works contract service

[Asked by Guest]

we would be grateful if following doubts are clarified :-

1) Under what Head would the service of a sub- contractor of a builder of residential complex be classified if he is not registered in sales tax and does not pay VAT

2) whether cenvat credit of service tax paid for past liability by a sub contractor is admissible to the main contractor even if SCN is issued.

3) Is payment of VAT necessary for a service to be classified as Works Contract Service.

[KASTURI SETHI]

W.e.f. 1.7.2012, all kinds of construction services are covered under one roof i.e. Works Contract Service under Section 65(105)(zzzza) (Code - 00440410) of the Finance Act.Different accounting codes for Residential Construction, Commercial or Industrial Construction and Services Provided by a builder have been allotted by CBEC. As per Board's circular No.165/16/2012-ST dated 16.11.2012 these are accounting codes are for statistical analysis ie. just for understanding the concept of service and are also valid. Percentage of abatements vary according to the nature of construction service.Reverse Charge Mechanism is applicable to all these services as these are covered under one roof of ' Works Contract Service' Sub-contractor is required to be registered as per nature of service. Regarding Cenvat credit of past liability, if otherwise admissible, would be hit by the bar of six months/one year.VAT is a State subject and I do not know about VAT. Rest depends upon the terms and conditions of the agreement/contract.

[KASTURI SETHI]

Sh.Jagannath Prasad Ji,

I would like to add that as already informed in my previous replies on this issue that pure labour cannot be classified under the category of 'Works Contract Service'. In that situation, you will have to resort to specific construction service i.e. Residential Construction, Commercial or Industrial Construction Service, Services provided by a builder.

[Ganeshan Kalyani]

In a situation where a manufacturer has purchased machinery from X company and engaged a service provider who would install and erect the machinery. In this case manufacturer has handed over the machinery so purchased to service provider to installing and erecting. Will this be a works contract service. and whether free issue of machinery should be added to price for calculating service tax.

[KASTURI SETHI]

Sh. Ganeshan Kalyani Ji,

The situation cited by you does not fall under the category of 'Works Contract Service' as only erection, installation and commissioning charges are involved and Service Tax will be leviable on only these charges. Charges for Erection, installation & commissioning of the machinery are labour charges and the value of free machinery is not to be added for the purpose of computation of Service Tax.

[Vijay kumar]

As long as there is no transfer of property in goods involving payment of VAT, the question of classification under works contract does not arise. The machine is handed over only for the purpose of installation and hence there is no change of ownership between X and Y. It's purely a service contract and only installation charges would form the taxable value for the purpose of service tax.

[KASTURI SETHI]

Sh.Vijay Kumar Ji,

In your reply, you have echoed my views.

AI Summary

Works contract service classification: construction services attract reverse charge and abatements; VAT payment alone is not decisive.
Construction services are consolidated under Works Contract Service with varying abatements and subject to the Reverse Charge Mechanism; sub-contractors must register by service nature. Cenvat credit of past liabilities, if otherwise admissible, is subject to statutory time-bars and may be affected by issuance of notices. VAT payment is not dispositive of works contract classification. Pure labour, and standalone erection/installation and commissioning, are treated as services only and free-supplied machinery is excluded from the taxable value when no transfer of ownership occurs.