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Treatment of service tax

Swopna (Audit Assistant ) (44 Points)

07 August 2015

Mr. Santosh doing construction work as a work contractor ( As a proprietor) and the principal company is a Pvt. Ltd company paying service tax to Santosh as RCM, but santosh is sub contracting the same work to third party.

My question is what would be the service tax treatment to the third party; I mean how is doing the work. The third party is also a proprietor.

Can Santosh pay 14% service tax to the contractor or he can pay the same amount what he is getting from the principal company.

Please suggest

Regards

Swopna

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3 Replies

ruhi25899 (Others) (22 Points)
Replied 08 August 2015

Ms. Swopna

Firstly, Santosh the principle works contractor will discharge two different service tax liability:

1) In case where contract is between the Principle contractor and Pvt. Ltd. company

2) In case where contract is between the Principle contractor and the third party

Secondly, the rate of tax of 14% will depend upon the type of contract i.e. 40% for original construction and 70% for other.

In case where contract is between the Principle contractor and Pvt. Ltd. company:

In this specific case Reverse Charge Mechanism applies as per Not. No. 30/2012 distributing the liability between the service provider and service receiver equally depending on the type of contract to avail the abatement value.

In case where contract is between the Principle contractor and the third party:

In this case the Service provider i.e. the third party will collect 14% of service tax from the principle contractor Santosh, on the type of contract after availing the specified abatement and will deposit to the Governmet.

Swopna (Audit Assistant ) (44 Points)
Replied 08 August 2015

Hi ruhi25899, my question is very much specific, Santosh who is a proprietor taking work contract from a Pvt limited company and outsourcing the same work to another proprietor.

Then,

Santosh is collecting service tax from the Pvt ltd company with RCM,

But the person whom Santosh is outsourcing the work is charging @ 14% service tax to Santosh,

And the question is can Santosh pay @ 14% service tax to the third party or he should pay that much, what he is getting from the Pvt Ltd company (who is a principal company)

what would be the treatment of service tax following the above fact.

Hope it is more elaborated to understand, expecting your remark on it.

Regards

Swopna

ruhi25899 (Others) (22 Points)
Replied 08 August 2015

Dear Swopna

In one case Santosh is a service provider and in other he is a service receiver. I'll explain with an example.

As mentioned before where its between company and santosh, they share the liability of tax depending on the type of contract (40% or 70%). For example if its original work on which tax is to be paid and bill amount is of Rs. 100,000/- then tax will be charged on 40% of Rs. 100,000 i.e. Rs. 40,000 @ 14%= Rs. 5600. Now company pays half of it and santosh pays half of it. they have to deposit the individual liability of 2800/- to the government in specified time. Santosh cant pay tax collected of 2800/- to third party against that particular liability. The two transactions are different and has to be dealt with differently.

Also when the contract between santosh and third party is for original works of Rs. 70,000 then third party who is service provider in this case is wholly liable to pay the service tax. the amount of service tax to be collected from santosh by third party will be=70,000*40%*14%=Rs. 3920.

Here what I want to make clear is that santosh will have to pay this Rs. 3920 as a service receiver to third party even when he has paid Rs. 2800 as a service provider (collecetd from the pvt. ltd.) in the first transaction.

Offcourse Santosh can take input tax credit of service tax paid against his own service tax liability.