- Value of Works Contract = Gross amount charged – Value of transfer of property in goods. However, VAT or Sales Tax is not includible in the value of material supplied.
- Value of Works contract service shall include the labour charges, amount paid to sub-contractor for labour and services, charges for planning, designing and architect’s fees, hire charges for machinery and tools, cost of consumables like water, electricity, fuel, etc., cost of establishment of contractor relatable to supply of labour and services, profit earned in relation to supply of labour and services.
- 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. However, if the actual value is not ascertainable, then the following percentage will be the taxable value for the purpose of paying the service tax:-
|Nature of Works Contract||Service tax payable on|
|Execution of original works **||40% of total amount*** charged for Works Contract. Where total amount includes the value of land, it will be 25% of total amount charged.|
|Other Works Contract including completion and finishing services like glazing, plastering, floor and wall tiling, installation of electrical fitting not covered above.||60% of total amount charged for Works contract.|
- Where value of goods or services supplied free of cost is not ascertainable, the same shall be determined on the basis of the fair market value closely available resemblance.
- Cenvat Credit of duty paid on inputs will not be allowed.
- As per newly substituted rule 2A, it is mentioned that the value of Works contract service shall include the amount paid to sub-contractor for labour and services. It implies that the cost of material paid to sub-contractor will not be included. There may be cases, where the sub-contractor is hired for a lumpsum consideration. In other words, the amount paid to sub-contractor is not separately defined. In such cases, how the said amount will be bifurcated so as to include the amount paid for labour and services only.
- Further, this rule also says that the value of works contract will include the cost of establishment of contractor relatable to supply of labour and services. Normally, only one establishment is hired by the contractor in execution of a particular works contract. Normally, this is used for keeping the material and capital goods used in the execution of works contract. Sometimes it is also used for residence of any worker for the safety of the material. That single establishment is used for a number of purposes but the rent paid for the same is undivided. Here the new rule says that cost of establishment of contractor relatable to supply of labour and services will be included. But normally there is a common establishment used for number of purposes, how its cost will be bifurcated, is not clarified.
- The new rule also says that where the VAT has been paid on the ACTUAL value of transfer of property in goods, then this value shall be considered while calculating the taxable value under the Works Contract service. However, in the case where VAT is not paid on the actual value, i.e. where the assessee has opted for composition scheme under Sales Tax, the assessee will calculate the actual value of goods and it will be deductible from the gross value. However, in the cases where the value is not ascertainable as above, the taxable value of Works Contract shall be based upon fixed percentage - 40%/25% in case of original works or 60% in case of other works contracts. It is clarified in above TRU letter F. no. 334/1/2012-TRU dated 16.3.2012 that this is not an option and it is to be done only if the value cannot be calculated for any reason. Thus, the formula prescribed (Value of Works Contract = Gross amount charged – Value of transfer of property in goods) will be applicable only where actual value of material is available, whether as per sales tax or specifically calculated for the purpose of Service Tax. In other cases, the taxable value shall be based upon the percentage prescribed.
- The rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Amendment Rules, 2007 says that –
“3. (1) Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to four per cent (w.e.f. 1.4.2012 - 4.8%) of the gross amount charged for the works contract.”
- The reverse charge method is extended to the works contract services to the extent of 50%. Thus, 50% service tax is payable by the recipient and the remaining by the provider of works contract service. But how the value shall be calculated for the purpose of paying the service tax? Whether it will be calculated separately by the service provider and service recipient? No clarification available. Further, what is the logic behind fixing the liabilities of two persons in respect of one amount? Simply increasing the costs and tension on part of both the parties involved therein.