Vat+service tax or wct?

This query is : Resolved

Arkaraj Mukherjee (Querist)
Follow

10 March 2012 Hi,

A Company A, registered under NSIC is in the Business of Electrical Maintenance repair and Overhauling. They primarily buy Copper Strips, Insulation material, Varnish, lubricants, paints etc. which are used in the repairing works.

The firm is registered under Service Tax as well as VAT. Presently they are charging only Service Tax while invoicing to their end customer on 40% on the Contract Value. On the contrary, While filing Quarterly return, they are paying 13.5% as VAT on the balance 60% of the Contract Value.

"A" does repairing work PAN India basis for multiple States customer like Bihar, Madhya Pradesh, Chattisgarh, Orissa etc..and they have their Workshop located in West Bengal. Any equipment coming for repair or overhauling from other States arrives through the waybill provided by 'A".

My queries: is the Tax structure of Service Tax on 40% and VAT@13.5% on Balance 60% of the Contract correct or does it falls under other type of Tax category like WCT or Service Contracts structure? What is the current Applicable Tax Law?

Experts please opine.

Regards,

Arkaraj Mukherjee.

Pankaj Gandhi Jaiswal

Pankaj Gandhi Jaiswal (Expert)
Follow

10 March 2012 The taxabality will depend on the substance of transaction. if it is divisible contract better make two separate agreement and charge service tax on service part on actual basis not 40% basis and similarly VAT as per actual on actual material sale. And if it is indivisible contract you should opt WCT. The rate of VAT is depend on state to state basis where transaction is being executed. Ther service tax there is two option 1st is under Rule 2A valuation and other is 4.12% on Gross Value

Arkaraj Mukherjee

Arkaraj Mukherjee (Querist)
Follow

11 March 2012 Their nature of business typically leads to indivisible contracts (since isolation of material and labour is diffcut). In that case, ideally "A" should goes into composition scheme of 4.12%: Now, what are steps to followed by the Company's Tax Consultant. Will their be any discontinuation in generation of the online Waybills for bringing in Motors and Transformers from Customer premises?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
Follow

03 August 2025 Great question! Here’s a detailed explanation about the tax structure for Electrical Maintenance & Repair contracts like in your case:
Situation Recap:
Company A does repair/overhauling work (electrical equipment).
Buys materials (copper strips, varnish, etc.) used in repair.
Charges Service Tax on 40% of contract value (labour component).
Pays VAT at 13.5% on remaining 60% (material component).
Business is PAN India; workshop is in West Bengal.
Equipment comes via waybills.
Key Points to Consider:
1. Divisible vs Indivisible Contract:
Divisible Contract:
Labour/service and goods/material components can be separately identified and invoiced.
Service Tax on labour portion only (actual labour cost).
VAT on actual sale of goods/materials.
Indivisible Contract:
Labour and material are intertwined and cannot be separately valued easily.
Such contracts typically attract Works Contract Tax (WCT) or composition schemes.
2. Current Tax Treatment in Your Case
Charging Service Tax on 40% of contract value (labour portion).
Paying VAT @ 13.5% on 60% of contract value (material portion).
This is acceptable only if contract is divisible and labour/material can be segregated. The percentages should be based on actual costs, not arbitrary 40/60 split.
3. If Contract is Indivisible (likely in your case)
Option to opt for Works Contract Tax (WCT) or a composition scheme under VAT laws.
In West Bengal, indivisible contracts typically attract WCT instead of separate VAT + Service Tax treatment.
Service Tax can be charged on the entire contract value but at a composition rate of 4.12% under the Notification No. 30/2012-ST (specifically for works contracts).
4. Implications for Waybills
If opting for composition scheme or WCT, waybills must be issued accordingly, as movement of goods will be under specific tax laws.
The company should coordinate with state VAT authorities to ensure online waybill generation continues smoothly under new tax regime.
No discontinuation expected if compliance is proper.
Recommended Steps for Company A's Tax Consultant:
Evaluate the nature of contracts carefully: divisible or indivisible.
If divisible, maintain separate agreements/invoices for labour and materials; charge service tax and VAT accordingly.
If indivisible, opt for WCT or the 4.12% composition scheme under service tax.
File returns accordingly.
Ensure all invoices and waybills comply with composition scheme regulations.
Coordinate with state VAT department for waybill issuance process continuation.
Update client contracts and invoicing accordingly to reflect correct tax treatment.
Keep track of interstate transactions and place of supply rules, as tax rates and applicability differ state-wise.
Summary Table
Scenario Tax Applicability Key Notes
Divisible Contract Service Tax on labour + VAT on materials Invoice separately, tax on actual costs
Indivisible Contract Works Contract Tax (WCT) or Composition Scheme (4.12% ST) Single tax on total contract value

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now