Amit Mundhra, FCA, ISA(ICAI)

Service tax provisions in respect to Works Contracts have undergone major changes after introduction of newservice tax regime. Works contract in itself is a very lengthy subject and law relating to Works Contract in Service Tax is available in a very scattered way. I am trying to summarize all the legal provisions relating to Works Contract in this new service tax regime in a series of articles. This article is the second one in the series. If you have not read the first article, you can view it by clicking here. I am covering following points in this article. o o Valuation of service portion in works contract CENVAT Credit availability in works contract

o Point of Taxation in Work Contract Service VALUATION OF SERVICE PORTION IN WORKS CONTRACT Section 67 of the Finance Act covers the Valuation of taxable services for charging service tax. We can summarize this section 67 as follows.

Relevant Clause 67(1)(i)

Type of Consideration

Mode of Valuation

Where provision of Gross Amount service is for a Charged by the service consideration in provider for such money service provided or to be provided by him.

67(1)(ii)

Where provision of service is not for wholly in money or for partly in money

Gross Amount Charged plus money value of the Consideration in kind

67(1)(iii)

Consideration ascertainable

not As may be determined in the prescribed manner.

Definition of relevant terms

Term Consideration

Definition Consideration includes any amount that is payable for the taxable service provided or to be provided.

Gross Amount Charged

Gross Amount Charged includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called Suspense A/c or by any other name, in the books of accounts of a person liable to payservice tax, where the transaction of taxable service is with any associated enterprise.

VALUATION OF WORKS CONTRACT SERVICE As the value of service portion in a works contract is generally not ascertainable, the valuation ofWorks Contract Service will always be governed by Section 67(1)(iii) where the government has prescribed Service Tax (Determination of Value) Rules, 2006 for the valuation. RULE 2A of Service tax (Determination of Value) Rules, 2006 governs the valuation of Works Contract Service, which is summarized as follows. Rule 2A gives two options for determination of value of Works Contract Service. These are; 1. Segregation Method 2. Composition Method SEGREGATION METHOD Following is the formula for calculation of Works Contract Service under Segregation Method.

Value of Works ContractService

Gross Amount Charged

Value of property in Goods Transferred

Value of Service Portion of Works Contract

Gross Amount Charged for theworks contract

Value of property in goods transferred in the execution of the saidworks contract

Shall Include charges Labour

Shall not include

or sales tax paid Sub payable contractor charges for labour & services Planning, designing and architects Fees Machinery and tools hire charges Consumables i.e. water, electricity, fuel used Cost establishment of of

Where VAT or sales tax is paid or payable on the actual VAT value of property in or goods transferred, such value adopted can be taken as Value of Property in goods transferred under this rule.

contractor related to labour and services Profit portion pertaining to labour and services.
COMPOSITION METHOD Following is the formula for calculation of Works Contract Service under Composition Method.

Value of Works ContractService

Total Amount Charged

Specified % rate

Total Amount Charged

Gross Amount Charged (As defined earlier) The fair market value of all goods and services supplied in or in relation to the execution of theworks contract

The fair market value of all goods and services

Fair Market Value of all goods and Services

The amount Charged for such goods or services if any + VAT or Sales taxlevied thereon.

Following is the specified % rate for different types of works contracts.

S.N.

Nature of Works Contract

Specified % rate on which tax is payable

Works contract for of original works i.e. -

execution

All new constructions

40%

All types of additions and alterations to abandoned or damaged structures on land that are required to make them workable Erection, commissioning or installation of plant, machinery or equipment or structures whether prefabricated or otherwise

Works contract for 70% Maintenance or repairs or or Reconditioning restoration or Servicing

Of Any GOODS

Works contract not above and including

covered 60%

Maintenance, repair,

Completion and finishing i.e. glazing, plastering, Floor and wall tiling, Installation of electrical fitting Of an IMMOVABLE PROPERTY

