In this post we are discussing provision related
to Service Tax on works contract after 01.07.2012 mainly under following heads
1.
Meaning of works
Contract.
2.
Valuation Method
including abatement % / prescribed % valuation of works
Contract.
3.
Provision of Reverse
Charge applicable on Works contract
With effect from
01-07-2012 works contract are covered under “Declared Services” under Section 66E of the Act:
Meaning of Works Contract w e f 01.07.2012
Works Contract has been
defined under section 65B(54)
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;
The above definition
is exhaustive as it starts with Works contract "means".But
last line of definition extend the scope to many similar activities.Major
change in service tax on Works contract from 01.07.2012 is that now movable
property is also covered under works contracts.Main features of new definition
is
- Transfer of property in goods involved in the execution
of such contract :First part of the definition is that there must
be transfer of property in goods in the contract
while executing the contract.If no transfer of property is
involved then it is not covered under works contract.
Contract with
consumables are not works contract:service provider is providing consumables like oiling and
lubricating the machinery then it is not covered in works contract as
property of goods is not transferred but goods are consumed .
Pure Labor contract
are not works contract.
- Transfer of Property in good is leviable to tax as sale
of goods : Second important part is that Transfer of property in
goods is taxable under sales tax. If such transfer is not taxable under
sales tax then contract is not covered under works contract.
- such contract is for the purpose of carrying out
1.
construction,
2.
erection,
3.
commissioning,
4.
installation,
5.
completion,
6.
fitting out,
7.
repair,
8.
maintenance.
9.
renovation,
10.
alteration
- of Any movable or immovable property : Now works contract covers movable property
also.Like repair of vehicle , Movable machinery is also covered under
works contract if material property of goods
gets transferred while executing repair contract.
- any other similar activity or a part thereof in
relation to such property : This
part extend the nature of activity other than 10 activities given above
and prone to litigation.
Will the goods portion
in transactions like annual maintenance contracts or erection and
commissioning or construction be includible in the value of services ?
All the examples given
in the question now comprise “works contracts” and only the service portion
of such contracts comprise service. By the express provisions contained in the
definition of service (which is mandated by constitutional provisions) it
is not possible to tax the goods portion of works contracts. However the
principles of segregation of the value of goods are provided in Rule 2A of
the Valuation Rules. Thus there is no basis for the taxation of goods
in such contracts even after the deletion of the stated notification.
Even for the sale of any
equipment for which a separate contract for warranty or after
sales services or maintenance is entered the discernible sales portion is
not to be included in the discernible portion of the value of service. For
all practical purposes these will be two separate contracts. However for
artificial segregation of value between goods and services, to save either
of the taxes on goods or services, the benefit was neither available earlier
under the stated notification and the position continues to be the same
under the new regime.
Would contracts for
repair or maintenance of motor vehicles be treated as ‘works contracts’?
If so, how would the value be determined for ascertaining the value
portion of service involved in execution of such a works contract?
Yes. Contracts for
repair or maintenance of moveable properties are also works contracts
if property in goods is transferred in the course of execution of such a
contract. Service tax has to be paid in the service portion of such a
contract.
Would contracts for
construction of a pipe line or conduit be covered under works contract?
Yes. As pipeline or
conduits are structures on land contracts for construction of such structure
would be covered under
works contract.
Would contracts for
erection commissioning or installation of plant, machinery, equipment or
structures, whether prefabricated or otherwise, be treated as a works
contract?
Such contracts would be
treated as works contracts if transfer of property in goods is involved in
such a contract.
Would contracts for
painting of a building, repair of a building, renovation of a building,
wall tiling, flooring be covered under ‘works contract’?
Yes, if such contracts
involve provision of materials as well.
Exemption to
sub contractor in work ccontract if main contract service are exempted : sub-contractor providing services by way
of works contract to the main contractor, providing exempt
works contract services, has been exempted from service tax under the mega
exemption if the main contractor is engaged in providing exempt services of
works contracts. It may be noted that the exemption is available to
sub-contractors engaged in works contracts and not to other outsourced
services such as architect or consultants.
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Valuation
of Services in works Contract wef 01.07.2012
As compared to the old
schemes for valuation of works contract services (up to 30.06.2012) one
under the rule 2A of the Valuation Rules and second under the Works
Contract (Composition Scheme for Payment of Service Tax) Rules 2007 has
been replaced with a unified scheme under the new rule 2A of Service Tax
(Determination of Value) Rules, 2006.
Substituted Rule 2A(i) of Service Tax (Determination of Value) Rules, 2006, inter alia, provides the rules to value service portion in the execution of a works contract.Main two option are available under valuation.In our view both these scheme of valuation are option available to assesses.
