service tax on works contract

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CA Vikas Agrawal (Querist)
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21 March 2008 sir,
we r apvt.ltd.co, working as a builder, we gave the works cotract ( excluding cement & steel),
my querry is that when works contractor raised the running bill, then at what amount he will charge service tax,
bcoz in notification no. 29/2007, mention the value of work contract service determined shall be equivelent to the gross amount charged for the works contract LESS the value of TRANSFER OF PROPERTY IN GOODS INVOLVED IN EXECUTION OF WORKS CONTRACT, and LESS VAT TAX,

then in the case of works contract we will deduct all material used in execution of work contract is it right ?

annapurna

annapurna (Expert)
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28 March 2008 Your company is a private limited and known as builder. Your company has given the works contract to contractor and and your company will be supplying the cement and steel. When the works contractor raises the running bill, they have to charge the service tax either on the notification 12/2003, or 18/2005 or 1/2006 subject to certain conditions. While determining the value for calculation of service tax, even the cost of materials supplied should also form part of the gross amount charged based on the Valuation rules. Then accordingly the deduction towards material used in works contract can be allowed.
Please make the query more clear, i have tried to answer based on my understanding

CA Vikas Agrawal

CA Vikas Agrawal (Querist)
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03 April 2008 actually my query releted to composition scheame under which contractor will charged only 4% service tax+cess,( rate wef. f/y 2008-09)
so please have a look on notification no.29/2007, releted to composition of tax for works contract

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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24 July 2025 Got it! Let me break down the key points regarding **service tax on works contracts** and the valuation rules based on your query and Notification No. 29/2007:

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### Situation:

* You are a private limited company (builder).
* You give a works contract **excluding cement & steel** (i.e., you supply cement and steel).
* Contractor raises running bills.
* You want to know how to calculate service tax and whether material value (cement & steel) supplied by you should be deducted.

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### Relevant Rules:

**1. Valuation of Works Contract Service (Notification No. 29/2007):**

* The value of service tax on works contract =
**Gross amount charged for works contract**
**LESS value of transfer of property in goods involved in execution of works contract**
**LESS VAT paid on such goods**

* The **gross amount** includes the total amount charged by the contractor (including materials, labor, consumables).

* **Material supplied by you** (like cement and steel) which is used by the contractor in executing the contract, should be **excluded** while calculating the taxable service value if the invoice clearly mentions the value of these materials separately and VAT is paid on them.

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**2. Composition Scheme for Works Contract (Notification No. 29/2007):**

* Applicable from FY 2008-09 onward.
* Contractor can pay **4% service tax + cess** on the **gross amount charged**, **without** separating material and labor.
* This is a simplified scheme, and if opted, the contractor does **not** deduct value of materials separately.

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### What does this mean for you?

* If the contractor opts for **composition scheme**, service tax will be charged on the **entire bill amount**, including materials (even if supplied by you).
* If composition is **not** opted, then the contractor must exclude the value of **cement and steel supplied by you** from the taxable service value, and pay service tax only on the balance (labor + other materials).
* In either case, VAT paid on materials must be excluded from the value calculation.

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### Summary:

| Situation | Service Tax Basis |
| ---------------------------- | -------------------------------------------------------------------------------------------------------- |
| Composition scheme opted | Service tax @4% + cess on **gross amount**, no deduction for supplied materials. |
| Composition scheme NOT opted | Service tax on **gross amount less value of materials (cement & steel) supplied by you, less VAT paid**. |

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### Your Action Points:

* Check if your contractor has opted for the composition scheme.
* If yes, service tax is charged on gross bill amount.
* If not, contractor must deduct value of cement & steel supplied by you, and VAT paid, from gross bill amount before charging service tax.
* Ensure the material supply value is properly documented and VAT paid.

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If you want, I can help draft the calculation or find the exact notifications for your reference! Would you like that?

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