Our company is into manufacturing. We engage contractors for doing various types of work in our factory premises such as repairs, additions, alterations, etc. These contractors are neither registered under service tax (since their turnover is less than Rs 9 lakh) nor are they paying any service tax. Under the negative list of taxation, are we required to pay tax under reverse charge even if the contractors do not pay any service tax? If yes, then what is the mechanism for computation of tax payable by us?
Under the negative list regime
- a body corporate (Service receiver)
- receiving works contract services from (service provider)
- an individual,
- Hindu undivided family,
- association of person or
- body of individuals
- is required to part pay service tax under the reverse charge mechanism. The service recipient is required to discharge 50% of the amount of tax payable on such services.
It has been clarified under the Guidance Paper issued by the Central Board of Excise & Customs that even where the service provider avails of the turnover-based exemption (since his turnover is less than R10 lakh), the service provider is required to discharge the prescribed portion of tax under the reverse charge mechanism.
10.1.3 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.
Further the service recipient has the option of choosing any of the valuation methods for the purpose of computing the service tax payable by him.You can adopt suitable method case to case basis ,detail is given here (valuation of Works contract under service tax wef 01.07.2012)