Service tax on works contract a critical issue
This query is : Resolved
06 June 2012
In a contract of work, State VAT allows the dealers to pay VAT on certain % basis say 20% of total value of contract at 4% VAT and 50% of total value of contract at 12.5% vat where dealers do not maintain proper books of accounts. The dealers used to bill accordingly and pay vat. If so, service tax should attract on rest percentage i.e on 30% of value of contract at applicable rate as because vat and service tax are mutually exclusive. Is the present frame of service tax provision will allow dealers to pay service tax in the above manner? And from this year, 50% of such service tax again vested on receivers. The whole story need clarity.
Experts can you please enlighten on this part.
Experts can you please enlighten on this part.
07 June 2012
namaskar.Pl.refer Notification No.11/2012-S.T.dated 17.03.2012(to be effective from 01/07/2012 vide notification no.19/2012 S.T.dated 05.06.2012.).By this notification new rules are framed.Rule 2A of the S.T.valuation Rules is substituted by a new rule 2A.value adopted for STATE VAT shall be taken as value for transfer of property in goods involved in the execution of W.C. shall be excluded for s.t.for more details pl.read the Above referred notification.C.A.sagar mal pareek,09824346469
07 June 2012
for the response to above query pl.read as under:
Vide Notification No.24/2012 S.T dated 06/06/2012,the earlier Notification no.11/2012 of 17/03/2012 has been superceded.hence requested to pl.refer Notification No.24/2012 s.T of 06.06.2012 for the response.tks n rgds.CA.sagar mal pareek,09824346469
Vide Notification No.24/2012 S.T dated 06/06/2012,the earlier Notification no.11/2012 of 17/03/2012 has been superceded.hence requested to pl.refer Notification No.24/2012 s.T of 06.06.2012 for the response.tks n rgds.CA.sagar mal pareek,09824346469
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08 June 2012
Dear Mr. Parekh
Notification 24/2012 included in case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods, service tax shall be payable on seventy percent. of the total amount charged for the works contract; thus repair and maintenance nature of contract where supply and labour and service involved came in the works contract ambit.
Although the definition of works contract has not been changed it still related to structure and building or plant & machinery in relation to such structure.
Secondly, in my example the value determined for contractual transfer of goods is not the actual value of materials but a specified value in the VAt Rule, whereas notification 24/2012 used the word actual value that's another area of doubt. If this value considered as actual value for service tax purposes will it be fare determination of value or for this purpose, value specified in clause A or B or C will be taken?
Notification 24/2012 included in case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods, service tax shall be payable on seventy percent. of the total amount charged for the works contract; thus repair and maintenance nature of contract where supply and labour and service involved came in the works contract ambit.
Although the definition of works contract has not been changed it still related to structure and building or plant & machinery in relation to such structure.
Secondly, in my example the value determined for contractual transfer of goods is not the actual value of materials but a specified value in the VAt Rule, whereas notification 24/2012 used the word actual value that's another area of doubt. If this value considered as actual value for service tax purposes will it be fare determination of value or for this purpose, value specified in clause A or B or C will be taken?
24 July 2025
This is indeed a nuanced and important issue in service tax on works contracts, especially when VAT is paid on a **deemed value basis** rather than on actual material costs.
---
### Let me clarify the points step-by-step:
---
### 1. **VAT on Works Contract on Percentage Basis**
* Many States allow dealers to pay VAT on **deemed percentages** of the total contract value instead of actual material value, like:
* 20% at 4% VAT
* 50% at 12.5% VAT
* This happens mostly when proper books are not maintained.
---
### 2. **Service Tax on Works Contract & Exclusion of Material Value**
* Service tax on works contract is charged on **value of service**, which is:
**Gross contract value – value of transfer of property in goods involved – VAT paid on those goods.**
* The **value of goods transferred** is to be excluded for service tax calculation.
---
### 3. **Conflict with Deemed VAT Value**
* The **VAT paid is on deemed % value, NOT actual material cost**.
* So the question is:
*Should service tax be levied on remaining % (like 30% in your example) of contract value as taxable service?*
OR
*Should service tax exclude the actual material value instead of the deemed VAT basis value?*
---
### 4. **Relevant Notifications**
* **Notification No. 11/2012 dated 17.03.2012** (later superseded by Notification No. 24/2012 dated 06.06.2012) clarifies the valuation of works contract for service tax.
* **Rule 2A of Service Tax Valuation Rules** is substituted to say:
*“The value adopted for State VAT shall be taken as value of transfer of property in goods involved in the execution of works contract and excluded from the taxable value for service tax.”*
---
### 5. **Key Implication**
* The **value for VAT paid on deemed % basis shall be accepted for service tax exclusion** as well.
* This means you **do not need to prove actual material cost separately**.
* Service tax will be applicable on the **balance value after deducting the VAT paid value**, even if VAT is on deemed % basis.
