Vat and service tax on works contract of modular kitchen

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Amit shah (Querist)
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24 May 2014 Dear Experts,

One of our client is a Modular Kitchen Contractor for new constructions only.

His contract terms include Complete Supply, fabrication, assembling, installation of Modular Kitchen at Site for a Contract Price (Composite price incl. Labour and Material - no breakup).

Location - Maharashtra

Purchase - No breakup of Contract wise Labour is available, hence difficult to adopt Actual Deduction Method. Purchase of Materials are 90% towards 12.5% items and 10% towards 5% items

MVAT Option adopted - Standard Deduction @ 25% towards Labour portion. 75% taxable value for material for payment of VAT

Query:
1. For Service Tax purpose, can we consider this 25% of Std. deduction of VAT as labour charges and pay Service Tax @ 12.36% on the same ?
2. Whether the Material Value i.e. 75% on which VAT has been paid can be considered as Actual Material Value for deduction in the light of Rule 2A - Determination of Tax. Value for Works Contract
3. If no, kindly advise the best method under VAT and Service Tax to have minimum tax liability
4. What is the VAT Rate to be charged on Modular Kitchens under WC for Mahrashtra ?

please advise at the earliest
Many Thanks for your response

MJ Krishnamurthy

MJ Krishnamurthy (Expert)
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24 May 2014 In Maharashtra the standard deduction of 25% labour is allowed. On the 75% break up of various material consumed,including profit,is to be done and vat is to be charged at the respective rates.
Regarding ST actual labour expenses,if it can be properly accounted in detail,as rule 2A(as quoted by you) can be taken as taxable value. If this is not possible,or it leads to doubts and controversies,40% of the total receipts can be taken as taxable amount for ST.....mjk

Amit shah

Amit shah (Querist)
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24 May 2014 Thanks for clarification sir. VAT issue is resolved.
However, for ST purpose the question remains
1. Can we take this as 40% of total receipt, as modular kitchen contract is for new works, but the its is not a construction Contract. So will it fall under 40% Taxable Category or 60% - pls advise

2. Rule 2A says Total contract less actual material value. Can we consider Material value arrived under VAT ( as per Std. deduction method) for deduction and pay service tax on balance.

Kindly guide.

MJ Krishnamurthy

MJ Krishnamurthy (Expert)
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25 May 2014 For original works 40% of the receipts is the formula for calculating taxable amount.In other cases such as repair,finishing,polishing etc,with less material supply 60% of receipts is to be taken for estimating the taxable amount.Modular kitchen involves wood work,masonry,laying and supply of tiles,painting etc. Hence it is a original works contract.There is no direct link between VAT and ST laws.Each have their own rules......mjk

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Amit shah

Amit shah (Querist)
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26 May 2014 Thanks again sir for clarifying the position.

Doubt here is Will the ST department accept Modular kitchen work ( like wood, mansonry, painiting, assembling) etc. as New constructions to justify as "Original Works" and avail benefit of 40%. We are doing all modular kitchen work only for New construction projects only, however this per se is not a Construction Activity.

Kindly help with relevant notification/circular which can be used to support 40% Original Work Claim.

As practically, ST department can argue that above modular kitchen work may be for the New Construction building, but does not fit in the definiation of Original Work and would force to pay based on 60% - Other works

Your thoughts in the matter would be highly appreciated sir.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Great detailed query! Let me break down the VAT and Service Tax treatment on modular kitchen works contracts in Maharashtra, especially for new constructions:

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### 1. **VAT on Modular Kitchen Works Contract (Maharashtra)**

* Maharashtra VAT allows **standard deduction of 25% on the contract value** towards labour.
* Remaining 75% is considered as material cost.
* VAT is payable on materials supplied under the contract at applicable rates (12.5% or 5% depending on materials).
* This method is accepted if no proper breakup of labour and material is available.

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### 2. **Service Tax on Works Contract for Modular Kitchen**

#### Is Modular Kitchen Work an "Original Works" or "Other Works"?

* **Original works** means any work involving construction, alteration, renovation, or repairs related to a building or civil structure.
* Modular kitchen involves **woodwork, masonry, painting, installation**, etc.
* Even though modular kitchen is a **part of finishing/interior**, if it is done as part of **new construction projects**, it may be argued as a part of original works.
* However, **strictly speaking, modular kitchen by itself is not “original works” but may qualify when integrated with new construction**.

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#### Taxable Value for Service Tax (Rule 2A):

* If properly accounted, **service tax is payable on contract value minus actual material cost**.
* Where no breakup, **40% of total contract value is deemed taxable for “original works”**.
* For "other works" (e.g. repair, finishing), **60% of total contract value is taxable**.

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### Your specific questions:

1. **Can you take 40% of total receipts for ST on modular kitchen contracts as “original works”?**

* You **can argue yes** since modular kitchen is part of a new construction project.
* However, there is a risk that Service Tax department may classify it as "other works" and demand tax on 60%.
* Support your claim with contract documents clearly showing integration with new construction and references to Service Tax Circulars clarifying “original works”.

2. **Can the material value arrived under VAT (using 25% standard deduction) be considered as actual material cost for ST?**

* **No direct link between VAT and Service Tax laws** — rules are separate.
* Ideally, material cost should be determined from actual purchase invoices.
* If actual breakup is not available, you may use reasonable estimation but beware that ST department may ask for evidence.
* VAT standard deduction is an accepted estimate for VAT purposes only, not automatically for ST.

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### Suggested action:

* Maintain proper records and try to document material purchase values separately for ST.
* For modular kitchens installed in new construction, **refer to Service Tax Circular No. 138/4/2004-ST dated 17.05.2004** (explains original vs other works).
* Consult a tax professional to get a written opinion and prepare to defend classification as original works if challenged.

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### Summary table:

| Aspect | VAT (Maharashtra) | Service Tax |
| ----------------------------- | ---------------------------------------- | ----------------------------------------------------------------------------------------------- |
| Labour Deduction | Standard deduction of 25% allowed | No automatic linkage with VAT |
| Taxable Value | 75% of contract value (material portion) | Contract value minus material cost (or 40%/60% deemed taxable value) |
| Material Cost | Purchase value of materials | Actual purchase invoices preferred, VAT estimates not sufficient |
| Original Works vs Other Works | Not applicable (VAT on material only) | Modular kitchen in new construction can be argued as Original Works (40%) but may be challenged |

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If you want, I can help you draft a letter/representation citing relevant notifications to support your position with the tax authorities. Would you like that?

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