Service Tax on Works Contract

Service Portion in Works Contract

•         Work Contract vs. Works Contract

•         Works contract has been defined in section 65B(54) of the Act as 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, maintenance (substituting “improvement”), repair, renovation, alteration of any movable or immovable property (substituting “building or structure on land”) or for carrying out any other similar activity or a part thereof in relation to any movable or immovable property (substituting “building or structure on land”). (Substitution made in  Finance Bill 2012 by Lok Sabha)

•         In terms of Article 366 (29A) of the Constitution of India transfer of property

in goods involved in execution of works contract is deemed to be a sale of such goods.

•         It is a well settled position of law, declared by the Supreme Court in BSNL‘s case [2006(2) STR 161 (SC)], that a works contract can be segregated into a contract of sale of goods and contract of provision of service.

•         This declared list entry has been incorporated to capture this position of law in simple terms under s.66E(h) “Service Portion in the execution of Works Contract”

Scope of Works Contract

•         Buildings and structures on land means not only buildings or structures attached to earth but also things permanently fastened to a building or structure attached to earth.

•         pipeline or conduits are structures on land : contracts for construction of such structure would be covered under works contract

•         contracts for erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise be treated as a works contract if

             -Transfer of property in goods is involved in such a contract; and

            - The machinery equipment structures are attached or embedded to earth after erection          commissioning or installation

•         contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under ‘works contract’

•         Pure labor contracts are not works contracts

Valuation in Works Contract

•         Follow Ganon Dunkerley i.e.

a) labor charges for execution of contract

b) amount paid to sub contractor for labor and services

c) Charges for planning, designing and architect fee

d) Charges for obtaining on hire or otherwise machinery and tools used for execution of works contract (including Depreciation)

e) Cost of consumables used in construction contract

f) Cost of Establishment of Contractor relatable to supply of labor & service

g) Other similar expenses relatable to supply of labor and services

h) Profit earned on supply of labor and services

•         Gross Amount does not include: Value of transfer of property in goods involved in the execution of the said works contract.

•         Where Value Added Tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract.

•         Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract to be excluded

Where value cannot  be so arrived

(i) execution of original works- 40% of the total amount charged for the works contract         

     execution of original works and the gross amount charged includes the value of land-20% per cent of the total amount charged including such gross amount (including land value) (It was notified in 11/2012 dated 17-3-2012 but Omitted in  Notification 24/2012 dated 06-06-2012)  Instead by Notification 26/2012 dated 20-6-2012, construction of complex etc for sale to prospective buyer except where entire consideration received after completion certificate made taxable @ 25% at S.No. 12

ii) Works contract for maintenance, repair, re conditioning, or restoration or service of goods- 70% of total amount charged

(iii) works contracts, other than contracts covered above, including contracts for maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of immovable property-60% of the total amount charged for the works contract shall be value of service portion

•         Total amount shall include value of all goods and services supplied free of cost for use in or in relation to the execution of works contract, under the same contract or any other contract.

•         Original works’ means :

            all new constructions;

             all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable

    erection, commissioning or installation of plant, machinery or equipment or structures whether pre fabricated or otherwise.

Works Contract Composition Scheme

•         Rate enhanced to 4.8% from 4%

•         Cess of 3% may be added.

•         However Works Contract Composition Scheme Notification withdrawn vide Notification 35/2012 dated 20-6-2012

•         Hence the scheme is no longer applicable

Partial Reverse Charge mechanism applied for works contract

•         Where service provider is-

            Individual or HUF or proprietary  firm or partnership firm, regd. or not or AOP in taxable territory.

•         And service recipient is business entity registered as body corporate located in taxable territory

(Registered Co-operative Society is also body corporate but specifically excluded from definition under Companies Act) Trust is not body corporate. Section 25 Company is not business entity..

•         50% tax shall be payable by service provider and 50% shall be payable by service recipient.

•         If service provider doesn’t charge any thing in invoice still service recipient to pay service tax under reverse charge.

•         Service recipient and service provider are independent to use their own mechanism of calculating service tax payable.

•         If service tax is charged at 100% inadvertently by service provider where reverse charge is applicable, still service recipient to deposit tax with department

Partial Reverse Charge- Point of Taxation

•         Point of Taxation for service provider is issue of invoice which is 30 days from date of provision of service but if Gross value of taxable service of contractor is 50 lacs or less payment can be made in month following month/quarter in which payment is received       -

•         For service recipient it is date payment for service as per Rule 7 of Point of Taxation Rules , hence service tax liability may arise in different periods for service provider and service recipient.

•         However if no payment is received with in 6 months from date of issue of invoice, the point of taxation for service recipient shall also be issue of invoice by service provider. (Proviso to Rule 7(1) of Point of Taxation Rules

•         Thus for delay beyond six months recipient might end up paying tax earlier than service provider having turnover lesser than 50 lacs.

