Service tax on work contract services

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

28 June 2013 My client has got the contract for construction of residential complex , on labour rate & consumables.

The company has deducted 50% service tax and claimed the above service under work contract service .

i want to know that pure labour contract + consumables comes under work contract services .

what will be the taxation procedure for contractor ( partnership firm)

CA Vikas Acharya

CA Vikas Acharya (Expert)
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29 June 2013 - Work Contract Meaning 65B(54): WC means a contract wherein transfer if 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 activity or a part thereof in relation to such property.

SO IF CONSUMABLES ARE CHARGABLE TO VAT IT WILL BE TREATED AS WORK CONTRACT.
ALSO AS PER INDUSTRIAL PRACTICE THIS TYPE O F CONTRACT ARE UNDER WORK CONTRACT.

Querist : Anonymous

Querist : Anonymous (Querist)

29 June 2013 sir in this contract the main portion around 90% consist of labour charges and balance is for shuttering material . i am in doubt whether service came under construction of residential complex service without abatement or work contract service

as per industrial practice they called the labour rate

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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24 July 2025 Here’s a detailed clarification for your **service tax on work contract services** query:

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### 1. **Definition of Work Contract Service:**

Under Section 65B(54) of the Finance Act (pre-GST), **Work Contract Service** means:

* A contract where transfer of property in goods is involved in execution of the contract, and
* The contract is for carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property.

So, **if the contract involves supply of consumables (goods) along with labor**, and the goods are taxable under VAT, **the entire contract is treated as Work Contract Service**.

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### 2. **Applicability on Your Case:**

* Your client has a **contract for construction of a residential complex** (immovable property).
* Contract is on **labour rate + consumables** basis.
* Consumables (like shuttering material) are goods that attract VAT.
* Labour is the service component.

Since **transfer of property in goods (consumables)** is involved and VAT is charged on them, this **falls under Work Contract Service** for service tax purposes.

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### 3. **Taxation Procedure:**

* **Service tax is applicable on the gross amount charged by the contractor** (including labour and consumables), after allowing prescribed abatement.
* **Abatement:** For work contract services, abatement is generally 75%, so service tax is payable on **25% of the gross value** (i.e., labor + consumables).
* The contractor (partnership firm in your case) must:

* Register for service tax if turnover exceeds threshold (Rs. 10 lakh).
* Charge service tax at applicable rate (usually 15%) on 25% of gross value.
* File regular service tax returns.
* The company deducting 50% service tax might be applying reverse charge mechanism (RCM) partially or a misunderstanding; generally, **service tax on work contract is payable by the service provider**.

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### 4. **Regarding “Construction of Residential Complex” Service Without Abatement:**

* If the contract was purely **service** without transfer of goods, it may come under "Construction of Residential Complex Service" which has **no abatement** and full value is taxable.
* However, since consumables are involved and taxable under VAT, the contract fits **Work Contract Service** category.

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### Summary Table:

| Aspect | Work Contract Service | Construction of Residential Complex (Without Abatement) |
| --------------- | ----------------------------------------- | ------------------------------------------------------- |
| Goods involved? | Yes, transfer of goods involved | No, pure service without transfer of goods |
| VAT on goods | Yes | No |
| Abatement | 75% (service tax on 25% of gross value) | No abatement (service tax on 100% value) |
| Applicability | When goods + labour combined (usual case) | When only labour/service, no goods transfer |

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### **Recommendations:**

* Confirm the **nature of contract** and if consumables are charged separately with VAT.
* Check if service tax is charged on full invoice or after abatement.
* Educate client on correct service tax compliance and reporting.
* If the contract is mainly labor but goods are involved and taxable under VAT, **work contract service rules apply**.
* For partnership firm, service tax return filing and payment must be done regularly.

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If you want, I can also provide the relevant notification excerpts and circulars related to work contract service tax rules. Would you like that?

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