SERVICE TAX ON WORKS CONTRACT – ATTRACTION DISAPPEARS ?

SHARE:

Prepared By:CA Pradeep Jain CA Preeti Parihar

Introduction:-

Budget, 2012 has brought major changes in the Works Contract to align the same with the new scheme of Service Tax by negative list. Implementation of Service Tax by negative list is a step towards betterment. But in its guise, the consequential amendments in various existing services seem to have increased the complexities. Same is the case with Works Contract. The amendments brought by recent Budget and their impact are the parts and parcels of this article.

Increase in rate:– 

The rate of works contract is increased from 4% to 4.8%. For this Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 have been amended vide notification no. 10/2012-ST dated 17.3.2012. The increased rate is effective as from 1.4.2012.

Reverse charge method extended to works contract:-

Under reverse charge method, the recipient of taxable service is notified as the person liable to pay the service tax. The reverse charge method has been extended to the works contract scheme vide Notification no. 15/2012-ST dated 17.3.2012, effective from the date the finance bill gets approval from the President. In this notification, liability of paying the 50% service tax is casted on the recipient of works contract service and remaining still lies on the provider of the service.
Valuation of Works Contract amended :–

At present, the value of Works Contract is determined as per Works Contract (Composition Scheme for Payment of Service Tax) Amendment Rules, 2007. Budget, 2012 has proposed to introduce the negative list of service and to line up with the same it is proposed that the valuation of Works Contract to be done in accordance with the Service Tax (Determination of Value) Rules, 2006. For this a new rule – 2A is being substituted vide Notification no. 11/2012-ST dated 17.3.2012 which is effective from the date negative list comes into effect. This rule states the following features for the valuation of the Works Contract service:-

  1. 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.
  2. 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.
  3. 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.
  4. 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 ContractService 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.


**The original work means - all new constructions and all types of additions and alterations to abandoned or damaged structures on land required to make them workable;
*** Total amount includes the value of all goods and services – VAT - services supplied free of cost under the same contract or any other 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.

Old method v/s new method of valuation:-

Old rule 2A had some of the features as the new one has. Some key features forming base of Works Contract service have been kept intact like the exclusion of VAT and non availment of Cenvat credit of inputs. As such, credit on capital goods and input services continue to be allowed. However, the manner of determining the gross amount charged for the Works Contract has been slightly changed. Under old rules, the cost of machinery and tools used in the execution of the said works contract were specifically excluded. However, there is no mention of the same in the new rule 2A. However, the charges of obtaining them on hire have been specifically included as were there in the old method. The drastic change has been done by defining the manner of determining the value of Works Contract. In old rules, the value of Works Contract to be taken for the purpose of taxation was simply as accounted by the service provider. However, in the new rule 2A, in the cases where the VAT is not paid on the actual value of transfer of property in goods, value is to be taken on the basis of fixed percentage.

Our outlook:-

  • 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.” 

Thus, the above rule has overriding effect on the section 67 of the Finance Act, 1994 and rule 2A of the Service (Determination of Value) Rules, 2006. It gives an option to the service providers that they can pay the service tax at the rate specified thereunder without having regard to the normal rate of service tax. Section 67 will cease to have its effect as from the date the negative list comes into force and as from that date new charging section 66B will be applicable.

In the para no. 13 of TRU letter F. no. 334/1/2012-TRU dated 16.3.2012, it is mentioned that a new rule is being introduced to SUBSTITUTE the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. Further, rule 2A of Service Tax Valuation rules is being substituted vide Notification no. 11/2012-ST dated 17.3.2012 which says that value of works contract shall be determined in accordance with this rule.

The effect of all the above is that rule 3(1) gives an option to the service provider to opt for the rate of 4% (4.8% w.e.f. 1.4.2012). However, as per TRU letter, it seems that the new rule 2A will substitute the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. But the option of composition scheme is affected by these rules, thus the withdrawal of these rules will also cease the composition scheme.

Further, the rate of 4% is itself mentioned in the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. This rate is enhanced to 4.8% w.e.f. 1.4.2012 by virtue of notification no. 10/2012-ST dated 17.3.2012. But as it seems from the language of TRU letter that the Composition rules are going to be substituted by some other rule, so there remains doubt whether the new rate will be prescribed somewhere else or will it be effective only till the date of implementation of negative list. If the scrapping of composition rules happens, it will mean that the service tax on works contract is also payable at the normal rate prescribed under the Finance Act, 1994.