* So, if VAT is paid on 70% of contract value, service tax is chargeable on remaining 30%.
---
### 6. **Regarding 50% Service Tax Liability on Receiver (Reverse Charge)**
* From 2012, under **partial reverse charge mechanism (PRCM)**, **50% of service tax on works contract is payable by the service receiver (buyer/client)** and 50% by the service provider (contractor).
* This is applicable for certain works contract services and is notified under the reverse charge rules.
---
### 7. **Repair & Maintenance Works Contract**
* Notification 24/2012 also clarifies that for repair/maintenance/reconditioning contracts, service tax is payable on **70% of total contract value**, i.e., 30% abatement.
* These are treated as works contract services as well, if involving transfer of property in goods.
---
### **Summary:**
| Issue | Clarification |
| --------------------------------------- | ---------------------------------------------------------------- |
| VAT on deemed % basis for materials | Used as the value of transfer of goods for service tax exclusion |
| Service tax on remaining contract value | Applicable on balance after excluding VAT paid value |
| Reverse charge mechanism | 50% service tax paid by service receiver, 50% by provider |
| Repair/Maintenance contract | Service tax payable on 70% of contract value (30% abatement) |
---
### **Your Query About Actual Value vs VAT Deemed Value**
* The notification states **value adopted for VAT shall be taken as value for transfer of goods**.
* This means **deemed value under VAT rules is accepted for service tax**, not the actual cost.
* So, it’s a pragmatic approach avoiding disputes over actual material cost.
---
If you want, I can help provide excerpts from the exact notifications or suggest draft replies based on this?
---
### Let me clarify the points step-by-step:
---
### 1. **VAT on Works Contract on Percentage Basis**
* Many States allow dealers to pay VAT on **deemed percentages** of the total contract value instead of actual material value, like:
* 20% at 4% VAT
* 50% at 12.5% VAT
* This happens mostly when proper books are not maintained.
---
### 2. **Service Tax on Works Contract & Exclusion of Material Value**
* Service tax on works contract is charged on **value of service**, which is:
**Gross contract value – value of transfer of property in goods involved – VAT paid on those goods.**
* The **value of goods transferred** is to be excluded for service tax calculation.
---
### 3. **Conflict with Deemed VAT Value**
* The **VAT paid is on deemed % value, NOT actual material cost**.
* So the question is:
*Should service tax be levied on remaining % (like 30% in your example) of contract value as taxable service?*
OR
*Should service tax exclude the actual material value instead of the deemed VAT basis value?*
---
### 4. **Relevant Notifications**
* **Notification No. 11/2012 dated 17.03.2012** (later superseded by Notification No. 24/2012 dated 06.06.2012) clarifies the valuation of works contract for service tax.
* **Rule 2A of Service Tax Valuation Rules** is substituted to say:
*“The value adopted for State VAT shall be taken as value of transfer of property in goods involved in the execution of works contract and excluded from the taxable value for service tax.”*
---
### 5. **Key Implication**
* The **value for VAT paid on deemed % basis shall be accepted for service tax exclusion** as well.
* This means you **do not need to prove actual material cost separately**.
* Service tax will be applicable on the **balance value after deducting the VAT paid value**, even if VAT is on deemed % basis.
* So, if VAT is paid on 70% of contract value, service tax is chargeable on remaining 30%.
---
### 6. **Regarding 50% Service Tax Liability on Receiver (Reverse Charge)**
* From 2012, under **partial reverse charge mechanism (PRCM)**, **50% of service tax on works contract is payable by the service receiver (buyer/client)** and 50% by the service provider (contractor).
* This is applicable for certain works contract services and is notified under the reverse charge rules.
---
### 7. **Repair & Maintenance Works Contract**
* Notification 24/2012 also clarifies that for repair/maintenance/reconditioning contracts, service tax is payable on **70% of total contract value**, i.e., 30% abatement.
* These are treated as works contract services as well, if involving transfer of property in goods.
---
### **Summary:**
| Issue | Clarification |
| --------------------------------------- | ---------------------------------------------------------------- |
| VAT on deemed % basis for materials | Used as the value of transfer of goods for service tax exclusion |
| Service tax on remaining contract value | Applicable on balance after excluding VAT paid value |
| Reverse charge mechanism | 50% service tax paid by service receiver, 50% by provider |
| Repair/Maintenance contract | Service tax payable on 70% of contract value (30% abatement) |
---
### **Your Query About Actual Value vs VAT Deemed Value**
* The notification states **value adopted for VAT shall be taken as value for transfer of goods**.
* This means **deemed value under VAT rules is accepted for service tax**, not the actual cost.
* So, it’s a pragmatic approach avoiding disputes over actual material cost.
---
If you want, I can help provide excerpts from the exact notifications or suggest draft replies based on this?
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