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In works contract service lump sum scheme for payment of service tax in a works contract has been introduced by amendment in Rule 2A of the  Service Tax (Determination of Value) Rules, 2006 vide Notification No. 11/2012 - Service Tax dated 17-03-2012. In works contract service there were two types of schemes which were earlier available i.e. payment of service tax on actual service involved and the composite scheme.

In the composite scheme service tax @ 4.8% is required to be paid on the total value of the whole contract including material part, while in the other case service tax is required to be paid on the actual value of labour and services incorporated in works contract (which can be possible where proper books of accounts are being maintained).

If the contractor has not maintained any regular books of account so as to determine the actual value of the labour and services incorporated in works contract then such contractor earlier had the only option to go for the composite scheme. 

Now another way to pay service tax in works contract service(which can be called lump sum scheme since service part in works contract is being determined in a lump sum percentage) has been provided by amending Rule 2A of the  Service Tax (Determination of Value) Rules, 2006.  Rule 2A(ii) dealing with such manner of lump sum payment of service tax as under:

Where the value has not been determined under clause (i), the person liable to pay tax on the taxable service involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-

(A) in case of  works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract:

Provided that where the gross amount charged includes the value of the land, in respect of the service provided by way of clause (8) of section 66E of the Act, service tax shall be payable on twenty five per cent. of the total amount including such gross amount;  in case of other works contracts including completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical  fittings not covered under sub-clause (A), service tax shall be payable on sixty per cent. of the total amount charged for the works contract;

For this purpose the terms original works, and total amount have been defined as follows:

(I) “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;

(II) “total amount” means the sum total of gross amount and the value of all goods, excluding the value added tax, if any, levied on goods and services supplied free of cost for use in or in relation to the execution of works contract, under the same contract or any other contract:

Provided that where the value of goods or services supplied free of cost is not ascertainable, the same shall be determined on the basis of the fair market value of the goods or services that have closely available resemblance;

Explanation 2 of the said rule 2A provides that duty of excise paid on any goods, property which is transferred (whether as goods or in some other form) in the execution of works contract, shall not be availed as CENVAT credit." 

The relevant part of the notification is being introduced as follows:

[TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY, PART II, SECTION 3, SUB-SECTION (i)]

Government of India

Ministry of Finance

(Department of Revenue)

New Delhi, the 17th March 2012

Notification No. 11/2012 - Service Tax

G.S.R. (E).- In exercise of the powers conferred by clause (aa) of sub-section (2) of section 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following   rules   further to amend the Service Tax (Determination of Value)   Rules, 2006, namely:               

1. (1) These rules may be called the Service Tax (Determination of Value) Amendment Rules, 2012.

(2) They shall come into force from the date on which section 66B of the Finance Act, 1994 comes into effect.

2. In the Service Tax (Determination of Value) Rules, 2006 (hereinafter referred to as the said rules), for rule 2A, the following rule shall be substituted, namely:-

“2A. Determination of value of taxable services involved in the execution of a works contract.- Subject to the provisions of section 67, the value of taxable service involved in the execution of a works contract (hereinafter referred to as works contract service), referred to in   clause (8) of section 66E of the Act, shall be determined by the service provider in the following manner, namely:- (i) Value of works contract service shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.

Explanation - For the purposes of this clause,-

(a) gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract;

(b) value of works contract service shall include, -

(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;

(c) Where value added tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under this clause.

(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the taxable service involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-

(A) in case of   works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract:

Provided that where the gross amount charged includes the value of the land, in respect of the service provided by way of clause (8) of section 66E of the Act, service tax shall be payable on twenty five per cent. of the total amount including such gross amount;

(B) in case of other works contracts including completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical   fittings not covered under sub-clause (A), service tax shall be payable on sixty per cent. of the total amount charged for the works contract;

Explanation 1 - For the purposes of this rule -

(I) “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;

(II) “total amount” means the sum total of gross amount and the value of all goods, excluding the value added tax, if any, levied on goods and services supplied free of cost for use in or in relation to the execution of works contract, under the same contract or any other contract:

Provided that where the value of goods or services supplied free of cost is not ascertainable, the same shall be determined on the basis of the fair market value of the goods or services that have closely available resemblance;

Explanation 2 - For the removal of doubts, it is clarified that duty of excise paid on any goods, property which is transferred (whether as goods or in some other form) in the execution of works contract, shall not be availed as CENVAT credit.”

Amit Bajaj Advocate

Bajaj & Bajaj Advocates

128, Sangam Complex,

Milap Chowk, Jalandhar (Punjab)

amitbajajadvocate@hotmail.com

www.amitbajajadvocate.com

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