  •  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.

While concluding:-

The composition scheme of works contract is as old as the works contract scheme. Being implemented on 1.6.2007, it offered an attractive rate of 2% on composite value of works contract. Alongwith this minimal rate, Cenvat credit of capital goods and input services was also allowed. As the scheme was so attractive, most of the service providers in reality sector had switched over to this scheme. However, the attractiveness was reduced by increase in the rate to 4% vide notification no. 7/2008-ST dated 1.3.2008. Now it is again increased to 4.8%. However, with the amendments made in the recent Budget indicates that the optional composition scheme is going to be withdrawn and the normal rate of service tax will be payable thereupon. But looking to the complexities of the new rule 2A and transitional phase of service tax by negative list; it seems that works contract will again build the towers of litigation.



COMMENTS

BLOGGER: 2
Loading...
Get Latest Updates In your Inbox

$show=index

Name

. SECURITIES (MNP) (TDS)2007-08 ` 01.07.12 01.09.2008 01.10.2012 06.07.2009 07.08.2012 1 PERCENT EXCISE ITEMS LIST 1 sep 1% excise 10 year nsc 10(10C) 1000 court cases judgements supplied to ITO 1000 rupee note 11-2008 11-2010 130 items 14.08.2008 15 august 150 Rs coin 15g 15h 18-12-2009 192(1A) 192A 194 I 194A 194c from 01.10.2009 194H 194j 194LC 1981-2007 2% cst 2% excise 2004 2008 2008-09 FY 2010 206AA 234A 234B 234C 234c interest calculator 234E 23AC 23ACA 23B 24C 24q annexure II 25 paisa coin 271(1)(c) 271B 271H 272B 27A 280 280 challan 281 282 283 29 AUGUST 29.04.2010. 29/08/2008 29/2008 service tax 2g meaning use 3 idiots 30 MARCH 31st March 32-2010 33 of 2009 35(2AA) 35(2AB) 3CD 3g meaning use 40(b) 43B 44 AB EXEMPTED INCOME 44AA 44AB AGRICULTURE 44AB new limit 44AB NON RESIDENT 44ad 46/2012 45/2012 49C 5 day week 5 years post office deposit 5/2011 50 paisa coin 54b 54EC 54ee 54f 54gb 5th paycommission punjab 6 % excise 6 crore advance limit 6/2005 69/2010 6th cpc 6TH PAY COMMISSION 70% of pan etds 7th Central Pay Commission 8 tips to save tax 80C 80ccc 80CCD 80cce 80CCF 80CCG 80d 80DDB 80EE 80G 80GG 80GGA 80GGB 80ggc 80tta 80U 85% of pan etds 86/2008 DATED 13-08-2008 87A rebate 89(1) 89(1) relief calculator 9.5 % rate for private epf 92E 95% of pan etds 98 dated 04/01/08 aadhaar aakash tablet aam admi aar Aayakar Sampark Kendra abatement abolished ACCOUNT PAYEE DRAFT Accounting ACCOUNTING CODE accounting code for services ACCOUNTING FOR GOVT GRANTS accounting standards ACES ADD IN Add-Ins additional relief in budget 2010 adjustment of advance FBT with advance Tax advance rullings advance salary ADVANCE TAX CALCULATOR advance tax challan ADVANCE TAX CUT OFF AMOUNT ADVANCE TAX DATES AFFIDAVIT AG Projects Technologies Ltd RT age 80 addition pension aibea wage revision aibea wage revision latest news aiboa aiboc aiboc wage revision AIG AIR airline ticket booking tds airlines all is well allowances allownces alphabet of inspiration alteration on check allowed alternate minimum tax AMENDED 3CD amendment in companies bill 2011 amendment in gratuity act 2010 amendment in registration service tax AMENDMENT IN SERVICE TAX ON RENT amendment to finance Bill 2010 AMNESTY SCHEME 2007 amt Anna Hazare anna hazzare bill vs govt lokpal bill appeal apply for new pan card against old pan card aqb arbitration arrears of salary arrears of sixth pay ARRERS TAX AS-12 ASBA assessee in default ASSESSMENT REOPENING ASSESSMENT YEAR 2008-09 REFUND atm atm 100 per day atm cash without card atm tips atm wrong debit audit cases itr filing audit limit enhanced Audit Questionaire AUDIT REPORT AUS VS IND.INDIA VS SL Automated teller