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:
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
In case of works contract entered into for execution of original works.
In case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods.
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.
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:
Type of contract
Amount on which service tax
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