VAluation of Composit Services
This query is : Resolved
23 April 2009
Fact:
A limited company engaged in providing Tower Installation Services by using certain materials which are ultimately transfer to the contractee.
As the installation service includes the transfer of property in goods, the company is charging VAT @ 12.5% on 80% of the Gross Amount Charged (Including Material) according to the provisions of DVAT. As per DVAT provisions 20% abatement will be available in case of composit work contract.
Further, the company is charging Service Tax after availing 67% Abatement under notification 1/2006 i.e. service tax is charged on 33% of the Gross Amount Charged.
By following the above procedure, company is paying tax (both VAT and Service Tax) on 113% of the gross amount charged.
Query:
Can the company pay Service Tax on balance 20% of the Gross Amount Charged by following the Notification No. 12/2003 or Rule 2-A of the Service Tax (Determination of Value) Rules 2006, rather than paying service tax on 33% of the gross amount charged.
A limited company engaged in providing Tower Installation Services by using certain materials which are ultimately transfer to the contractee.
As the installation service includes the transfer of property in goods, the company is charging VAT @ 12.5% on 80% of the Gross Amount Charged (Including Material) according to the provisions of DVAT. As per DVAT provisions 20% abatement will be available in case of composit work contract.
Further, the company is charging Service Tax after availing 67% Abatement under notification 1/2006 i.e. service tax is charged on 33% of the Gross Amount Charged.
By following the above procedure, company is paying tax (both VAT and Service Tax) on 113% of the gross amount charged.
Query:
Can the company pay Service Tax on balance 20% of the Gross Amount Charged by following the Notification No. 12/2003 or Rule 2-A of the Service Tax (Determination of Value) Rules 2006, rather than paying service tax on 33% of the gross amount charged.
27 April 2009
Yes it can charge ST on 20% under 12/03. I think this was replied earlier also.
28 April 2009
But the 80% value taken in DVAT is not the actual valuation of the material portion. Even though the 80% value can be taken as value of material or actual value of material will be taken under 12/2003. Kindly Confirm
30 April 2009
this type of transaction covered under both taxes i.e. VAT and Service Tax. in the present case there is a composit works contract, hence as per Delhi VAT laws, you are rightly dischasrging VAT after availing standard deduction i.e. @20%. But, as service tax is concern; before introdusing works contract category this type of cotracts were not taxable under commissioning & installation category but after that i.e. in the preasent situation this type of contracts are covered under category 'service tax on works contracts' and there is no standard abetment/ dudctions are prescribed hence you are liable to pay service tax subject to notification 12/2003.
30 April 2009
Kindly reply about method and rate for tax calculation in given case
02 August 2025
Here’s a detailed explanation regarding the **valuation and tax treatment of composite services involving tower installation and material supply**, based on your facts and queries:
---
### Background Facts Recap:
* Company provides **tower installation services**, which includes supply of materials that become property of the contractee.
* Under **Delhi VAT (DVAT)**:
* 20% abatement is available on composite works contracts.
* VAT charged @ 12.5% on 80% of gross amount (post abatement).
* Under **Service Tax**:
* Company claims **67% abatement** under Notification No. 1/2006.
* Service tax charged on 33% of gross amount.
### Issue:
* Currently, VAT + Service Tax are effectively paid on 113% of the gross contract value.
* Can service tax be charged on balance 20% of gross amount (instead of 33%) by following Notification No. 12/2003 or Rule 2-A of Service Tax (Determination of Value) Rules, 2006?
---
### Legal & Practical Analysis:
#### 1. **VAT Treatment (DVAT)**
* DVAT allows **20% abatement** on composite works contract, so VAT is charged on 80% of gross value.
* This is standard practice under DVAT rules for works contracts involving transfer of goods along with services.
#### 2. **Service Tax Treatment**
* Earlier, service tax was charged on **installation and commissioning services**.
* With Notification No. 12/2003, **works contracts** involving transfer of property in goods are taxable service.
* **Notification No. 1/2006** provides **abatement of 67%** for works contracts, so tax is payable on 33% of gross contract value.
#### 3. **Can service tax be charged only on 20% of gross amount (value of services portion) instead of 33%?**
* **Notification No. 12/2003** and Rule 2-A (Determination of Value) do not provide for reducing the taxable value to 20%.
* The **33% taxable value** (after 67% abatement) is fixed under Notification 1/2006 for works contracts.
* The **20% VAT abatement** under DVAT is separate and not linked to the abatement allowed under service tax laws.
* The valuation rules for service tax do not permit bifurcation of the contract value arbitrarily between goods and services.
* Hence, **service tax must be paid on 33% of the gross contract value**, not 20%.
---
### Practical Implications:
| Tax Type | Taxable Value for Tax Calculation | Tax Rate |
| ----------- | ------------------------------------------------- | --------------------------------------------- |
| VAT | 80% of gross contract value (after 20% abatement) | 12.5% (DVAT) |
| Service Tax | 33% of gross contract value (after 67% abatement) | Service Tax rate (e.g., 12% or as applicable) |
* **Total effective tax base = 113%** (80% + 33%) of contract value.
