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Service tax on works
contracts
(The article was written
in 2007)
TWO MAJOR ISSUES-
VALUATION OF SERVICE AND COMPOSTION SCHEME - CA SUDHIR
HALAKHANDI
The Finance Minister Mr.
P. Chidambaram through Finance Act- 2007 introduced
Service Tax on works contract and now this service is
made taxable w.e.f. 1st. June 2007 through Notification
23/2007-Service Tax dated 22-5-2007. At the time of
introduction of service tax on works contract following
two major points were clarified and these were: - 1.
That the rules of determination of value will be
declared later. 2. The composition scheme for this
service will also be declared in due course. Now both
these issues related to service tax on works contract
have been settled and the Rule for determination of
Value of works contract and composition scheme for this
purpose have been introduced. Let us see a brief study
of the both these major points of taxation of works
contract service under service tax laws: - 1.
DETERMINATION OF VALUE VAT is payable on the Value of
transfer of property in goods involved in execution of
works contract and service tax is payable on the labour
and service involved in execution of works contract
hence the Rules for determination of value on which
service tax is payable by the service provider has been
declared through insertion of Rule 2A in Service Tax
(Determination of Value) Rules 2006 by Notification No.
20/2007 – Service Tax, dated 22-5-2007. The new Rule 2A
is related to determination of value of works contract
for the purpose of Service tax. These rues are
applicable from the 1st. Day of June 2007 i.e. the day
on which service tax on works contract is applicable.
The determination of value of works contract is based on
the following: - 1.As per Rule 2A of the Service Tax
(Determination of Value) Rules 2006 the value of
transfer of property in goods involved in execution of
the works contract shall be deducted from Gross value of
the contract. Here see: - VALUE OF WORKS CONTRACT= Gross
value of works contract- Value of transfer of property
in goods involved in execution of works contract. Two
explanations are also added to this rule of
determination of value of service under works contract:
- 1.The Value added tax or sales tax paid on the works
contract shall be excluded from the value of the
Contract. 2.The levy has been further explained that the
value of works shall include the following: - (i).
Labour charges for execution of the works contracts;
(ii). Amount paid to subcontractor for labour and
Service. (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 contracts; (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. It will not be practical to calculate the
profit on transfer of goods and profit on labour or
service separately. It will not be easy to determine the
value of the transfer of property in goods involved in
the execution of the works contract because here the
value of the goods is not the purchase value and further
to solve this problem to some extent it has been
provided in Rule 2A(1)(ii) that the actual value of the
goods on which the value added tax is paid shall be the
value of the transfer of property in goods involved in
execution of a works contract. The intention of the
Government is to tax the value of labour and service and
profit thereon. Hence the method of valuation of works
contract has been explained by two ways to make the
matter more clear. The Rules for determination of value
of works contract as declared by the Notification No.
29/2007-Service tax, Dated 22-5-2007 as mentioned above
are not only complicated but also very confusing. At
first place it is stated that the value of works
contract service shall be equal the gross value of the
contract less value of transfer of property in goods
involved in the execution of the works contract. But
here though the purchase price or cost of goods involved
in the works contract can be determined easily but the
value of the Goods is subject to Gross profit involved
in execution of works contract and it will be difficult
to calculate the profit on supply of goods separately.
The explanation part (b) has stated that the value of
works contract shall include the cost of labour and
service and profit thereon. It will practical problem to
calculate the profit on labour and service. Let us see
how in explanation (b) has clarified the ingredients of
the gross value of works contract on which service tax
is payable: - (i). Labour charges for execution of the
works contracts; (ii). Amount paid to subcontractor for
labour and Service; (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 contracts; (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. Knowing the problem, an
attempt is also made to solve this problem by inserting
Rule 2A(ii) which provides that when the Value added tax
has been paid on actual value of the transfer of
property in goods involved in execution of works
contract then such value shall be taken as the value of
transfer of property in goods involved in execution of
the works contract. Let us see this part of the Rule: -
(ii)Where Value Added Tax or sales tax, as the case may
be, 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 or sales tax, as the case may
be, shall be taken as the value of transfer of property
in goods involved in the execution of the said works
contract for determining the value of works contract
service under clause (i). 2.COMPOSITION SCHEME The rate
of tax under composition is 2% on Gross value of
contract and it is declared by the Notification No.
32/2007- Service Tax, Dated 22-5-2007. The main features
of the composition scheme is as under: - 1. The rate of
tax under compostion scheme is 2% on gross value of
contract. Gross value of contract does not include the
amount paid the contractor as VAT and sales Tax. 2. The
service provider providing works contract service opting
for composition scheme shall have to opt for composition
scheme before payment of service tax. No formal
application is prescribed for this purpose hence the
service provider can file his option with simple letter
mentioning the work order No. and total amount involved
in it. 3.The provider of taxable service under this head
shall not have the right to claim CENVAT credit of the
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. 4. The composition tax is
payable on whole amount of the works contract and once
opted the service provider cannot withdraw from the
scheme before completion of the contract. (Note :- The
composition fees has been increased to 4% Now) Though no
format of option has been mentioned and provided in the
Notification No. 32/2007- ST, Dated 22-5-2007 hence a
suggestive format for the same is given here for the
benefit of the taxpayers: - FROM: - XYZ CONSTRUCTION
COMPANY ___________________________
___________________________ _______________ To, The
Superintendent of Central Excise (Service Tax)
__________________________ __________________________
____________ Dear Sir, Re: - Option for Composition
scheme as mentioned in Works Contract (Composition
Scheme for payment of Service Tax) Rules 2007 as
Notified through Notification No. 32/2007 ST Dated
22-5-2007 for our work order No. 23/2007 dated 1st. June
2007 with ABC Corporation amounting to Rs. 15 Crores.
With reference to above we have to state that we are
opting for payment of service tax under the Works
Contract (Composition Scheme for payment of Service Tax)
Rules 2007 as provided by Notification No. 32/2007-ST
dated 22-5-2007 for the above mentioned works contract.
The photo state copy of work order is enclosed herewith
for your perusal and record. Thanking you Yours
faithfully FOR XYZ CONSTRUCTION COMPANY (Auth. Sign)
Encl: - Copy of work order No. 23/2007 dated 1st. June
2007. Since the Levy of service Tax on works contract
and also the Rule for determination of value for
taxation are very confusing and complicated hence an
optional composition scheme is introduced but the
contractors are under practical compulsion to opt for
composition scheme. END |