machine AUTOMATION OF CENTRAL EXCISE AND SERVICE TAX ay 2010-11 bad debts Bank Bank account bank audit bank audit 2012 bank charges BANK SALARY bank strike 06/07/09 and 07/07/09 banking law amendment banknotes banks npa provisioning BARE ACT bare rules BASE RATE BY BANKS bcct BIMAL JAIN biometric pan card black and white form not acceptable black money BLOCK PERIOD blogging bobay refund BONUS bonus share book discount BOOK ON EFILING BOOK REVIEW books of accounts BOOMING INDIAN ECONOMY both House rent allowance both hra and house loan Brass Scrap BRIBE CASE BROKER BSE bsnl broadband bsnl broadband usage bsnl land line sms alert BSR CODES BUDGET 2009 budget 2010 budget 2010-11 budget 2011 BUDGET 2012 budget 2013 BUDGET 2014 BUDGET 2014 CONTEST budget expectations BUDGET HIGHLIGHTS budget live on computer budget live telecast budget notification budget on tv budget speech BUDGET SPEECH DOWNLOAD Budget-2014 Budget-2015 BUDGET-2016 BUDGET08 Business BUSINESS AND PROFESSION MEANING BUSINESS COVERED UNDER 44ab BUY HOUSE C FORM CA CAN ONLY AUDIT MVAT CA CLUB INDIA CA GIRISH AHUJA CA NITIN GUPTA CA PARDEEP JAIN CA ROHIT GUPTA ca services CA sudhir Halakhandi CA Swapnil Munot CA Vikas Khandelwal calculate arrear CALCULATE NEW PAY calculate your emi calculation of tax on salary arrears CALCULATOR CALCULATOR REVISED capital asset capital formation huf Capital gain capital gain account scheme 1988 CAPITAL GAIN INDEX capital gain on repayment of loan capital gain on tenancy rights capital goods capital revenue CAPITAL SUBSIDY CAR LOAN RATE INCREASE carry forward of losses in late return cas cash flow statement CASH PAYMENT DIS ALLOWANCE CASH PAYMENTS EXCEEDING 20000 CASH SUBSIDY cbdt cbec CBI ARRESTED centeral sales tax rate CENTRAL PAY COMMISSION CENTRAL PROCESSING CENTER CENTRALISED PROCESSING OF RETURNS Cenvat CENVAT Credit Rules cgas 1988 challan challan 281 CHALLAN 289 challan correction challan Form 17 CHALLAN STATUS INQUIRY change change in cst rate change in excise duty rates CHANGE IN PAN ADDRESS CHANGE IN PAN DATA change in tds rates in budget changes CHANGES IN SERVICE TAX ACT changes in new itr forms CHANGES IN TDS CHARGES ON CASH PAYMENT OF CREDIT CARD BILL charitable organisation check name from PAN check tds deducted online Cheque cheque bounce cheque payment before due date cheque tender date /realisation date Cheque Truncation CHEQUE VALIDITY child care leave CHILD DEPENDENT PREMIUM CHILD MARRIED PREMIUM child plan childeren name children education allownces chip based atm card cibil cibil for companies CII 2007-08 CII 2008-09 CII 2010 cii 2012-13 CII2011-12 cin CIRCULAR 3/2010 DT 2.03.2010 CIRCULAR 8-2010 CIT v. Emilio Ruiz Berdejo (2010) 320 ITR 190 (Bom.) cloning of atm card clubbing of income COLLECTION CHARGES COLOR SCHEME COMMISSION ON SMALL SAVINGS common error in 2009-10 common error in itr 4-5-6 compa companies bill 2012 COMPANIES RATE COMPANY BILL 2011 company deposit Company Law Settlement Scheme COMPANY REGISTRATION complusory payment of taxes Composition scheme service tax COMPUTER AS FAX MACHINE computer sytem at ito office CONCEPT PAPER configure yahoo mail in outlook express consolidate account statement construction purchase of house Consultancy Service Consumer Price Index continues services CONTRIBUTION TO NEW PENSION SCHEME CONTRIBUTORY PENSION FUND CONVERT FIGURES INTO WORD EXCEL COPARCENER CorpMcash corporation bank correction etds CORRECTION IN PAN DATA correction in section CORRECTION RETURN CORRECTION RETURN.ETDS cost accounting cost audit cost inflation index cost inflation index 2012-13 COST INFLATION INDEX FY 2010-11 COST INFLATION INDEX FY 2011-12 COST OF INDEXATION CALCULATOR court case in entry tax punjab cpc phone number cpf Credit card