Works contract

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Nilesh (Querist)
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15 December 2011 DEAR ALL PLS GUIDE ME ON WORKS CONTRACT
ONE OF MY CLIENT IS DOING A CONSTRUCTION WORKS WITH MATERIAL HE IS RECEIVING A DIRECT CONTRACT FROM BUILDERS SO WHAT % OF SERVICE TAX & VAT SHOULD WE CHARGE TO BUILDER AND CAN WE GET CENVAT CREDIT OF SERVICE TAX TO SUBCONTRACT GIVEN BY US

PLS PLS GUIDE ME

PUNEET GOYAL

PUNEET GOYAL (Expert)
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15 December 2011 FOR THE SERVICES TAXABLE UNDER THE HEAD WORKS CONTRACT SERVICES U/S 65 (105)(zzzza) following provisions shall be applicable:
OPT FOR COMPOSITION SCHEME
1. VALUE OF TAXABLE SERVICES
Value of all goods (including FOC)+ value of all services -vat or sales tax -cost of machinery and tools used for execution of work.
(As per explanation of rule 3 of Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007)

2. CENVAT CREDIT MAY BE TAKEN OF
1. Input services
2. Capital goods
But cenvat credit cannot be taken of
Input and goods involved in execution of work. (As per Rule 3 (5) of CENVAT Credit Rules 2004, input removed as such)
The CENVAT credit of tax paid on taxable services as referred to under sub-clauses
(zzd), (zzq) and (zzzh) of clause (105) of section 65 of the Finance Act, 1994, shall be available
only to the extent of 40% of the service tax paid when such tax has been paid on the full value of the service after availing CENVAT credit on inputs.
(WEF 01.03.11)
3. RATE OF SERVICE TAX
4.12%
NOT OPT FOR COMPOSITION SCHEME
1. VALUE OF TAXABLE SERVICES
Gross amount charged – value of goods – sales tax/vat
(As per rule 2A of SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006)

2. CENVAT CREDIT MAY BE TAKEN OF
1. Inputs
2. Input services
3. Capital goods
But cenvat credit cannot be taken of goods involved in execution of work.
(Circular No. 96/7/2007-ST dated 23.08.2007 as amended by circular no 98/1/2008-ST dated 04.01.2008)
3. RATE OF SERVICE TAX
10.30%

As far as VAT is concerned in respect of works contract, you have the option to pay VAT under composition scheme or under normal provisions as above as per respective State VAT law.

List of Services Specified Under Rule 2 (l)(ii)(A) of CENVAT Credit Rules, 2004
1. Port Services [65 (105) (zn)]
2. Port Services in other port [65(105)(zzl)]
3. Air Port Services [65(105)(zzm)]
4. Commercial or Industrial Construction Services [65(105)(zzq)]
5. Construction of Complex Services [65(105)(zzzh)]
6. Works Contract Services [65(105)(zzzza)]
7. Architect’s Services [65 (105) (p)]
If the above services are used for the
(a) construction of a building or a civil structure or a part thereof; or
(b) laying of foundation or making of structures for support of capital goods
then these services shall not be considered as input services and accordingly CENVAT credit shall not be allowed. In other words, if the above services are used for provision of services other than construction etc in clause (a) & (b) then they shall be included in the definition of input services and accordingly CENVAT credit shall be taken.

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Nilesh

Nilesh (Querist)
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21 December 2011 DEAR ALL PLS GUIDE ME ON WORKS CONTRACT
ONE OF MY CLIENT IS DOING A CONSTRUCTION WORKS WITH MATERIAL HE IS RECEIVING A DIRECT CONTRACT FROM BUILDERS SO WHAT % OF SERVICE TAX & VAT SHOULD WE CHARGE TO BUILDER AND CAN WE GET CENVAT CREDIT OF SERVICE TAX TO SUBCONTRACT GIVEN BY US
ONE OF MY CLEINT CHARGING THE SERVICE TAX @ 3.43 % UNDER WORKS CONTRACT I.E 1/3 OF 10.30% IS IT CORRECT, ON THE BASIS OF EARLIER CALCULATION 1/3 OF 12.36% I.E 4.12%
PLS GUIDE ME
THNX IN ADVANCE

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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03 August 2025 Sure! Here’s a clear explanation addressing your queries about service tax and VAT on works contract, and the Cenvat credit on subcontract services for your client who is doing construction work for builders:

1. Service Tax on Works Contract
Nature of Works Contract Service Tax:
Works contract is a composite service involving both goods and service (labour + material).

Taxable Value under Service Tax (before GST era):
Under Rule 2A of Service Tax Valuation Rules, the taxable value of a works contract is a percentage of the total contract value based on the type of work:

70% for original works (construction, repair, etc.)

40% for works involving the transfer of immovable property (other than original works)

60% for other types of works contracts

Applicable Rate:
The service tax rate before GST was 10.3% (including cess) or 12.36% depending on the year.

Composition Scheme:
Sometimes taxpayers opted for a composition scheme where tax was charged on a reduced portion of the contract value, e.g., 40%, 60%, or 70%. The rates like 3.43% (which is roughly 1/3rd of 10.3%) or 4.12% (1/3rd of 12.36%) are attempts to apply tax only on the service portion.

Is 3.43% correct?
If your client is charging 3.43% on the entire contract value, that implies charging tax on 1/3rd of the contract value (approx 33%), which is lower than the prescribed 40%, 60%, or 70% based on type of work.
This may not be correct unless the contract specifically falls under a category with 40% valuation or the government has issued a notification authorizing this rate.

2. VAT on Works Contract
VAT Applicability:
VAT is applicable on the value of materials supplied under the works contract.

Contractor’s Responsibility:
Usually, the builder deducts VAT or WCT on the material portion if the contractor is registered under VAT.

VAT Rate:
The VAT rate varies by state and type of material but is commonly in the range of 4% to 5% for works contract materials.

3. Cenvat Credit on Subcontract Services
Cenvat Credit on Service Tax paid to Subcontractors:
If your client hires subcontractors and pays service tax on those services, he can avail Cenvat credit of the service tax paid on subcontracted work, provided:

The subcontractor is registered under service tax.

The subcontract service is used for providing taxable services by your client.

Proper invoices and documents are maintained.

Summary Table:
Aspect Details
Service Tax Rate 10.3% / 12.36% (depending on the period and rate applicable)
Valuation for Service Tax 70% (original works), 40%, or 60% (others) of total contract value
Service Tax Charged @ 3.43%? Generally No unless notified or contract category supports this valuation
VAT on Materials VAT on material value as per state VAT rates (~4-5%)
Cenvat Credit on Subcontract Yes, if subcontractor charges service tax and conditions met

Recommendation:
Review the contract and confirm the type of works contract (original work or others).

Apply service tax on 40%, 60%, or 70% of contract value accordingly and charge at the applicable rate.

Charge VAT on the material portion at prevailing state rates.

Claim Cenvat credit for service tax paid to subcontractors based on invoices.

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