Tax on Work Contract.

[Sudhakar Sinha]

Dear Sir,

Consider a case, a work contract is awarded to contractor for construction office building in which cement and steal are free issue material by employer and other material are in the scope of contractor. Please suggest tax applicable for such Work Contract.

Regards

Sudhakar Sinha

[Rajagopalan Ranganathan]

Dear Shri. Sinha,

As per rule 2 A (b) of Service Tax (Determination of Value) Rules, 2006,

Value of works contract service shall include, -

(i) labour charges for execution of the works;

(ii) amount paid to a sub-contractor for labour and services;

(iii) charges for planning, designing and architect's fees;

(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

(v) cost of consumables such as water, electricity, fuel used in the execution of the works contract;

(vi) cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and services;

The rule does not distinguish between cement and steel supplied by the service receiver or procured by the service provider. Therefore cost of cement and steel supplied by the employer (service receiver) is includible in the gross value charged by the service provider.

Though there are some decisions by CESTAT/High Court holding that value of free supply materials are not includible in the gross value charged by the service provider, these decisions relate to the period prior to 1.7.2012. Since the above-mentioned rule had come into effect on 1.7.2012 the rule will prevail. This is my opinion.

 

[Sudhakar Sinha]

Dear Sir,Please distinguish the applicability of Service tax and Sales tax as per option available on above Contract. RegardsSudhakar Sinha

[Rajagopalan Ranganathan]

Dear Shri. Sinha,

According to Rule 2 A of Service Tax (Determination of Value) Rules, 2006 service provider has two options to pay service tax in respect of works contract service executed by him. Firstly, service provider may calculate value of service as per rule 2 A (i), that is, calculate value of service alone and pay service tax @ normal rate of 12.36% (inclusive of education cess and S and H education cess) on such value. In this case you can avail Cenvat credit of input services and capital goods used for providing the output service. In this case you have to pay separately sales tax/vat on the goods/property transferred to service provider while executing the works contract service.

OR

Secondly, pay service tax under rule 2 A (ii), namely 'composition scheme' under which you may pay service tax on 40% of total value of works contract (for execution of original works) or 70% of total value of works contract [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]. In this case also you can avail Cenvat credit of input services and capital goods.

In both the cases you cannot avail cenvat credit of duty paid on inputs.

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;

 

 

AI Summary

Works contract valuation: free issue materials included; choose direct valuation or composition scheme with differing tax and credit effects. Value of works contract service includes labour, service-related charges and the cost of materials supplied by the service receiver, so free issue cement and steel are includible under the Determination of Value rule. A provider may either value only the service component and pay service tax at the normal rate or opt for the composition scheme based on a prescribed percentage of total contract value; Cenvat credit for input services and capital goods is allowed, but credit for duty on inputs is not, and sales tax on transferred goods is payable separately.