* This is **legally valid** and recognized by authorities.
---
### Summary & Recommendation:
* The **company cannot reduce service tax taxable value to 20%** based on VAT abatement.
* The **33% taxable value for service tax under Notification 1/2006 is fixed and non-negotiable**.
* VAT and service tax are governed by **separate laws and rules**, so their abatements do not offset or reduce each other.
* Company must **continue charging VAT on 80% and service tax on 33%** of gross contract value.
* Any deviation may invite scrutiny and penalties.
---
### Final Note:
If you want, I can help draft a simple calculation sheet or template for your tax calculation or share official circulars/notices on this topic. Would that be helpful?
---
### Background Facts Recap:
* Company provides **tower installation services**, which includes supply of materials that become property of the contractee.
* Under **Delhi VAT (DVAT)**:
* 20% abatement is available on composite works contracts.
* VAT charged @ 12.5% on 80% of gross amount (post abatement).
* Under **Service Tax**:
* Company claims **67% abatement** under Notification No. 1/2006.
* Service tax charged on 33% of gross amount.
### Issue:
* Currently, VAT + Service Tax are effectively paid on 113% of the gross contract value.
* Can service tax be charged on balance 20% of gross amount (instead of 33%) by following Notification No. 12/2003 or Rule 2-A of Service Tax (Determination of Value) Rules, 2006?
---
### Legal & Practical Analysis:
#### 1. **VAT Treatment (DVAT)**
* DVAT allows **20% abatement** on composite works contract, so VAT is charged on 80% of gross value.
* This is standard practice under DVAT rules for works contracts involving transfer of goods along with services.
#### 2. **Service Tax Treatment**
* Earlier, service tax was charged on **installation and commissioning services**.
* With Notification No. 12/2003, **works contracts** involving transfer of property in goods are taxable service.
* **Notification No. 1/2006** provides **abatement of 67%** for works contracts, so tax is payable on 33% of gross contract value.
#### 3. **Can service tax be charged only on 20% of gross amount (value of services portion) instead of 33%?**
* **Notification No. 12/2003** and Rule 2-A (Determination of Value) do not provide for reducing the taxable value to 20%.
* The **33% taxable value** (after 67% abatement) is fixed under Notification 1/2006 for works contracts.
* The **20% VAT abatement** under DVAT is separate and not linked to the abatement allowed under service tax laws.
* The valuation rules for service tax do not permit bifurcation of the contract value arbitrarily between goods and services.
* Hence, **service tax must be paid on 33% of the gross contract value**, not 20%.
---
### Practical Implications:
| Tax Type | Taxable Value for Tax Calculation | Tax Rate |
| ----------- | ------------------------------------------------- | --------------------------------------------- |
| VAT | 80% of gross contract value (after 20% abatement) | 12.5% (DVAT) |
| Service Tax | 33% of gross contract value (after 67% abatement) | Service Tax rate (e.g., 12% or as applicable) |
* **Total effective tax base = 113%** (80% + 33%) of contract value.
* This is **legally valid** and recognized by authorities.
---
### Summary & Recommendation:
* The **company cannot reduce service tax taxable value to 20%** based on VAT abatement.
* The **33% taxable value for service tax under Notification 1/2006 is fixed and non-negotiable**.
* VAT and service tax are governed by **separate laws and rules**, so their abatements do not offset or reduce each other.
* Company must **continue charging VAT on 80% and service tax on 33%** of gross contract value.
* Any deviation may invite scrutiny and penalties.
---
### Final Note:
If you want, I can help draft a simple calculation sheet or template for your tax calculation or share official circulars/notices on this topic. Would that be helpful?
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- GSTR9- ITC
- Audit of F and O T/O
- REVENUE RECOGNITION AS PER IND AS 115
- GST 9- Table 8
- GST payable under RCM
- How to update Transaction data in broker samco account holding after transfer shares KARVY
- Applicablity on tds
- RCM on GTA Services
- Unable to generate and save json file for updated return
- Regarding TDS not deducted on rent
- Related to Rate of Depreciation
- Mismatch of Sales Invoice in GSTR-1
- Query on Mismatch of Sales Invoice in GSTR-1
- Import purchase entry
- Rule 54(1A) for Distributing ITC
- EXCESS CREDIT REALTED GST REVERSAL
- Export invoice not reported
- CA Articleship Extension Matter
- GST OFFICER WRONG NOTICE
- "Please ensure that the Total of the Deductions u/s 54F match the same in Table D in Sch CG"
Trending Online Classes
-
LIVE Course on GSTR-9 & GSTR-9C (Technical | Practical | Concept - Based)
Sachin Jain03 November 2025
CAclubindia
