Vat & service tax in works contract

This query is : Resolved

Sheela V (Querist)
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28 May 2015 In case of Works Contract, a consolidated invoice is raised for VAT & Labour. The client is registered under composition scheme for VAT purposes, then Composition Tax is collected @ 4% on total contract value and paid to the Government. The actual labour is about 30% of the project value. But as per ST rules, Taxable service in case of non-original works contract is 70% of the contract value. Please suggest whether he has to collect ST only on 30% of the contract value or 70% as per ST rules.

Also Can he raise two separate invoices for labour & VAT? If so, then as per COT, tax should be collected on total consideration of the contract, which will be 100% of the contract value. Then one invoice will be 100% of contract value for COT & 30% of contract value for ST, which will impact my turnover in books. Please guide.

Kumar Gaurav

Kumar Gaurav (Expert)
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28 May 2015 Please do following things:

Option I

1)-Pay 4% VAT on 100% of contract value
&
2)- ST on 70% of contract value

Please note raising two invoices do not have any impact in relation to charding VAT/ST

Sheela V

Sheela V (Querist)
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03 June 2015 Thanks Mr. Kumar Gaurav. But as per the work order, the actual labour component is only 30% of the project which is chargeable for ST. So, charging ST on 70% will be high cost for the project. Please suggest.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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03 August 2025 Got it! This is a common confusion with works contracts involving VAT and Service Tax (ST). Here's a clear breakdown:

### VAT & Service Tax on Works Contract (with Client under Composition Scheme):

**1. VAT Aspect:**

* If the client is registered under Composition Scheme, they pay VAT at a flat rate (e.g., 4%) on the **entire contract value**.
* So, VAT is collected on 100% of contract value regardless of labour/material breakup.

**2. Service Tax Aspect:**

* Service Tax on works contract (non-original works contract) is calculated on **70% of the contract value** as per the law — this is a deemed labour component.
* Even if actual labour is only 30%, as per ST rules, tax is on 70%.
* Hence, ST is applicable on 70% of the contract value, not 30%.

### About Raising Separate Invoices for Labour & VAT:

* Raising two invoices (one for labour and one for VAT on materials) is allowed, but **this doesn't change the tax liability**.
* For VAT purposes, tax is on total contract value.
* For ST purposes, tax is on 70% of contract value.

### Impact on Books:

* You will have VAT booked on full contract value.
* ST will be booked on 70% of contract value.
* Your turnover in books will reflect both separately.
* This is standard and expected treatment.

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### Why you can't charge ST only on 30% labour component:

* Service Tax law uses the **deemed labour value method** to simplify assessment.
* Actual labour may be less, but ST is charged on 70% deemed labour for non-original works contracts.

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### Summary:

| Tax Type | Tax Base | Rate/Notes |
| -------- | ------------------------------ | ------------------------- |
| VAT | 100% of contract value | 4% (composition scheme) |
| ST | 70% of contract value (deemed) | As per applicable ST rate |

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If you want, I can help draft invoice samples or journal entries for this scenario. Would you like that?

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