Substituted Rule 2A(i) of Service Tax (Determination of Value) Rules, 2006, inter alia, provides the rules to value service portion in the execution of a works contract.Main two option are available under valuation.In our view both these scheme of valuation are option available to assesses.
1 Pay
service tax on Value of services after deducting value of goods from the gross
value.
2 Pay
service tax at composite rate
- In case of original
work, pay service tax on 40% value,
- In case of maintenance or repair or reconditioning or
restoration or servicing of any goods, pay service tax on 70% value,
- In case of all other works contract, pay service tax on 60% value.
Service provider is also
eligible to avail CENVAT Credit of input services and capital goods.
1 Pay
service tax on Value of services after deducting value of goods from the gross
value:
gross amount charged for the works contract less the value of property in goods
transferred
- In the cases where VAT has been paid on ACTUAL value of
transfer of property in goods,
then this value will considered while calculating the value of Works
Contract.
- If the VAT is not paid on the ACTUAL value, the
assessee will calculate the same for the purpose for service tax and it will be deductible from the gross value.
(i) Value of service
portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in the execution of the said works contract.
Explanation.- For the
purposes of this clause,-
(a) gross amount charged for
the works contract shall not include value added tax or sales tax, as the case may be, paid or payable,
if any, on transfer of property in goods involved in the execution of the said
works contract;
(b) 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;
(c) Where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then,
such value adopted for the purposes of payment of value added tax or sales tax,
shall be taken as the value of property in
goods transferred in the execution of the
said works contract for determination of the value of service portion in the
execution of works contract under this clause.
2.
Pay service tax at composite rate
In our view First and
second (1) and (2) shown in this post is optional and to opt option B ,A part
must not be ruled out first.In second option wording has been used as
"Where the value has not been determined under clause (i)" instead of "Can not be determined "
(ii) Where the value has
not been determined under clause (i), the person liable to pay tax on the
service portion involved in the execution of the works contract shall determine
the service tax payable in the following manner, namely:-
(A) in case of works contracts entered into for
execution of original works, service
tax shall be payable on forty per cent. of the total amount charged for the works
contract;
Explanation 1.- For the
purposes of this rule,-
(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;
(B) in case of works contract entered into for maintenance or repair or reconditioning or
restoration or servicing of any goods, service tax shall be payable on seventy percent. of the total amount charged for the works contract;
70% is applicable on
Movable property
Section 65B(25)
"goods" means every kind of movable property other than actionable
claim and money; and includes securities, growing crops, grass, and things
attached to or forming part of the land which are agreed to be severed
before sale or under the contract of sale;
(C) in case of other works contracts, not covered under sub-clauses (A) and (B),
including maintenance, repair, completion and finishing services such as
glazing, plastering, floor and wall tiling, installation of electrical fittings
of an immovable property , service tax shall be payable on sixty per cent. of the total amount charged for the works contract;
(d) “total amount” means the sum total of the gross amount charged
for the works contract and the fair market value of all goods and services
supplied in or in relation to the execution of the works contract, whether or
not supplied under the same contract or any other contract, after deducting-
(i) the amount charged
for such goods or services, if any; and
(ii) the value added tax
or sales tax, if any, levied thereon:
Provided that the fair
market value of goods and services so supplied may be determined in accordance
with the generally accepted
accounting principles.
Explanation 2.--For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.”.
Explanation 2.--For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.”.
Cenvat Credit :The Provider of taxable service could not take
CENVAT credit of duties/cess paid on any inputs used in or in relation to the
said works contract. However, credit in respect of taxes paid on capital goods
and input services shall be available
Can the manner of
determination of ‘total amount charged’ be explained by way of a suitable
example?
The manner of arriving
at the ‘total amount charged’ is explained with the help of the
following example pertaining to works contract for execution of ‘original
works’.
1 Gross amount received
excluding taxes =95,00,000
2 Fair market value of
goods supplied by the service receiver excluding taxes =10,00,000
3 Amount charged by service
receiver for 2= 5,00,000
4 Total amount charged
(1+2-3) =1,00,00,000
5 Value of service
portion(40% of 4 in case of original works) 40,00,000
Note: When the service
provider pays partially for the materials supplied by the service receiver,
gross amount charged would inevitably go higher by that much amount.
=====================================================
Reverse Charge applicable on Works contract wef 01.07.2012
The reverse charge method is extended to the works contract services to the extent of
50%(partial reverse charge). Thus, 50% service tax is payable by the
recipient and the remaining by the provider of works contract service.The
condition under reverse charges are
1.
Service receiver must be
a body corporate and
2.
