Valuation & Reverse Charge for Construction Industry

NEW VALUATION & REVERSE CHARGE MECHANISM RELATING TO CONSTRUCTION INDUSTRY

INTRODUCTION:

We have discussed in my previous article about the changes in the applicability of service tax relating to construction industry. In this article, an attempt is made to discuss the changes in valuation mechanism and reverse charge mechanism that would require the attention in terms of service tax compliance.

1. Service Tax (Determination of Value) Rules, 2006 have been amended so as to provide for new scheme of valuation.  The value of the taxable service can be arrived at as follows.

2. The value of the taxable service involved in execution of a works contract can be arrived by deducting the value of material involved in the execution of the Works Contract from the gross amount charged for the works contract.

3. The value of the taxable service can also be arrived by way of adding up the value of the taxable services involved like labor charges, payments to sub-contractors, architects fee etc.

4. If it is not possible to arrive at the value of the service portion in works contract, in any of the above modes, then service tax can be paid on 40% of the gross value of the original works contracts i.e. in cases of new constructions. In case of repairs, alterations and modifications other than original works contracts, service tax can be paid on 60% of the gross amount charged for the contract. This option of paying service tax on 40% is not freely available and can be exercised only if it is established that the value of the taxable service cannot be arrived at as per the prescribed valuation mechanism.

5. The term ‘Original Works’ is defined to mean all new constructions, all types of additions and alterations to abandoned/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.

6.The earlier 67% abatement scheme as well as the composition scheme under the works contract is now not available. The only abatement scheme available is to pay service tax on 25% of the gross amount charged including the value of land which effectively turns out to 3.09%.

7. The gross amount charged shall not include VAT amount charged. Further it does not include the land value except in case where abatement of 75% is availed.

8. Further clarified that in case where the material supplied by service receiver shall be includible in the gross amount charged in case if the service provider is exercising the option of payment of service tax on 40% of the gross amount charged or 25% of the gross amount charged including the land value. The value of the material so supplied shall be arrived at by FMV of the same after deducting for any charges collected by service receiver and VAT paid on the same.

9. One major benefit extended to builders is that the builder is allowed to take CENVAT Credit of capital goods and input services but not on inputs irrespective of the option (regular scheme/option of 40, abatement of 75%) which was not available earlier under the abatement schemes. Therefore those who are not accumulating CENVAT Credit are now required to avail the same on capital goods and input services from 01.07.2012,

10. To sum up: The following are the alternatives in valuation of services.

a. Arriving at the value of services by deducting the value of material from gross amount charged (excluding VAT and land value) or by aggregating the value of services.

b. If this is not practicable, pay service tax on 40% of the gross amount charged (excluding VAT and land value).

c. An abatement option of paying service tax on 25% of the gross amount charged including land value (excluding VAT)

d. In case of where option under (b) or (c) above is exercised, the FMV value of the material supplied by the service receiver shall also be added to the gross amount charged after deducting for any charges collected by service receiver from service provider and VAT paid on such material.

CENVAT Credit on capital goods and inputs services is available on all alternatives.

1. Finance Act, 2012 has provided to include certain other services also under reverse charge mechanism so as to require the service receiver to discharge the service tax liability. The following are such services.

a. Legal services received from advocate or a firm of advocates practicing as an individual.

b. Supply of manpower services, rent a cab service, works contract services received from Individual, proprietary firm, HUF, Partnership Firm whether registered or not including association of persons received by business entity registered as body corporate in taxable territory.

2. The following is the extent of the value of each of the taxable services on which service tax is required to be paid by the service receiver and service provider

NOTE:

1. The service receiver is required to discharge the liability to the extent stated above irrespective of the fact that service provider is claiming small service provider exemption.

2. As per explanation in Notification no.30/2012 –ST clarifies Service receiver can  at their option adopt a method of valuation is independent  of  that of service provider in case of Works contract services.

3. Therefore with respect to the above services, it is the responsibility of the service receiver paying service tax. Since under the new scheme CENVAT Credit can be availed by any builder irrespective of the option of payment of service tax, it is always advisable to discharge the service tax liability on all these services and take credit of the same to set off the output liability. This is a revenue neutral transaction as long as you are paying service tax on all these services. Otherwise this would lead to unnecessary costs like interest and penalty.

Since a week time is left, it is indispensable to shift the gears be proactive in taking measures for service tax compliance.

(For queries please mail to: manikakarla@gmail.com)