KEY POINTS Following key points can be summarized in respect to above methods of valuation of works contractservice. Integration of Valuation with State VAT Laws It seems that, the government has drafted these two methods of valuation after taking into consideration the various state laws applicable for works contract. Generally, for VAT purpose, the state laws have these 2 types of methods, in which a person can either adopt the Segregation Method or Composition / Exemption Method. The government has integrated the valuation rule with state laws, which is in my view a good step to reduce the taxation conflict between the State Government and Central Government. Assessee can use different method for different contracts The assessee has liberty to choose the method of valuation for every separate works contract he is entering. For one works contract, he can choose Segregation Method and for other he can use Composition Method. AVAILABILITY OF CENVAT CREDIT IN WORKS CONTRACT SERVICE Under rule 2A of Service Tax (Determination of Value) Rules, 2004, explanation -2 provides as follows. for the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of 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 Key Points CENVAT credit on Inputs not Allowed As per explanation 2 of the determination of valuation rules, the provider of works contract service cannot take CENVAT credit of inputs (goods) used in relation to the execution of works contract. As per earlier provisions, the service provider had the option to pay service tax on full value of contract and thereafter claim CENVAT credit on inputs (goods) used in execution of works contract.

But this option has not been provided in the rules applicable from 01.07.2012. Thus, in effect, the service provider in any case cannot claim the CENVAT credit of inputs (goods) used in execution ofworks contract. CENVAT credit on Input Services and Capital Goods Allowed As per explanation 2 of the determination of value rules, there is no restriction on claiming the CENVAT credit of Input Services and Capital Goods. Thus the provider of works contract service can claim CENVAT credit of Input Services and Capital Goods as per the CENVAT Credit rules 2004. POINT OF TAXATION OF WORKS CONTRACT SERVICE After 01-07-2012, the payment of service tax is governed by section 68 of the Finance Act. The point of taxation rules, 2011 have been prescribed under section 68. What is Point of Taxation The point of taxation is the point when the liability for payment of service tax becomes due/ payable to the government. We can summarize the point of taxation rule in following way.

S.N. 1

Condition

Point of taxation

Where invoice for the Tax will be payable at service is issued within the time of issue of 30 days from the invoice. Completion of taxable service

Where invoice for the Tax will be payable at service is issued after the time of completion 30 days from the of provision of service Completion of taxable service

Where payment is received by the service provider before raising the invoice or before completion of provision of service

Tax will be payable at the time of receipt of advance amount, to the extent of such amount

What the term Completion of provision of service means:

Completion provision service

of This term is not defined anywhere of under the service tax law but, as per departmental clarification in circular no. 144/13/2011 S.T. dated 18-062011 it has been clarified that; This would include not only the physical part of providing the service but also the completion of all other auxiliary activities that enable the service provider to be in a position to issue the invoice. Such auxiliary activities could include activities like measurement, quality testing etc. which may be essential prerequisites for identification of completion of service. The test for the determination whether a service has been completed would be the completion of all the related activities that place the service provider in a situation to be able to issue invoice. However such activities do not include flimsy or irrelevant grounds for delay in issuance of invoice. Thus generally above clarification will govern the meaning of the term Completion of provision of service.

Completion of provision of service in case of Continuous Supply of Service

In proviso to rule 3 of Point of Taxation Rules, an exception / deeming provision has been created to define the term completion of provision of service. It seems that this proviso is coming at wrong place. Its better place should have been in Rule 4A of the Service Tax Rules, 1994.

Meaning of Completion of provision of service in case of Continuous supply of service

As per proviso to Rule 3 of Point of Taxation Rules In case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of acontract, which requires the receiver of service to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service.

Works Contract Service is a Continuous Supply Service As per rule 2(c) of Point of Taxation Rules, 2011, the term Continuous Supply of Service is defined as below. Continuous Supply of Service means any service which is Provided or to be provided continuously or on recurrent basis, under a contract for a period Where the central government, by a notification in the official gazette, prescribes provision of a exceeding three months with the obligation of payment periodically or from time to time, or particular service to be a continuous supply of service, whether or not subject to any conditions. As per notification No. 38/2012 dated 20.06.2012, the government has notified following 2 services which shall be deemed to be Continuous Supply of Service w.e.f. 01-07-2012. Telecommunication Services Service portion in execution of a works contract.

