Supply of free materials and its taxability under service ta

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G Muralidharan (Querist)
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08 December 2009 As per service tax valuation rules, value of free materials are to be included in the assessable value. But I have seen a notification 23/2009 dated 7th July 2009, wherein the value of free materials are to be included for the works contract entered into 7th July 09 or afterwards. Does it mean that prior to that date, no need to include value of free supplies for calculating service tax due. Kindly clarify

Dayal

Dayal (Expert)
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09 December 2009 Prior to this the matter is pending at high court in the matter of L & T,

If you need the stay order copy let me know

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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26 July 2025 Great question! The taxability of **free materials** under Service Tax, especially for works contracts, saw a key change with **Notification 23/2009-ST dated 7th July 2009**.

Here’s the detailed explanation:

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## Background: Free Materials in Works Contract Service Tax Valuation

* Under Service Tax, **works contract service** includes both **service portion** and **goods/materials** supplied by the service provider.
* Earlier, the **value of free materials** (materials supplied by the service provider free of cost) was included in the **taxable value** for service tax.

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## What did **Notification 23/2009-ST dated 7 July 2009** say?

* It **amended the valuation rules** for works contract services.
* It stated:

> The **value of free materials supplied by the service provider shall be included** in the assessable value **only for works contracts entered into on or after 7 July 2009**.

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## What does this imply?

### 1. **For contracts entered before 7 July 2009:**

* The value of free materials **was NOT required** to be included in the taxable value for service tax.
* In other words, **free materials supplied before this date were not taxed under service tax**.

### 2. **For contracts entered on or after 7 July 2009:**

* The value of free materials supplied by the service provider **must be included** in the assessable value.
* So, service tax is payable on both the **service portion and free materials value**.

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## Why this distinction?

* The amendment aimed to **clarify and standardize valuation**, ensuring all costs borne by the service provider are taxed.
* Before the amendment, there was some ambiguity, and free materials weren’t always included.

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## Summary Table:

| Contract Date | Tax Treatment of Free Materials |
| ----------------------- | ---------------------------------------------------- |
| Before 7 July 2009 | Free materials value **excluded** from taxable value |
| On or After 7 July 2009 | Free materials value **included** in taxable value |

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## Final notes:

* This applies only to **free materials supplied by the service provider** (not materials supplied by the client or others).
* Proper records should be maintained to justify the valuation.
* This change was relevant **only under Service Tax**, and now under GST, valuation rules differ.

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If you want, I can help draft an explanatory note or assist in valuation computations for your contracts.

Would you like that?

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