Valuation of service tax

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sandeep k panchal (Querist)
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18 October 2013 my friend is a electrical contractor, he quoted a tender in a govt. co., works mention in the tender is like recondition of earthpits which includes erection, commissioning, fabrication, some civil work and material (like pipe, iron plates and civil material), now per his logic this work includes 70% material and 30% services and he charged service tax on (30%+3% cess) of gross amount. he did write or wrong please clarify.
(he registered under 3 services i.e. works contract, maintenance & rep. and business auxileary)

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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18 October 2013 i) Seems it is a 'works contract' covered under notification 24/2012 ST. If so ST has to be paid @ 12.36% on the 60% of the entire contract value OR

ii) Look whether the case can be fit into notification 25/2012 ST so as to claim exemption from service tax.

sandeep k panchal

sandeep k panchal (Querist)
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19 October 2013 thank you sir,we can't opt 2nd option for him.

i )now what we do. can we seem this service as election, commissioning and installation and get registered with new service. OR if we prove that total material cost is almost 70% and mention in bill separately. can it work

ii) (but if our contract include maximum value of material of gross contract value and we could't specify value of material then why we pay service tax on 60% of total amount. ) please guide.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Great questions! Here’s a detailed clarification for your friend’s electrical contracting service tax issue:

### 1. **Works Contract and Service Tax on 60% of Contract Value**

* Under **Notification 24/2012-ST**, *works contract* is treated as a service and taxed accordingly.
* The **service portion** is deemed to be **60% of the total contract value** (40% is presumed as the value of goods/materials supplied).
* Therefore, the service tax is levied on 60% of the contract value, regardless of the actual material cost or service portion. This is a **deemed valuation rule**.
* This rule is applied **when material cost is not separately stated or proven** in the contract.

### 2. **If Material Cost is Specified Separately in the Bill**

* If the contractor **clearly segregates the value of materials and services in the invoice/bill**, service tax will be levied only on the **service portion** (not on the material value).
* So if your friend can show **documented evidence** that 70% of the contract value is for materials (and billed separately), and only 30% for services, then **service tax can be charged on 30% of the total**.
* This means **proper billing and documentation** is critical to avail this benefit.

### 3. **Changing Service Category to “Erection, Commissioning, and Installation” Service**

* Registering under a different service category like "Erection, Commissioning and Installation" does not change the tax treatment if the contract is still a *works contract* involving material supply and construction.
* Generally, works contract covers such jobs, so it would still be subject to the deemed valuation rule (60% of gross value).
* Only if the contract strictly involves *pure service* without supply of goods/materials, it might be possible to classify under “Erection, Commissioning, and Installation” and charge service tax on full value.

### 4. **Why Pay Service Tax on 60% if Material Cost is High but Not Specified?**

* The **60% deemed value** rule applies to **simplify valuation and tax collection**.
* If material cost is not separately mentioned, tax authorities assume that 60% of the contract is service (taxable) and 40% is material (non-taxable).
* This avoids disputes over the value of materials and services.
* So **if material cost is not invoiced separately or can’t be proven**, the contractor has to pay service tax on 60% of gross contract value.

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### **Summary / Recommendations:**

| Scenario | Service Tax Basis | Notes |
| ----------------------------------------------------- | -------------------------------------------- | -------------------------------------------------- |
| Material and service **not separately billed** | 60% of gross contract value (deemed value) | Applies by default as per Notification 24/2012-ST. |
| Material and service **separately billed and proven** | Service tax only on actual **service value** | Contractor must maintain proper documentation. |
| Contract purely service without material supply | Full contract value | Eligible for other service category rates. |

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**So, your friend should:**

* **Segregate material and service value clearly in invoices.**
* Keep **purchase bills for materials** and proof of costs.
* Use proper accounting to support the service portion.
* If unable to do this, comply with 60% deemed valuation rule.

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If your friend needs help with structuring bills or accounting entries for this, I can help draft a sample invoice or accounting entries too. Would you like that?

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