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Valuation of Works Contracts

Atul Rathod , Last updated: 21 September 2016  

Background: The services relating to construction is specifically covered under declared services given in Section 66E of Finance Act, 1994 post July 2012 after introduction of negative list based taxation to avoid any dispute. In the said Section 66E, clause (h) specifically covers “service portion in the execution of a works contract”. Thereby there will be service tax liability on the contract whether undertaken with material as works contract or without material.

a. When contract is undertaken without material, the entire value will be considered as service. Therefore service tax would become payable on full value at 12.36%. The same needs to be charged by Vendor and Service Receiver has to pay to Vendor.

b. In case of contract with materials, the service tax is to be paid only on the service portion in the execution of works contract Thereby there will be necessity to identify the value of service portion in works contract.

In order to identify the same, rule 2A of the Service Tax (Determination of Value) Rules 2006 is notified which gives guidelines for determining the value of service portion the execution of works contract.

As per the said Rule 2A(i) of the said rules,

The value of service portion in the execution of the works contract shall be equivalent to the gross amount charged for the works contract less value of property in goods transferred in the execution of the said works contract.

(The value of property in goods transferred has to be identified with sufficient documentary evidence. However if VAT/Sales Tax is paid at actuals based on records, the same value shall be adopted for claiming deduction/exclusion.)

On the said taxable value arrived at, service tax at the rate of 12.36% has to be computed.

However, Where value cannot be determined as per Rule 2A(i) of the said rules then Rule 2A(ii) provides the manner in which the service portion can be determined Which provides that ?

  1. If it is Original works – 40%
  2. If it is other works including completion and finishing services – 70%.

Though primarily the service tax liability for service portion in works contract is on the service provider in case where service provider happens to be

  1. Individual, 
  2. HUF or
  3. partnership firm including association of persons

And service receiver is business entity registered as a body corporate, then 50% of the tax liability has to be discharged by the service receiver in terms of Section 68(2) of Finance Act, 1994 read with Rule 2(1)(d)(i)(F)(c) of Service Tax Rules, 1994 and also read with Sl.No. 9 of Notification No. 30/2012-ST dated 20.06.2012. (This is under the concept of ‘Joint Charge’).

Therefore in above cases service receiver  would become liable to pay service tax to the extent of 50% of tax liability as explained above. The total Service tax liable on contract shall be 6% i.e.(15% of 40% of value). The Vendor has to charge 3% as Service tax on Value. i.e 50% of 15% on 40% of value and balance 3% i.e (50% of 15% on 40% of value) has to be paid by Service Receiver to Credit of Central Government.

However if contractor is a company (not individual, HUF, Partnership or AOP, BOI), then applicable service tax to be paid by service provider (contractor) only and there will not be any liability on Service Receiver.

Further also in case the contract is without materials (even if there is separate contract for supply of materials and separate contract for labour), applicable service tax to be paid by service provider (contractor) only and there will not be any liability on Service Receiver.

In GST:- There will not be two taxes on the Works Contract separately such as VAT or Service tax. Further as per Model Law Works Contract has been declared as Supply of Services. Hence while determining the liability, one has to see Time of Supply of Service as well as Place of Supply of Service. However, there is no concept of Joint charge in GST.

The author can also be reached at Atuljain1926@gmail.com 

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Atul Rathod
Category Service Tax   Report

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