1) One way to identify the Service Portion & Material Portion separately. In such case the contractor will charge VAT on the material portion & Service Tax @ 10.30 % on the service portion. The credit for all taxes paid can be taken.
2) Another way may be to go for "Composition Scheme" in such case you have to pay Service tax @ 4.12% on the total basis value & VAT also on the total basic value (For VAT rate under this scheme you have to refer VAT act of your particular state where services are being provided. I remember this rate for Maharashtra, here it is 5% of Building & 8% in other cases).
Works Contract (Composition Scheme for Payment of Service tax) Rules, 2007’ applies here. As per rule 3(2) of Composition Scheme, the assessee cannot avail Cenvat credit of inputs. Thus, the assessee can avail Cenvat credit of input services and capital goods.
Now another concern may be regarding TDS & VAT TDS. For TDS - Income tax TDS for contractor has to be deducted. For TDS VAT you have to deduct TDS @ 2% if contractor is registered under VAT Act other higher deduction @ 4% has to be made. Upto some limit this deduction is also not to be done (I remember it for Maharashtra here it is 500000)
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