Service Tax on Work Contract: According to the Clause 44 of section 65B of the Finance Act, 1994, a Work Contract is defined as a contract wherein the transfer of property in services and goods involved is leviable to tax. The contract’s primary purpose is to carry out the construction, enforcement, installation, commissioning, completion of repair and maintenance, fitting, alteration, and renovation of immovable and movable property. It is also applicable for carrying out any other similar activities or a part thereof about such property.
- What Is Service Tax On Contract?
- Work Contract Is A Declared Service
- Reverse Charge Mechanism for Works Contract
- Taxable Value Of Service In Execution Of Work Contract
What Is Service Tax On Contract?
A work contract is defined as the transfer of goods as part of a service contract that involves repair, renovation, and installation of heavy infrastructure.
Section 65B of Finance Act, 1994, states the following-
- Property transfer in goods and services involved in the execution of such a service and work contract
- The transfer of such property in goods is leviable to tax such as VAT, WCT, or Sales Tax.
The term ‘leviable to tax as sale of goods does not necessitate that the VAT is paid to transfer property involved in such a contract. It simply means the transfer of property is determined whether such a contract is a works contract or not.
The primary purpose of such a contract is for
- Construction,
- Erection,
- Commissioning,
- Installation,
- Completion,
- Fitting out,
- Repair,
- Maintenance, like alteration and renovation
The term ‘for carrying out any other similar activity or a part thereof about such property holds a broad implication and is prone to litigation.
It can be concluded that the service contract is the composite or single contract for providing both the transfer of property in goods and provision of service.
Work Contract Is A Declared Service
To get a hold of clarity, section 66E of Finance Act, 1994, states what shall be considered service and hence liable to charge service tax. However, this is applicable unless they are exempted anywhere else in service tax law.
Clause (h) of section 66E of Finance Act, 1994, stipulates that the service portion in executing a work Contract is a service. Hence based on this part, service tax is to be levied accordingly.
Reverse Charge Mechanism for Works Contract
A service provider is under obligation to discharge the service tax liability. This is based on the service portion in the execution of a work contract. However, in a few cases, the obligation mentioned above is partially shifted to service recipients.
A notification issued by CBEC brings the concept of the partial reverse charge in the execution of a work contract.
The notification provides that in case of taxable services either agreed or presented by way of service portion in execution of works contract by any-individual, Hindu Undivided Family or partnership firm.
Taxable Value Of Service In Execution Of Work Contract
Overall, the valuation of service provisions is governed by Section 67 of the Finance Act with Service Tax Rules, 2006. The general rule states that the taxable service value is the gross amount charged for a service, whether in money or otherwise.
According to the new rule, 2A of Service Tax Rules, 2006, the subject to the provisions of section 67, is determined in the following manner, namely-
- Regular Scheme
- Standard Deduction Scheme
Regular Scheme
Regular Scheme, also known as, Rule 2A(i) of the said rules, states that the service value portion in the execution of the service contract shall be equivalent to the gross amount. This is the amount charged for the service contract, which is less the value of property in goods transferred in the execution of the said service contract. However, such gross amount charged is said to be not included as a VAT or Sale Tax.
However, there may be an instance where the service provider is paying the VAT or Sales tax, not on the actual value of respective State VAT or respective sales tax law. Then the service element comprises the following components a-
- The overall amount paid to a sub-contractor regarding the labour and services;
- The applicable charges for architect’s fees and the planning and designing process
- The applicable charges for obtaining on hire and the machinery and tools used for the execution of the service contract
- The total cost of consumables such as fuel, electricity, and water used in the implementation of the service contract
- The overall cost of contractor establishment relatable to the labour and service supplies
- Similar expenses that are related to the provision of labour and services
- The profits earned by the service provider congenic to the supply of work and services
Standard Deduction Scheme
Standard Deduction Scheme or Rule 2A(ii) states that where value has not been determined. Here, the person liable to pay tax on the service portion involved in the execution of the service contract shall be determined on the following-
Upto October 2014:
- 40 percent for the execution of original works
- 70 percent for services, such as maintenance or repair or reconditioning or restoration or servicing of any goods
- Sixty percent for any other purposes and reasons that do not fall under the two points mentioned above, including maintenance, repair, completion and finishing services. These services include glazing, floor and wall tiling, plastering, and electrical fittings of immovable property.
With Effect From October 1, 2014:
- 40 percent for the execution of original works
- Seventy percent in case of service contracts not covered under the sub-clause and includes-
- Repair, reconditioning, maintenance, restoration, or servicing of any goods.
- Repair, maintenance, completion and finishing services, including processes like glazing, floor and wall tiling, plastering or installation of electrical fittings of immovable property
The term ‘original work’ includes
- New constructions
- Different types of alterations, additions to damaged or abandoned structures required to them workable
- Constructing, commissioning, and installation of structures, plants, and machinery whether pre-fabricated or otherwise
The term ‘fair market value includes
The fair market value of services and goods so supplied may be determined per the generally accepted accounting principles.
The term ‘total amount’ refers to the sum total of the gross amount charged for the works contract and fair market values. x