CREDIT CARD BILL PAYMENT ICICI BANK credit scores cricket team critical illness CROSSED DEMAND DRAFT CRR crr reducred CS DIVESH GOYAL CST CST 3% OR 2 % cst act 1956 cst form CST FORM STATUS cst rate changed CST REDUCE RATE ctt currency CURRENCY TRADING ILLEGAL custom custom changes in budget cusual leave DA MERGE da rate da rate 01.07.2012 da rate january 2013 da rate july 2012 da rate wef 01.01.2012 date extension DDO ASK RENT RECIPT ddt dearness allowance Debit card DEBT EQUITY RATIO debt funds debt trap declared goods DEDUCTION 80C deduction for higher studies deduction on saving bank interst deduction u/s 80DD Deemed income of employee deemed services defective return defence officers defence pay defence pay scales DELAY IN FILING delete ledger in tally DELHI HIGH COURT demat deposit tax of two quarter in single challan depreciation depreciation on car depreciation on commercial vehicle. DEPRECIATION ON INTANGIBLE ASSETS depreciation rate depreciation rate 2009-10 DETAIL AFTER E FILLING DETAIL OF TIN Determination of value DIFFRENT TYPE OF TAXES digital signature din direct payment in bank account DIRECT SUBSIDY direct tax bill direct tax changes in budget direct tax code direct tax code 2009 Disability insurance discussion Paper distribution of salary dividend distribution tax dividend striping dnd do not call. document identification number document ientification number documents required for service tax registration domestic transfer pricing donation dot double taxation dow jones download download 89(1) relief calculator download direct tax code 2012 download form 16A download fvu download idfc INFRA BONDS FORM draft reply drawback rates dtaa dtc DUE DATE AY 2010-11 due date ay 2011-12 due date extended due date extended to 31.08.2012. due date for service tax return due date form 16 due date form 16a due date June due date march tax due date of return 2008-09 due date pf esi due date to deposit tds DUE DATES DUE DATES CALENDAR DUE DATES CALENDER DUE DATES INCOME TAX DUE DATES SERVICE TAX DUE FAMILY PENSION DULICATE PAN DUPLICATE TAN dvat e book Income Tax rules e book on service tax E ERA OF TAXES e filing do and don'ts e filing of audit report e filing processing status e filing software excel free e filing through evc e filing utilities e mode for notice to shareholder e notice to share holder e payment of epf E PAYMENT OF EXCISE DUTY e payment of income tax E PAYMENT OF SERVICE TAX e payment of tds E STAMP DUTY e tutorial for TAN registration E-1 FORM E-1 SALE e-commerce E-FILE SERVICE TAX RETURN e-Intermediary e-payment from friends account E-PAYMENT OF SERVICE TAX e-payment of taxes E-SEVA BY ICAI e-TDS/TCS statements earn from home earned leave Easy Exit Scheme ebay EBOOK EBOOK ON SERVICE TAX economic survey economic survey 2010 economic survey 2011 economic survey 2012 Edible Oils EDITABLE INCOME TAX FORM education cess EDUCATION LOAN eet EFFECTIVE DATE CST RATE REDUCTION effective date of allowncs efiling errors efiling free efiling income tax return efiling of excise return efiling registration problem Electricity act ELECTRONIC FOREX TRADING Electronic Verification Code (EVC) elegent card on holi ELSS EMANAGEMENT OF TAXES EMI CALCULATOR empanelment as branch auditor EMPLOYEE PROVIDENT FUND employee state insurance employee state insurance act 1948 employee state insurance act Limit employer e sewa eMudhra Consumer Services entries r off in 50 paisa entries rounded off in rs ENTRY TAX entry tax punjab epf epf challan epf claim epf e passbook EPF FAQ epf int rate 11-12 epf interest exemption epf interest rate epf interest rate for fy 2010-11 epf limit epf online EPF ONLINE CHALLAN GENERATION epf statement EPF TRUST epf withdrawals epfo equal monthly installments