Service tax on Works Contract was introduced on 1.6.2007. Starting with an attractive rate of 2% service tax on the composite value of both material & labour, today it has reached the rate of 4.8% w.e.f. 1.4.2012. Under the current scheme, the works contract covers only immovable properties, however, in order to bring it up to the proposed negative list; the definition of works contract has been amended so as to include the movable properties also. Further the reverse charge mechanism is also extended to it. This article revolves around the enhanced scope of the works contract service under negative list scenario.
New definition of works contract:-
The new definition of works contract has been given under section 65B(54) of the Finance Act, 1994 which reads as follows:-
“Works Contract means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.”
Thus, the definition that was proposed in the Finance Bill, 2012 did not include the movable properties but the definition that is being given in the Finance Act, 2012 includes the services related to movable properties also.
Scope of Works contract service under negative list:-
The definition of works contract service encompasses a wide range of services like construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration and other such services. Some of these activities are purely related to immovable properties like construction, erection, installation, etc. However, some of these activities can be carried out on both movable and immovable properties like the repairs, renovation, maintenance, etc.
Under the negative list, the specified categories have been demolished and scope of the works contract has been enhanced so as to include movable properties also. Now, many of the services related to movable properties under current scheme involving the material therein like Authorized service station, repairs and maintenance services, Photography services, etc. will fall under works contract service in the negative list scheme provided the material involved therein is leviable to VAT/sales tax. This will cover cases where the authorized service station does the repairing of a car and supplies any part thereof. Hence it is a composite contract where both service and material value is involved and as such will be covered under the works contract. Thus, the annual maintenance contracts involving the material along with service will also fall under the purview of works contract under negative list and will be chargeable to service tax @ 4.8%.
Valuation of works contract service:-
In the new scheme of negative list, the valuation of Works Contract is to be done in accordance with the Service Tax (Determination of Value) Rules, 2006. For this purpose, rule 2A is being inserted which specifies the steps for valuing the works contract service. This rule lays down following fundamentals for its valuation:-
Value of Works Contract = Gross amount charged – Value of transfer of property in goods. However, VAT or Sales Tax is not includible in the value of material supplied.
Value of Works contract service shall include the labour charges, amount paid to sub-contractor for labour and services, charges for planning, designing and architect’s fees, hire charges for machinery and tools, cost of consumables like water, electricity, fuel, etc., cost of establishment of contractor relatable to supply of labour and services, profit earned in relation to supply of labour and services.
In the cases where VAT has been paid on ACTUAL value of transfer of property in goods, then this value will considered while calculating the value of Works Contract.
If the VAT is not paid on the ACTUAL value, “the person liable to pay tax on service portion involved in the execution of works contract” will calculate the same as follows:-
i. In, works contract for original works, service tax will be payable on 40% of total amount charged;
ii. In works contract for maintenance/repairs/ reconditioning/ restoration/ servicing of any goods, service tax will be payable on 70% of total amount charged.
iii. In case of other works contract (like maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property)not covered in above two clauses, service tax will be payable on 60% of total amount charged.
For the purpose of valuation,
a. "original works" means all new constructions; 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.
b. Total amount = Gross amount charged for works contract + fair market value of goods and services supplied free of cost under same/any other contract – Amount charged for such goods and services – VAT/Sales tax
Under existing scheme of works contract, an option has been given to the assessees either to opt for composition scheme or pay the service tax at full rate on service portion after deducting the material value from total amount. Even option is also available for the services related to movable properties like authorized service station, photography service, repairs and maintenance services, etc. in form of notification no. 12/2003-ST dated 20.6.2003. Under this notification, if the value of material is identifiable and charged separately in the invoice, it is deductible and service tax is payable only on the service portion. This notification is available as an option, but it is being deleted in view of negative list. However, under current scheme, the model of this notification is being carried forward as a mandate, not as an option.
