WORKS CONTRACT

1
WORKS CONTRACT

• SERVICE TAX

2
What is works contract

• As per Explanation to Section 65 (105) (zzzza) of
  the Finance Act, 1994, the term works contract
  means a contract wherein,
• (i) transfer of property in goods involved in the
  execution of such contract is leviable to tax as
  sale of goods, and
• (ii) such contract is for the purposes of
  carrying out,
• (a) erection, commissioning or installation of
  plant, machinery, equipment or structures,
  whether pre-fabricated or otherwise, installation
  of electrical and electronic devices, plumbing,
  drain laying or other installations for transport
  of fluids, heating, ventilation or
  air-conditioning including related pipe work,
  duct work and sheet metal work, thermal
  insulation, sound insulation, fire proofing or
  water proofing, lift and escalator, fire escape
  staircases or elevators or
• (b) construction of a new building or a civil
  structure or a part thereof, or of a pipeline or
  conduit, primarily for the purposes of commerce
  or industry or
• (c) construction of a new residential complex or
  a part thereof or
• (d) completion and finishing services, repair,
  alteration, renovation or restoration of, or
  similar services, in relation to (b) and (c) or
• (e) turnkey projects including engineering,
  procurement and construction or commissioning
  (EPC) projects

3
Exclusions from scope

• Works contracts executed with respect to the
  following are not covered in the definition of
  the term works contract
• Construction of Roads
• Construction of Airports
• Construction of Railways
• Construction of Transport Terminals
• Construction of Bridges
• Construction of Tunnels and Dams.

4
Valuation of works contract

• Option I
• As per Rule 2A of the Service Tax (Determination
  of Value) Rules, 2006 value of the works contract
  service shall be equivalent to the gross amount
  charged for the works contract less the value of
  transfer of property in goods involved in the
  execution of the said works contract
• In other words the portion of the contract which
  represents material shall be excluded from the
  contract value in determining the taxable value
  which is chargeable to service tax.
• Once value has been ascertained as mentioned
  above service tax shall be charged at the rate of
  10.3 (Inc. Cess) on such value

5
Valuation of works contract

• Option II
• On the other hand assesses have been provided
  with an option to pay service tax on works
  contracts under the Works Contract (Composition
  Scheme for payment of Service Tax) Rules, 2007.
• Under this scheme the service provider
  (contractor) can opt for a composition scheme
  wherein he can pay service tax at the rate of
  4.12 (incl. Cess) of the gross value of the
  contract.
• Gross value of the contract shall include all
  goods used in execution of the contract including
  the value of the goods supplied by the contractee
  free of cost or otherwise.

6
Who is liable to pay service tax

• The liability to pay service tax under works
  contract rests with the provider of taxable
  service namely the Contractor.
• The Contractor either by following option I or
  option II shall pay service tax
• Since the service tax is an indirect tax it will
  be recovered from the service receiver namely the
  Contractee
• And can utilize the Cenvat credit, if any,
  eligible as per the Cenvat Credit Rules, 2004 for
  payment of service tax.

7
Cenvat Credit

• Under Option I the contractor shall be eligible
  to avail Cenvat credit with respect to duties
  paid on inputs and capital goods and service tax
  paid on input services which are used in or in
  relation to the execution of the works contract.
• Under Option II the contractor shall be eligible
  to avail Cenvat credit with respect to duties
  paid on capital goods and service tax paid on
  input services but he is NOT ENTITLED to avail
  Cenvat credit of duties paid on inputs used in or
  in relation to execution of works contract.

8
Sub contract

• The main contractor may sub-contract part of the
  contract to another person, generally called the
  Sub-Contractor.
• The provisions as discussed above will be
  applicable to the transaction between the main
  contractor and sub-contractor as if the main
  contractor is a contractee and sub contractor is
  a contractor.
• Accordingly the sub-contractor can follow either
  of the options discussed above with respect to
  the value of the contract awarded to him and pay
  service tax.
• The service tax levied by the sub-contractor from
  the main contractor is available as Cenvat credit
  to the main contractor

9
Example Main contracts following option I and
sub contractor follows either of the options

• Let us take an example where A awards a civil
  construction contract worth Rs. 100 to B.
  Material portion represents 70 and
  labour/service portion represents 30. B awards
  50 of the contract to C on subcontract basis.
  Find out the tax liability of B in this regard.
• Calculation of service tax liability under Option
  I
• Total value of the contract is 100
• Value of goods involved in execution of contract
  70
• Value of the service for payment of service tax
  30
• Service tax payable at the rate of 10.3 3.09
• In this case if the sub contractor is also
  following option I the he will
• Levy service tax as follows
• Value of the contract 50
• Value of material involved in execution of
  contract 35
• Value of the service for payment of service tax
  15
• Service tax at the rate of 10.3 1.545
• Therefore service tax payable by B would be
  1.545

10
Example Main contracts following option I and
sub contractor follows either of the options

• On the other hand if the sub contractor follows
  option II then the calculations would be
• Value of the contract 50
• Service tax payment under composition method
• at the rate of 4.12 on the value of the
  contract 2.06
• Therefore the subcontractor will collect Rs. 2.06
  from the main contractor and the same will be
  available as cenvat credit to the main
  contractor, in such a case the service tax
  payable by main contractor would be
• Service tax payable (as computed under option
  I) 3.09
• Less Service tax paid to sub contractor
  eligible
• as cenvat credit 2.06
• Net outflow 1.03

11
Example Main contracts following option II and
sub contractor follows either of the options

• Where the main contractor follows Option II the
  service tax payable would be
• Value of the contract 100
• Value for the purpose of calculating service tax
• under composition method 100
• Service tax at the rate of 4.12 4.12
• If the sub contractor follows Option
  I Option II
• Value of the contract 50 50
• Value of the contract for calculating ST
  15 50
• Service tax rate 10.3 4.12
• Service tax payable 1.545 2.06
• Net outflow to the main contractor (ST payable as
  
• Computed under option II Less ST paid to Sub
  contractor) 2.575
  2.06