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An Overview of Service Tax on Works Contract Service under Reverse Charge Mechanism

1. Reverse Charge?

As per Section 68(1) of the Finance Act, liability to pay service tax is of the service provider. However there is exception to the above provision as per section 68(2), according to which vide notification No. 30/2012-ST dated 20-06-2012, the receiver of service is liable to pay service tax in whole or part of service tax which is known as payment of service tax under reverse charge mechanism.

2. Applicability of Reverse charge:

Payment of service tax under reverse charge is applicable only if the following two cumulative conditions are fulfilled:

i. Provider of Works contract service is an individual, HUF or partnership firm whether registered or not including association of person located in the taxable territory And,

ii. Such works contract service is provided to a business entity registered as body corporate located in the taxable territory. If the above two conditions are not fulfilled the provider of service as to pay whole of the service tax.

3. Service tax payable under reverse charge mechanism:

When reverse charge mechanism is applicable in respect of works contract service, then the receiver of service as to pay 50% of service tax and balance of 50% service tax as to be paid by the service provider.

When value of the works contract is determined under Rule 2A(i) of the valuation Rules, both the service provider and the receiver of the service as to pay service tax at 6.18% each.

When value of works contract is determined under Rule 2A(ii) of the valuation Rules, the effective rate of service tax payable by the receiver of service and provider of service will be:

        Sl.No.

        Type of Works Contact

Effective rate of Service tax payable by the service provider

Effective rate of Service tax payable by the receiver of service

  1.  

In case of works contract entered into for execution of original works.

           2.472%

             2.472%

        ii.

In case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods.

           4.326%

             4.326%

      iii.

In case of other works contact, not covered by (i) & (ii) above, including maintenance, repairs, completion and finishing services such as glazing, plastering, floor and wall tilling, installation of electrical fittings of an immovable property.

           3.708%

           3.708%

4. Determination of Value on different basis by both the service provider and the service receiver:

In terms of Explanation II to the notification No. 30/2012-ST dated 20-06-2012, in case of works contract service, where both the service provider and service receiver is the person liable to pay service tax, the receipt of service has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service.

5. Other Important points to be considered by the receiver of service who is liable to pay service tax under reverse charge:

i. Service receiver who is liable to pay service tax cannot avail the benefit of exemption of Rs 10 lakh as no SSI exemption is available under reverse charge.

ii. Point of taxation shall be the date on which payment for such service is made by the service receiver to the provider of service.

iii. CENVAT credit cannot be availed off while discharging service tax liability under reverse charge mechanism.

6.Valuation of works contract services:

In case of works contract service only service portion is chargeable to service tax. Rule 2A of Service Tax (Determination  of Value) Rules, 2006 deals  with  the  special  provisions  for  determination of  taxable  value  in respect of works contract service. This rule provides for two methods for determination of value of works contract service.

The first method  as per Rule 2A(i) of the valuation Rules which can be used  when  the service  provider  maintains  complete  details in respect  of transfer of property  in goods involved  in the execution of works contract, labour  charges,  cost of consumables  etcIf the service provider unable to determine the value of works contact under the first method, it shall be determined in according to the second method prescribed under rule 2A(ii) of the Valuation Rules.

Determination of value as per first method [Rule 2A (i)]

(a) As  per  first  method  the value of  works contract service  shall  be equivalent  to  the gross  amount charged  for  the works  contract  less the value  of property  in goods involved  in the execution of the said  works contract.

(b) Gross amount charged  for the works contract shall not include Value Added tax  (VAT) or sales tax,  paid  on  the  transfer  of  property   in  goods  involved  in  the execution of the said works contract.

Where value  added  tax or sales tax has been  paid  or payable  on the actual  value  of  property   in  goods  involved   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 transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service.

(c) Inclusions in gross amount: For the above purpose of the rule, 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;                                                                                                                                          

Determination of value as per second method [Rule 2A (ii)] (Composition Scheme)

a)Taxable portion in works contract Service: Where the value has not been determined under clause (i), the service portion involved in the works contract is determined according to the clause 2A (ii) of the Valuation Rules. Under this rule the taxable portion in execution of different types of works contract shall be determined as under:

      Sl.No.

          Type of contract

Amount on which  service tax

             is payable 

     a)

   b)

    c)

Works   contract   entered   into   for execution or original works

Works contract entered into for maintenance or repair or reconditioning or restoration or servicing or any goods

Other works not covered by (a) and (b) above, including maintenance, repairs, completion   and   finishing   services   such   as glazing,    plastering,    floor   and    wall    tiling, installation   of electrical fittings of an immoveable property

40% of the total amount charged for the works contract

70% of the total amount charged for the works contract

60% of the total amount charged for the works contract

b) Original Work defined : The term "Original works" means –

(i)  all new construction

(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 per-fabricated or otherwise.

c) Meaning of total amount: “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 –

(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.

7. Works contracts exempted from service tax under mega notification:

In terms of notification No.25/2012-ST, dated 20-06-2012, the following works contract   services are exempt from service tax.

(I) Services provided to Government or local authority: By virtue of Notification No. 25/2012-ST, dated. 20-6-2012 (S. No. 12) services provided  to the Government or local authority    by way of erection, construction,  maintenance,  repair, alteration,  renovation  or restoration  of the following have been exempted from service tax, namely-

(a) a civil structure  or any other  original works  meant  predominantly for a non-industrial or non-commercial use;

(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity  specified under Ancient Monuments and Archaeological Sites and Remains Act, 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) drinking  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 clause44 of section 65 B of the said Finance Act, are exempt from service tax.

As per para 2(zc) of the Notification, "residential complex" means any complex comprising of a building or buildings, having more than one single residential unit.

The term "single residential  unit" is defined  under  para 2(ze) to mean a self-contained  residential Unit which is designed  for use, wholly or principally, for residential purposes for one family.

As per para  2(s) of the Notification, "governmental authority" means a board, or an authority any other  body established with  90% or more participation by way  of equity or control  by government and  set  up  by an Act of the Parliament or a State Legislature to carry  out  any  function entrusted to a municipality under article 243W of the Constitution.

(II) Services relating to road, bridge, tunnel, etc.:-By virtue of Notification No. 25/2012-ST, dated 20-06-2012, (Sl.No. 13), services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-

(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 Jawarhalral Nehru Urban  Renewal Mission  or Rajiv Awaas Yojana;

(c) building owned by an entity registered under section  12AA  of the Income  Tax Act, and  meant predominantly for religious use by general public;

(d) 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 are exempt from service tax.

(III) Services relating to airport, port or railways-By virtue of Notification No. 25/2012-ST,dated 20-06-2012 (Sl.No. 14) 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 upto  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 such  purposes; or 

(e)  mechanised food grain handling system, machinery or  equipment for units processing agricultural produce as foodstuff  excluding alcoholic beverages, are exempt from service  tax.

8. Exemption in respect of works contract service provided by sub-contractor to main contract.

In terms of clause 29(h)of Notification No.25/2012-ST,dated20-6-2012,service provided by a sub-contractor providing services by way  works contract to another contactor  services which are exempt, is exempt from service tax.

In para  7.11.11 of Taxation of Services- An Education Guide issued by CBEC on 20-6-2012, it been  clarified that  the exemption provided in  the  mega-exemption to services by way  of construction of  roads etc., is not available to the sub-contractors who provide input service to these main contractors in relation to such construction.

Thanks & Regards                                                                                                                        

CA Chandrashekar L                                                                                                              

Mysore

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