There can not be tax on tax

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kedar divekar (Querist)
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24 July 2010 i.e. VAT on basic + service tax or vice versa.

i do agree that service tax is now chargeable on software products along with VAT

but both should be chargeable on basic value and not on each other.

pls, if anybody is of other opinion, do share your valuable comments, alongwith relevant tax circulars, if you are of diff. opinion

Aditya Maheshwari

Aditya Maheshwari (Expert)
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24 July 2010 See rule 2A of Service Tax (Determination of Value) Rules, 2006

2A. Determination of value of services involved in the execution of a works contract:

(1) Subject to the provisions of section 67, the value of taxable service in relation to services involved in the execution of a works contract (hereinafter referred to as works contract service), referred to in sub-clause (zzzza) of clause (105) of section 65 of the Act, shall be determined by the service provider in the following manner:-

(i) Value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.

Explanation.- For the purposes of this rule,-

(a) gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract;

(b) value of works contract service shall include,-

(i) labour charges for execution of the works;

(ii) amount paid to a sub-contractor for labour and services;

(iii) charges for planning, designing and architect’s fees;

(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

(v) cost of consumables such as water, electricity, fuel, used in the execution of the works contract;

(vi) cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and services;

(ii) Where Value Added Tax or sales tax, as the case may be, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service under clause (i).]3

There it is stated no service tax to be levied on VAT charged and the same i think can be used for software also.

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kedar divekar

kedar divekar (Querist)
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25 July 2010 still it is not clear from above.

give me examples from software fraternity, as various vendors are confused about the same, and charging VAT on service tax (basic + service tax) * VAT or service tax on VAT (basic + VAT) * service tax

Aditya Maheshwari

Aditya Maheshwari (Expert)
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25 July 2010 If there is tax on tax then on what amount tax would be charged? Simply think about that.

There cannot be a figure for the same. SO it is not possible and hence apply the above rule to software also as there is no specific rule to it.

Also as far i as understand service tax and vat, ST is charged by the manufaturer or the person making the software and when the same is sold by retail vendor then VAT is charged.

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