Cenvat Credit in works Contract

•         Now cenvat credit is not available on any inputs used in or in relation to works contract

            (Notification 24/2012 dated 6-6-2012)

•         Hence Cenvat credit is available on input service and capital goods.

•         Cenvat credit of tax paid by service recipient under reverse charge mechanism is available to service recipient.

Exemption for Works Contracts for Government- Pt.12 of 25/2012 dated 20-6-12

Services provided to the Government, a local authority or a governmental

authority (Set up by Parliament or State Act, 90% equity with Govt. and carrying

functions of municipality) by way of construction, erection, commissioning,

installation, completion, fitting out, repair, maintenance, renovation, or alteration

of -

(a)  a civil structure or  any other original works meant predominantly for  use

other than for commerce, industry, or any other business or profession;

(b)  a historical monument, archaeological site or remains of national importance,

archaeological excavation, or antiquity specified under the Ancient Monuments

and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c)    a structure meant predominantly for use  as (i) an educational, (ii) a clinical,

or  (iii) an art or cultural establishment; 

(d)  canal, dam or other irrigation works;

(e)  pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii)

sewerage treatment or disposal; or

(f)    a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act;

Exemption in Works Contract-for Public Infrastructure Point 13 of 25/2012 dated 20-6-12

13.  Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-

(a)     a road, bridge, tunnel, or terminal for road transportation for use by general public;

(b)     a civil structure or  any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

(c)      a building owned by an entity registered under section 12 AA

of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;

(d)     a pollution control or effluent treatment plant, except located as a part of a factory; or

a structure meant for funeral, burial or cremation of deceased;

Exemption in Works Contract for Infrastructure Point 14 of 25/2012 dated 20-6-12

14. Services by way of construction, erection, commissioning,

or installation of original works pertaining to,-

(a) an airport, port or railways, including monorail or metro;

(b) a single residential unit otherwise than as a part of a residential complex;

(c) low- cost houses up to a carpet area of 60 square meters per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(d) post- harvest storage infrastructure for agricultural produce   

            including a cold storages for such purposes; or

(e) mechanized food grain handling system, machinery or

            equipment for units  processing  agricultural produce as food

            stuff excluding alcoholic beverages;

NOTE: Completion, fitting out, repair, maintenance, renovation, or alteration ARE NOT COVERED

Sub Contractor Notification Point No.29(h) of 25/2012 dated 20-06-12

29. Services by the following persons in respective capacities –

(h)  sub-contractor providing services by way of works contract to another contractor providing  works contract services which are exempt

•         Sub Contractor providing back to back service to principal service provider in whose hands principal service is exempt, shall also be exempt.

•         But no exemption available to other service providers like architect etc who are not carrying on any works contract.

Negative list- Process amounting to manufacture or production of goods 

•         As per S.65(B) process amounting to manufacture or production of goods means

            - a process on which duties of excise are leviable under s. 3 of CEA 1944  or

            - a process on which duties of excise is leviable under Medicinal and Toilet Preparation (Excise Duties) Act 1955 (Added by Finance Bill 2013) or

     - a process amounting to manufacture of alcoholic liquor for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force.

    Note: Hence process of manufacture of liquor has been kept out of purview of service tax. In 2009 it was taxable under Business Auxiliary service

 

Exempted Job Work Point 30 of Notification  25/2012 dated 20-06-2012

Certain processes although not dutiable under CEA are exempt vide Entry 30 of Exemption Notification 25/2012 dated 20-6-12 :

•         Carrying out an intermediate production process as job work in relation to:–

•         (a) agriculture, printing or textile processing;

•         (b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act ,1985 (5 of 1986);

•         (c) any goods on which appropriate duty is payable by the principal manufacturer; or

•         (d) processes of electroplating, zinc plating, anodizing, heat treatment, powder coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines up to an aggregate value of taxable service of the specified processes of one hundred and fifty lakh rupees in a financial year subject to the condition that such aggregate value had not exceeded one hundred and fifty lakh rupees during the preceding financial year;

Printing

•         Printing done on job work basis is out of purview of service tax

•         If printing work is done with material e.g. letter heads, invoice books, balance sheets, the activity is manufacture

•         Products printed on paper are excisable goods covered by Chapter 49 of CETA

•         Thus there is no service tax on activity of printing on paper or textiles.

Textile processing

•         Job Work of stitching, embroidery and washing and finishing of garments are covered by textile processing, hence exempt under Notification 25/2012 dated 20-06-2012.

•         As per CBEC letter No. 2305/Commr(ST)/2011 dated 15-07-2011 in resposnse to Cygnus Apparel Private Limited regarding SCN , Embroidery work done on job work basis is manufacture and covered by Chapter heading 5810 of CETA and outside service tax purview.

•         Zari Work on sarees should also stand on same footing.

Tailoring Work and stitching on Job Work

•         Stitching work by job worker is exempt under Notification 25/2012

•         Tailoring and stitching of cloth is manufacture and outside the service tax purview.

•         Putting house mark on tailored cloth is not branding