Service tax

Queries 600 views 3 replies

Ishaan

Student CA Final

45 Points Joined September 2014

A company requires Installation of new Machinery. For this purpose, it has appointed a Contractor who would supply materials and labour for the completion of the Contract.

This qualifies for a "Works Contract" since there exists a transfer of goods required in the execution of the Contract and the materials transferred are subject to VAT and according to the circular dated 1.7.2012, Service Tax on the Labour Portion for a Works Contract falls under the Reverse Charge Mechanism(RCM)/Joint Charge Mechanism(JCM) under the purview of which, Liability of Service Tax on the Labour Portion is to be shared by both Service Provider(SP) and the Service Receiver(SR) @ 50% each i.e. SP's liability is 50% of 12.36%(effectively 6.18%) on Labour Portion and SR's liability is 50% of 12.36%(effectively 6.18%) on Labour Portion.

I have three queries regarding the same:

(I) What if the Service Provider is Unregistered and does not have a Service Tax Registration No. and is not charging Service Tax in his bill? Is the Service Receiving Company still liable to deposit their bit of Service Tax i.e. 6.18% on Labour Portion?

(II) What if the Service Provider is charging full 12.36% Service Tax in his bill and shifting the Whole Liability of 12.36% to the Service Receiving Company? Can the Service Receiving Company deduct the respective amount from the subsequent bills of the Contractor because the Service Receiving Company is only liable for 50% of the Service Tax i.e. 6.18% of the Labour Portion?

(III) In a Tea Garden Audit, I observed a practice in which the Tea Company purchased materials, which were required in the execution of the Contract, from the Contractor by raising LPO's/Challans/Invoices and made the materials a part of the Garden Stores. At the time when the Contract was undergoing, the Company requisitioned the same materials needed as and when for the completion of the Contract.

In the Contract it was mentioned that Materials are to be supplied by the Company. So effectively, this would not be a Works Contract but the Contractor, in his bill, had mentioned the dues of both Materials and Labour and charged 12.36% Service Tax on the Labour Portion from the Company. And, by logic, transfer of goods involved in the execution of Contract is taking place. So this should qualify as a Works Contract.

However, it was pointed out in Audit that it would be beneficial for the Company that it does not purchase materials and make it a part of the Stores separately but they mention it in the Contract that materials are to be supplied by the Contractor so that the Contract qualifies for a Works Contract and the Service Tax Liability comes down to 6.18% rather than 12.36%.

My question is that Is the Company correct in doing so or the advice given to them was correct? They had an explanation that if the Contractor comes to know that he is liable for Service Tax, then he would boost up his rates from the next time and subsequently the Company would have to suffer.

Replies (3)

JSS

Practice

58 Points Joined September 2014

Dear Ishaan,

Please consider the following replies:

1) Given that the contract is for Installation of new machinery involving Supply and Service, this falls under "Original Works", chargeable at 40% of value. Hence the Effective Service Tax comes to 12.36% of 40%, i.e., 4.94%. Hence, in the given case, even if the service provider is unregistered, and given that the service receiver is a company, the company is liable to pay Service Tax under reverse charge, the amount being 2.472%, i.e., 50% of 4.94% of the invoice value, as per Notn. No. 24/2012 read with Notn No. 30/2012 of June 2012.

2) If the service provider charges complete 12.36%, then it is not correct, as the taxable value of an "Original Works" is only 40% of the invoice value, as per Notn. No. 24/2012, as mentioned above. In that case, the service receiver is liable to pay only 50% of 40% of 12.36% to the service provider, as the receiver is under liability to pay the remaining 50% to the government.

With regard to your third query, we will revert again.

Please refer to the above mentioned notifications in case of any clarifications.

Ishaan

Student CA Final

45 Points Joined September 2014

Correct me if I'm wrong, in case of Original Works, 40% will be considered as the Service Portion when the Value of Materials and Labour is not divisible i.e. the Bill is of Composite Amount. In case value of Materials and Labour are given separately then Service Tax is to be paid on the Labour Portion only @ 12.36%

Ishaan

Student CA Final

45 Points Joined September 2014

My abovementioned comment is in reference with Rule 2A clause(i) and clause (ii).

Determination of value of service portion in the execution of a works contract

clause (i) Value of service portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in the execution of the said works contract.

clause (ii) Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-

(A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent of the total amount charged for the works contract;