Vat and service tax (work contract)

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nilesh (Querist)
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17 May 2013
In the state of Maharashtra there is standard deduction in work contract, so can we adopt the same in service tax as standard deduction mentioned in VAT act.

Rs.100/- is the Work contract value

then vat to be paid on Rs. 70/- and service tax to be paid on Rs. 30/-
this can be treat as service value.

in the case of service tax, they also given the standard deduction 40%, 60%, and 70%.

but this is not the correct piture. goverment is taking the benefit of this. so I feel that standard deduction would be same in VAT act and Service tax act.

please let me if any case in this regards.

nilesh

nilesh (Querist)
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18 May 2013 Experts are requested to please give your suggestion or information.

Aashok Kumar Sharma online

Aashok Kumar Sharma online

(Expert)
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02 August 2025 Great question! The issue of whether the **standard deduction allowed under the Maharashtra VAT Act for works contracts** can be applied similarly for **Service Tax valuation** is a common confusion.

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### Key points to understand:

1. **VAT standard deduction (Maharashtra VAT Act)**:

* For works contracts, Maharashtra VAT allows a **standard deduction of 25%** of the contract value towards labour (non-taxable portion).
* VAT is payable on the **remaining 75% considered as material cost**.
* This deduction is a *statutory provision under Maharashtra VAT laws* to ease compliance where exact breakup of labour/material is difficult.

2. **Service Tax valuation (Works Contract Services)**:

* Service Tax valuation follows the **Service Tax Rules**, specifically Rule 2A of the Service Tax (Determination of Value) Rules.
* The **taxable value is contract value minus actual cost of materials** used.
* If actual breakup is not available, the government allows a deemed taxable value:

* 40% of the contract value for “original works” (new construction)
* 60% for “other works” (repair, maintenance, finishing)
* 70% in specific cases like electricity works (rare)

3. **Are VAT and Service Tax deductions the same?**

* **No, these are two different laws and are independent of each other**.
* The VAT Act applies only to sale of goods (materials portion).
* Service Tax applies on the service portion (labour + service component).
* The **standard deduction allowed under VAT is not automatically applicable under Service Tax**.
* For Service Tax, you must follow Service Tax valuation rules, **irrespective of the VAT deduction**.

4. **Any court cases or clarifications?**

* Courts and tribunals have generally upheld that VAT and Service Tax are separate taxes.
* You **cannot claim VAT deduction standards as a basis for Service Tax valuation**.
* Department may challenge valuation if you do not maintain proper breakup and rely on VAT deduction for ST.

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### Summary:

| Tax Type | Deduction/Valuation Method | Notes |
| --------------- | ---------------------------------------------------------------- | ------------------------------------------------ |
| Maharashtra VAT | 25% standard deduction allowed on contract value | Applies only for VAT on material portion |
| Service Tax | Actual material cost deduction or deemed taxable value (40%/60%) | Independent from VAT; based on service tax rules |

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### Your example:

* Contract value = Rs.100
* VAT payable on Rs. 75 (assuming 25% labour deduction)
* Service Tax payable on Rs. 40 (if original works) or Rs. 60 (other works), **not Rs. 30** as per VAT deduction.

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### Recommendation:

* Maintain proper purchase records to claim actual material cost under Service Tax.
* If no breakup, adopt 40% or 60% deemed taxable value as per nature of works contract.
* Do **not** apply VAT deduction for Service Tax valuation.

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If you want, I can share some notifications or case law references supporting this distinction. Would you like me to?

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