15 February 2010
One of my client(Contractor/ Builder) has to give Performance Guarantee , question is that service tax is applicable on this guarantee or not ? the amount involved is the whole of the performance guarantee amount. Kindly Revert on this urgently as he has to enter into a contract
10 August 2024
### **Performance Guarantee and Service Tax**
**1. Nature of Performance Guarantee:** - **Performance Guarantee:** This is a financial guarantee given by a contractor or builder to ensure the satisfactory completion of a project or fulfillment of contract obligations. It is typically provided in the form of a bank guarantee or a performance bond.
**2. Service Tax Applicability:** - **Service Tax and Performance Guarantee:** As per the service tax regulations, service tax is generally not applicable to performance guarantees. This is because a performance guarantee is not considered a service but rather a financial instrument or commitment. - **Clarification from CBEC:** The Central Board of Excise and Customs (CBEC) has clarified that performance guarantees are not subject to service tax. The guarantee is a financial arrangement and does not fall under the taxable service categories.
**3. Relevant Sections and Rules:** - **Service Tax Act:** Under the Finance Act, 1994, which governs service tax, the service tax is applicable to services provided, but performance guarantees are not categorized as a service. - **Circulars and Notifications:** There are no specific circulars or notifications imposing service tax on performance guarantees. The primary consideration is whether the activity constitutes a service under the service tax law.
**4. Impact on Contract:** - **No Service Tax on Performance Guarantee:** Since service tax is not applicable, your client will not need to charge or pay service tax on the performance guarantee amount. - **Accounting for Performance Guarantee:** The performance guarantee amount should be accounted for as a liability or financial commitment rather than a taxable transaction.
**5. Documentation and Compliance:** - **Documenting the Guarantee:** Ensure that the performance guarantee is properly documented and clearly stated in the contract. - **No Service Tax Invoice:** Since service tax does not apply, there is no need to issue a service tax invoice for the performance guarantee.
### **Summary:** Performance guarantees provided by a contractor or builder are not subject to service tax. The amount involved in the performance guarantee does not attract service tax, and the guarantee should be treated as a financial arrangement rather than a taxable service.
For any updates or specific cases, you may want to check the latest notifications from the CBEC or consult with a tax professional to ensure compliance with current regulations.
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