Service provider must
be
o Individual,
o HUF,
o Partnership firm (registered or unregistered ) ,
o AOP.
3.
Both service Provider
and service receiver must be located in
taxable territory.
If above Conditions are
not fulfilled then reverse charge is not applicable.Means if service provider
is other then four categories given above then reverse charge is
not applicable. Further service receiver must be Body corporate.
Thus the nature of the service(works contract) and the status of both the service provider and service receiver are important to determine the applicability of partial reverse charge provisions.
Thus the nature of the service(works contract) and the status of both the service provider and service receiver are important to determine the applicability of partial reverse charge provisions.
Further as per
explanation II given in notification 30/2012 dated 30.06.2012 in works contract services, where both service
provider and service recipient is the persons liable to pay tax, the service
recipient has the option of choosing the valuation method as per choice,
independent of valuation method adopted by the provider of service.
What does a service
provider need to indicate on the invoice when he is liable to pay only a part
of the liability under the partial reverse charge mechanism?
The service provider
shall issue an invoice complying with Rule 4A of the Service Tax
Rules 1994. Thus the invoice shall indicate the name, address and the
registration number of the service provider; the name and address of the
person receiving taxable service; the description and value of taxable service
provided or agreed to be provided; and the service tax payable thereon. As
per clause (iv) of sub-rule (1) of the said rule 4A ‘’the service tax payable
thereon’ has to be indicated. The service tax payable would include
service tax payable by the service provider.
If the service provider
is exempted being a SSI (turnover less than Rs 10 lakhs), how will the
reverse charge mechanism work?
The liability of the
service provider and service recipient are different and independent
of each other. Thus in case the service provider is availing exemption
owing to turnover being less than Rs 10 lakhs, he shall not be obliged to
pay any tax. However, the service recipient shall have to pay service tax
which he is obliged to pay under the partial reverse charge mechanism.
Will the credit of such
tax paid be available to the service recipient?
Normally, the credit of
the entire tax paid on the service received by the service receiver would
be available to the service recipient subject to the provisions of the CENVAT
Credit Rules 2004. The credit of tax paid by the service provider would be
available on the basis of the invoice subject to the conditions specified
in the CENVAT Credit Rules 2004. The credit of tax paid by the service
recipient under partial reverse charge would be available on the basis on
the tax payment challan, again subject to conditions specified in the said
Rules.
What shall be the point
of taxation for the service recipient? When will he need to pay the
service tax in respect of his liability?
Both the service
provider and service recipient are governed by the Point of Taxation
Rules 2011 in respect of the service provided or received by him. Usually
it is the invoice or date of receipt of payment which is the point of
taxation for the service provider. However for the service recipient, in terms of rule 7 of the said rules, point
of taxation is when he pays for the service. Thus in the case where the invoice is issued in
say July 2012 and the service recipient pays for the same in August 2012
the point of taxation for the service provider will be the date of issue
of invoice in July 2012. The point of taxation for the service recipient shall
be the date of payment in August 2012. The service provider would be
required to pay tax (to the extent liability is affixed on him) by
5th /6th August, 2012 or 5th /6October 2012 depending upon
the admissibility of benefit under the proviso to rule 6 of the Service
Tax Rules 1994. The service recipient would need to pay tax (to the extent
liability is affixed on him) by 5th/6th September 2012.
How will the service
recipient know which abatement or valuation option has been exercised by
the service provider?
The service recipient
would need to discharge liability only on the payments made by him. Thus
the assessable value would be calculated on such payments done (Free of Cost
material supplied and out of pocket expenses reimbursed or incurred on
behalf of the service provider need to be included in the assessable value
in terms of Valuation Rules). The invoice raised by the service provider
would normally indicate the abatement taken or method of valuation used
for arriving at the taxable value. However since the liability of the service
provider and service recipient are different and independent of each
other, the service recipient can independently avail or forgo an abatement
or choose a valuation option depending upon the
ease, data available and
economics.
Is the reverse charge
applicable on services provided and complete before 1.7.2012 though
payments were made after 1.7.2012?
For any service whose
point of taxation has been determined and whole liability affixed
before 1.7.2012 the new provisions will not apply. Merely because payments
are being made after 1.7.2012 will not add any additional liability on the
service receiver in respect of such services.
Can Tax liability under reverse charge
Mechanism be settled with use of Cenvat Credit by service receiver ?
No, Cenvat credit can be
used fro output services only. Service tax payable under reverse charge is
related to input services.so Service receiver have to deposit this service tax
by Cash/challan only. However such deposited amount is available for Cenvat credit
to service receiver on the basis of challan.
