Thus as per the above definition of works contract for the purpose of service tax two conditions must be satisfied before a contract may be called a works contract.
1. The contract must be such that wherein transfer of property in goods in the execution of such contract is leviable to tax as sale of goods. Meaning thereby the goods incorporated in such contract must be leviable to VAT or sales tax as sale of goods.
The point to be noted here is that the word used is “Leviable to tax as sale of goods” that means it is not necessary that VAT must have been actually paid on the transfer of property in goods incorporated in the contract, it is enough if transfer of property in goods is leviable to tax as sale of goods for the purpose of determining whether such contract is a works contract or not.
2. The contract must be for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.
Before the introduction of negative list only contracts relating to immoveable property were considered as works contract but now contracts relating to both immoveable and moveable property will be covered in the definition of works contract if the first condition is also satisfied, for the purpose of service tax
Valuation of works contract services:
Rule 2A of Service Tax (Determination of value rules) 2006 has been substituted w.e.f 01/07/2012. Two methods have been prescribed for the valuation of services involved in the execution of a works contract. One is payment of service tax on actual value of services involved in the works contract and the other one is alternate method which is to be opted if the value of services has not been determined as per the first method.
The composite scheme of 4% which was available under Works Contract (composite scheme for payment of service tax) Rules, 2007 has been withdrawn w.e.f 01/07/2012.
Valuation on actual basis:
As per this rule 2A 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 transferred in the execution of the works contract.
Works contract service= Gross amount charged for works contract-value of property in goods transferred in the execution of such works contract
Gross amount charged for works contract shall not include VAT or sales tax, as the case may be paid or payable, if any, on the transfer of property in goods involved in the execution of the works contract.
Although value of service in the works contract has to be calculated after deducting value of property in goods from the gross receipt but explanation (b) to rule 2A (i) also explains what would be included in the Value of works contract service -
(i) labour charges for execution of the works;
(ii) amount paid to a sub-contractor for labour and services;
(iii) charges for planning, designing and architect's fees;
(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
(v) cost of consumables such as water, electricity, fuel used in the execution of the works contract;
(vi) cost of establishment of the contractor relatable to supply of labour and services;
(vii) other similar expenses relatable to supply of labour and services; and
(viii) profit earned by the service provider relatable to supply of labour and services;
Further explanation (c) to rule 2A(i) explains that 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 works contract, then, such value adopted for the purpose 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 works contract under this clause.
Alternate method for determination of service tax payable on the service portion in a works contract: Rule 2A(ii) also provide an alternate method to determine service tax payable in a works contract if the same has not been calculated in the above manner.
For example if VAT or sales tax is not paid on the actual value of goods incorporated in a works contract but under a composite or lump sum scheme under the relevant sales tax or VAT law then such alternative method shall be adopted to determine the service tax payable. Such alternative method as per rule 2A(ii) is as follows:
In case of works contracts entered into for execution of original works, service tax shall be payable on 40% of the total amount charged for the works contract;
Original works means:
(i) all new constructions;
(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;
(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;
Maintenance and repair of goods:
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 70% of the total amount charged for the works contract.
In case of other works contracts:
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 60% of the total amount charged for the works contract.
Since in all the above three cases calculation of service portion is to be done as a percentage of “Total Amount”. It is important to understand what is a "Total Amount" in a works contract.
Total amount means the sum total of gross amount charged for the works contract and the fair market value of all goods and service 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 therefrom:
(i) the amount charged for such goods or services, if any; and
(ii) the value added tax or sales tax, if any, levied thereon.
The fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.
FMV of free of cost material/services to be added while calculating total amount. Fair market value of all the goods and services supplied in connection with a works contract will have to be added( even if they are provided free of cost by the contractee/service receiver) for calculating the Total amount charged for works contract. However the amount charged for such goods if any and the VAT or sale tax levied on it will be excluded.
This can be explained with the help of an example:
Gross amount received by contractor: 1000000/-
Fair market value of free of cost material supplied by contractee: 200000/-
Total amount for calculating service tax: 1200000/-
Under alternative method under rule 2A(ii)
Service portion in case or original works i.e 40%: 480000/-
Suppose in the above example the contractee does not provide goods free of cost but charges Rs. 100000/- for the goods supplied by him whose fair market value is Rs. 200000/- in such case the total amount will be calculated as follows:
Bill amount of the contractor: 1000000/-
Fair market value of free of cost material supplied by contrcatee: 200000/-
Less Amount charged by service receiver/contractee: 100000/-
Total amount for calculating service tax: 1100000/-
Under alternative method under rule 2A(ii)
Service portion in case or original works i.e 40%: 440000/-
The risk while paying service tax under the alternate method under rule 2A(ii) is that if the fair market value of material or services provided free of cost by the contractee, forms a considerable part of the contract then it would result in enhanced service tax liability than the service tax which would have been payable on the actual services provided by the contractor, had there not been any free of cost material or services supplied by the contractee.
For example if in a works contract 90% of the material is to be supplied free of cost then service tax payable by the contractor (if he pays under alternate method) would be much more than the service tax which would have been payable on actual services provided by him.
No CENVAT of inputs but CENVAT of input services and capital goods available under alternate method : It is clarified under Explanation 2 to Rule 2A(ii) that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.
That means a service provider in this case shall be eligible to take the credit of service tax paid on input services as well as duty paid on the capital goods.
Works contracts exempted from service tax under mega notification: Mega Exemption notification exempts certain services from service tax. Those relating to works contract are provided as follows:
Under serial No. 12 of mega exemption: Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of -
(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;
(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);
(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;
(d) canal, dam or other irrigation works;
(e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or
(f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act.
Thus the above services are exempt only if provided to Government, a local authority or a governmental authority. If any of the above service is provided to any other person then it will not be exempt.
Another thing to be noted that in clause (a) above service of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of civil structure provided to Government is not exempt if it is meant for commerce, industry, or any other business or profession.
Exemption under serial No. 13 of mega exemption notifiacation: Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-
(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;
(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
(c) a building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;
(d) a pollution control or effluent treatment plant, except located as a part of a factory; or
(e) a structure meant for funeral, burial or cremation of deceased;
Construction, repairing of roads meant only for general public are exempt from service tax, however the construction, repairing etc of roads not meant for general public for example roads in a factory of any other premises is not exempt from service tax.
Exemption under serial No. 14 of mega exemption notifiacation: Services by way of construction, erection, commissioning, or installation of original works pertaining to,-
(a) an airport, port or railways, including monorail or metro;
(b) a single residential unit otherwise than as a part of a residential complex;
(c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;
(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or
(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages
Sub-contractor providing works contract service in an exempt works contract, also exempt from service tax: 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.
To be continued.
In the next article reverse charge mechanism in works contract services will be discussed.