Works contract and Service Tax

Works contract and Service Tax

Works contract has been defined in Service Tax vide Section 65B(54) as under:

“works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

Thus, the definition is wider in terms of understanding but has been again restricted to 10 activities.

Valuation

Rule 2A of Service tax (Determination of Value) Rules, 2006 deals with valuation provision in case of works contract.  The Rule provides for two options for determination of value of services in a Works contract.  The two options are not a choice, but when the first option is not possible, only then the second option is to be resorted to.

  • Option I : When value of value added tax has been paid on the actual value of transfer of property in goods

This option is available in cases where the contractor knows the exact portion of goods as is used in works contract and property in which has been transferred to the contractee on actual value.  No proportion or abatement as provided under the state VAT laws is sued to determine the VAT to be paid and the calculation towards goods is made at actuals.

It is further provided that under this option, Gross amount shall not include the value added tax / sales tax paid, if any, on transfer of property in goods involved in the execution of the said works contract.  However, it further provides that the Gross Amount shall include the following items:

  • labour charges for execution of the works;
  • amount paid to a sub-contractor for labour and services;
  • charges for planning, designing and architect’s fees;
  • charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
  • cost of consumables such as water, electricity, fuel used in the execution of the works contract;
  • cost of establishment of the contractor relatable to supply of labour and services;
  • other similar expenses relatable to supply of labour and services; and
  • profit earned by the service provider relatable to supply of labour and services;

 

  • Option II: When value has not been determined under Option I

If Option I is not possible to be followed, service tax shall be paid in the following manner:

Type of Works Contract Options Manner of computation of service tax
Original Works

(a) “original works” means-

(i) all new constructions;

(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

 In other cases Service tax shall be payable on 40% cent of the total amount including such gross amount

 

1.1.1

In case of works contract, not covered under sub-clause (A), including works contract entered into for,—

(i) maintenance or repair or reconditioning or restoration or servicing of any goods; or

(ii)  maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property, service tax shall be payable on seventy per cent of the total amount charged for the works contract

Service tax shall be payable on

70% of the total amount charged for the works contract

 

Read More

 

Works contract and VAT
Works contract and GST
Job Work under GST
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