In other words, under works contract, the option of paying service tax on the basis of a fixed percentage is only available if the VAT has not been paid on the material on actual basis. If this condition is satisfied only then, the assessee can pay the service tax on a fixed percentage over the gross amount charged. Thus, the scheme of option with assessees has been taken away under negative list. The department will always ask for telling the exact amount of material used which is impossible. Even under the VAT, the assesses were not able to tell the exact amount of material in works contract. Thus, the composition scheme was introduced. The option either to pay the tax on value of service or under the composition scheme should be restored in works contract to avoid unnecessary litigation.
Reverse charge method extended to works contract:-
Along with changes in the spirit of works contract by amending the definition, the reverse charge method has also been extended to the works contract service. Under notification no. 15/2012-ST dated 17.3.2012, it is prescribed that the 50% service tax on works contract will be paid by the service recipient and 50% will be paid by the service provider in the cases where the service provider is an individual/firm/LLP and the recipient is the body corporate.
Though the government has exercised due diligence in drafting the provisions under negative list, yet there are some issues that needs attention. Some of such issues are as follows:-
a. The reverse charge mechanism has been extended partly to the works contract service where 50% service tax would be paid by the service provider and remaining 50% will be paid by the service recipient. How the value will be determined, either on the basis of invoice raised by the service provider or there will be any other method?
b. If it will be on the basis of invoice, in what manner the invoice will be issued by the service provider? Whether he will issue the invoice will entire value with total service tax thereupon and will indicate that the 50% amount of service tax will be paid by the service recipient? Or the invoice will be raised with entire value but service tax will be charged only to the extent it is payable by the provider of service.
c. There will be cases where the service provider is availing the exemption under notification no. 6/2005-ST dated 1.3.2005 and hence not liable to pay the service tax on 50% value while the service recipient will have to pay the service tax on remaining 50% as the benefit of this notification is not available to service recipients.
d. Where the service provider is covered under notification no. 6/2005-ST, whether the same taxable value can be bifurcated into two parts – one chargeable to service tax and other not chargeable to tax?
e. The reverse charge mechanism will increase the complicacies for individual service providers. They will have to keep the track over each and every invoice by looking to what type of concern they are providing the services. In case, the service is being provided to the person other than business entity, the 100% service tax is to be paid by the individual/LLP/firm service provider. Thus, such service providers will have to analyze the legal identity of the service recipients and ascertain where they have to pay complete service tax and where 50% service tax.
f. In the cases where the service provider is liable to pay the service tax only on 50% value, whether this value will be considered as the receipts from exempted service for the purpose of determining the limits under notification no. 6/2005-ST.
g. In the cases where the assessment is not accepted by the department or in case of valuation disputes, proceedings will be initiated against whom – the service provider or service recipient or both?
h. Where an individual/firm/LLP provides works contract services to the government/local authority and these services are not exempted under serial no. 12 of mega exemption notification no. 12/2012-ST dated 17.3.2012, what will be the situation – whether the service tax will be paid by the service provider completely or government will be considered as person liable to pay the service tax to the extent of 50% under reverse charge mechanism.
i. Further, the composition scheme has not been given as an option. Under current scheme also, there is a lot of dispute regarding the value of material involved. Thus, the dispute will also continue in the negative list also where the department will insist on providing the actual figures, while the assessee will contend that it is not ascertainable.
j. When the finance bill was proposed, there was provision of paying the service tax @ 25% on total amount charged including the value of land. However, after enactment of Finance Bill, this provision has been deleted from the Valuation rules. However, it is hoped that this will be brought back in the Act.
In short, intention of the government, behind extending reverse charge method on works contract service and that too partially, is not clear. In absence of many of the unanswered questions, it seems that the works contract is going to be harsher under negative list.
The service tax by way of negative list is going to be implemented just after a few days. The most complicated and full of litigations - Works contract with Reverse charge mechanism is now ready with extended scope to create more ambiguities under the new scheme also. The transitional phase of the negative list is going to be a challenging one for the government and many clarifications are still needed for its effective implementation.
An article by:-
CA PRADEEP JAIN
CA PREETI PARIHAR