If Service Tax Paid on Output Service, connected input service exempted

[Ramesh M]

Dear Experts,

If we pay Service Tax on output service of Erection & Commissioning, connected service done by a sub contractor, is there any exemption for him, since we are paying tax on final output service.

[Rajagopalan Ranganathan]

Sir,

The sub-contractor is liable to pay service tax on the service provided by him. However the main contractor can take credit of service tax paid by the subcontractor and use the credit for payment of service tax by him. CBEC has clarified in Circular No.96/7/2007-ST dated 23.8.2007 that a sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by the sub-contractor.

Services provided by sub-contractors are in the nature of input services. Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services. The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided.

[KASTURI SETHI]

After 1.7.2012, the concept is crystal clear. Services provided by Sub-contractor is exempted only if the services provided by the main contractor are exempted. If main contractor is liable to Service Tax, sub-contractor is also liable to Service Tax.

AI Summary

Sub-contractor liability: subcontracted services remain taxable while the main contractor may claim input tax credit. A sub-contractor remains separately liable to service tax for services provided; such services are taxable even when used as inputs by a main contractor. The main contractor may, however, take and utilize input tax credit of service tax paid by the sub-contractor. Sub-contractor exemption applies only where the main contractor's output service is itself exempt; if the main contractor is taxable, the sub-contractor must also pay service tax.