Analysis of Service Tax on work contract

Work contractor definition:

“Works contract”, for the purposes of section 65(105)(zzzza), means a contract wherein,-

(i) Transfer of property in goods involved in the execution of such contract is livable 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;

Work contract service is declared service and not in negative list as per new service tax regime.

What is the manner of determination of value of service portion in execution of a works contract from the total contract?

As per sub-rule (i) of the said Rule 2A the value of the service portion in the execution of a works contract is 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.

Gross amount includes:

a. Amount paid to sub contractor for labour and services

b. Charges for planning, designing and architect’s fees

c. Charges for obtaining hire or otherwise machinery and tools used for execution of work contract

d. Cost of the consumables such as water, electricity, fuel used in the execution of work contract

e. Cost of the establishment of the contractor relatable to supply of labour and services and other similar expense for supply of labour and services

f. Profit earned by the service provider relatable to supply of labour and services

Gross amount does not include

a. Value of transfer of property in goods involved in the execution of the said works contract

b. Value Added Tax (VAT) 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

Is there any simplified scheme for determining the value of service portion in a works contract?

Where works contract is for:                                        

a. Execution of original works.                                           

Forty percent of the total amount charged for the work contract.

b. Maintenance or repair or reconditioning or restoration or servicing of any goods including such gross amount.

Seventy per cent of the total amount charged.

c. In case of other works contracts, not included in serial nos. (A) and (B) above, works contract  including contracts for maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings.

Sixty percent of the total amount charged for the work contract

NOTE:

‘Total amount’ referred to in the second column of the table above would be the sum total of gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of works contract, under the same contract or any other contract,

Less (i) the amount charged for such goods or services provided by the service receiver; and (ii) the value added tax or sales tax, if any, levied to the extent they form part of the gross amount or the total amount, as the case may be.

How is the fair market value of goods or services, so supplied, be determined to arrive at the total amount charged for a works contract?

The fair market value of the goods or services so supplied shall be determined in accordance with The generally accepted accounting principles.

What are ‘’original works’?

• All new constructions;

• All types of additions and alterations to abandoned or damaged structures  on land that are required to make them workable;

• Erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise.

Can the manner of determination of ‘total amount charged’ be explained by way of a suitable example?

Example pertaining to works contract for execution of ‘original works'.

i. Gross amount received excluding taxes: 95,00,000

ii. Fair market value of goods supplied by the service receiver excluding taxes: 10,00,000

iii. Amount charged by service receiver for 2: 5,00,000

iv. Total amount charged (1+2-3): 1,00,00,000

v. Value of service portion(40% of 4 in case of original works): 40,00,000

Note: When the service provider pays partially or fully for the materials supplied by the service receiver, gross amount charged would inevitably go higher by that much amount.

Work contract in 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. 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 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;

Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-

i. A road, bridge, tunnel, or terminal for road transportation for use by general public;

ii. A civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

Sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt;

Services provided to Government, a local authority or a governmental authority by way of -

i. Carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and up gradation; or

ii. Repair or maintenance of a vessel or an aircraft;

Thanks for reading

CA Tarannum Khatri

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