Tax query

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Jyoti (Querist)
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15 November 2012 One of my friend has business of Labour Assembly. So I would like to ask whether he has to register for service tax and sales tax both or only service tax registration after turnover exceeds Rs.10 Lacs.

As in their business no material is purchased from outside,material is alloted by their client and he has to supply labour only. So whether sales tax registration is required as his consultant ask him to register both.

CA.ATUL GUPTA IPCC TAX FACULTY

CA.ATUL GUPTA IPCC TAX FACULTY (Expert)
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15 November 2012 YOUR FRIEND CONSULTANT IS VERY MUCH RIGHT AND THEY HAVE TO REGISTER FOR BOTH SERVICE TAX AND VAT.THIS SITUATION FALLS IN WORK CONTRACT SITUATION ND THEY CAN PAY ONLY 4.8% SERVICE TAX INSTEAD OF 12%.

MOREOVER THEY NEED TO REGISTER IF THERE TURNOVER CROSS 9 LAKH NOT 10 LAKH

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Jyoti

Jyoti (Querist)
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30 November 2012 Bt sir, for if they register for VAT,then they have to pay Rs.25000/- for registration which can be availed as credit on purchase of Rs.500000/-. But they have only minor purchase, so its nt possible that purchase will become Rs.500000/- in one or two years. So could u please guide after registration how to avail such credit or whether they can take such credit against service tax or not. Thanks.

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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26 July 2025 Your question highlights a common confusion when dealing with **labour contracts vs. works contracts** and the **overlap of VAT (now GST) and Service Tax** (pre-GST regime). Since this query dates to **pre-GST era (2012)**, the answers relate to the **then-prevailing Service Tax and VAT laws**.

---

### 🧾 Situation Recap (as of 2012):

* Your friend is in the **labour assembly** business.
* **No material is used**; only **labour is supplied**.
* **Client provides the materials**.
* Consultant advised to register for **both VAT and Service Tax**.

---

### ✅ Clarification:

#### 1. **Is it a Works Contract or Pure Labour Service?**

* Based on your description, this appears to be **pure labour service**, because **no transfer of property in goods** is involved.
* **Works contract** applies **only when goods/materials are supplied** by the contractor **along with labour**.
* Therefore, **VAT registration is not required** if there's **no sale of goods** involved.

✅ **Conclusion**:
If your friend **only supplies labour** and **does not transfer any materials**, then **Service Tax registration** is required **only** (once turnover exceeds ₹9 lakh, mandatory after ₹10 lakh).

---

#### 2. **Why Consultant May Be Suggesting VAT Registration**

* Some consultants **advise VAT registration anyway** due to:

* Anticipated future purchases/sales.
* Composite contracts with embedded supply of minor consumables.
* Client demands for VAT compliance.
* But if **no material is ever sold** or used, then VAT registration is unnecessary.

---

#### 3. **VAT Registration Fee Credit**

* The **₹25,000 VAT registration deposit** (in Maharashtra, for example) is **adjustable** only if:

* You **purchase taxable goods**, and
* **Collect VAT** on sale of goods and remit it.
* This amount **cannot be adjusted against Service Tax** liability or **Service Tax input credit**.
* **VAT credit and Service Tax credit** were governed by **different laws and cannot be cross-utilized**.

✅ **Conclusion**:
If your friend **does not sell goods or buy taxable goods worth ₹5 lakhs**, then that **₹25,000 deposit will remain unutilized**, and **registration serves no benefit**.

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### 🧾 Final Recommendation:

* If the business is **pure labour-based**, stick to **Service Tax registration only** (above ₹9L).
* **Do not register for VAT** unless:

* They plan to supply materials in future.
* Their contracts evolve into **composite works contracts**.
* Save on **unnecessary compliance and deposit burden**.

---

If you're interested, I can help:

* Draft a **service tax registration checklist**.
* Create a **simple decision matrix** for future contracts: pure labour vs. works contract.
* Help estimate **tax liability under abatement scheme (4.8%)** if it becomes a works contract.

Let me know!

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