Thus, it is clear that the Works Contract Service in any case will be deemed to be continuous supply of services under the Point of Taxation Rules, 2011 and accordingly provisions related to Continuous Supply of Service will be applicable on it. In summary, in case of works contract service, if the contract or work order provides specific dates by which certain amount of work is to be completed and payment is to be released, then the date mentioned

in the contract will be deemed to be the date of completion of provision of service for the purpose of service tax. Amit Mundhra, FCA Author is a Fellow member of the ICAI and he can be reached at amit.mundhra@gmail.com

CA Ashish Gupta

Background: It is very common practice in the construction or infrastructure related industries that the contract prices agreed between the parties are inclusive of taxes applicable on such construction/maintenance/repair/renovation or related activities. In such circumstances, the service provider can not levy service tax over and above the contract price and is bound to discharge its liability of service tax from the price charged. As we all know that the recent amendments in service tax regime have drastically changed the system of taxation on services. Through this article, we have made an attempt to assess the post amendment position under law with respect to taxability of inclusive rate works contracts. Statutory Provision: Section 67(2) of Finance Act, 1994 provides that where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. It can be easily infer from above that where contract price of any works contract is inclusive of all taxes then taxable value of such service under such contract shall be computed in a manner that the value of service and service tax thereon shall be equivalent to the contract price. Valuation ofworks contract services shall be determined in accordance with the rules framed for the said purpose i.e. Rule 2A of Service Tax (Determination of Value) Rules, 2006. In terms of this rule, value of service portion in the execution of a works contract can be determined by following two options: Option 1: Actual Cost Method Under this method, service provider shall compute the value of services by reducing the value of goods transferred in the execution of the works contract and sales tax thereon from the gross amount of charged. Further, service provider is eligible to utilize CENVAT Credit on eligible inputs, input services and capital goods for the payment of its liability of service tax on its output

services. *Value of service shall include labour cost, fuel/electricity cost, hire charges, planning/designing cost used in the execution of said works contract. [Refer Rule 2A(i)(b) of ST (Valuation) Rules, 2006] Illustration:

AAA Ltd has entered into a contract with BBB Ltd for construction of an office of BBB Ltd for a consideration of Rs.50,00,000/- (inclusive of all taxes and cost involved in it). The execution of such contract involves transfer of property in goods worth Rs.30,00,000. ABC Ltd has adopted same value for the purpose of payment of VAT of Rs.3,50,000 (approx). In this case, the valuation of service and service tax thereon shall be determined in following manner: Contract Value Less: Value of Material transferred & VAT Gross Amount Charged (inclusive of service tax) Taxable Value of Service (16,50,000/112.36*100) Service Tax Payable (14,68,500*12.36%) Option 2: Fixed percentage method Under this method, the value of service portion in the execution of various types of works contractshall be computed at a fixed percentage of the total amount charged for the provision of such service. Service provider is not allowed to take CENVAT Credit on inputs used in or in relation to said works contract. Valuation of various types of works contract is tabulated herein below:1 : 1,81,506 : 14,68,494 : : : 50,00,000 33,50,000 16,50,000

S. No.

Purpose of the Works Contract Execution of Original Works

Taxable Value ofService 40% of Total Amount Charged*

(A)

(B)

Maintenance or Repair or 70% of Total Reconditioning or Restoration Amount or Servicing of any Goods Charged* Any purpose other than 60% of Total mentioned in (A) & (B) above, Amount including Maintenance, Repair, Charged* Completion and Finishing Services [such asGlazing, Plastering, Floor and Installation of Electrical

(C)

Fittings] of property.

an

immovable

*Total amount charged shall include the value of goods or services supplied in or in relation to anyworks contract after deducting amount charged for such goods or services and VAT levied thereon. Illustration: AAA Ltd has entered into a contract with BBB Ltd for construction of an office of BBB Ltd for a consideration of Rs.50,00,000/- (inclusive of all taxes). During the execution of the contract BBB Ltd provides the services of interior decorator along with some material to be used in construction of such office to AAA Ltd at a price of Rs.10,00,000 while the market value of such service and material is Rs.20,00,000/-. Now the valuation of service and service tax thereon under such contract shall be determined in following manner: Contract Value Add: Value of Material / services supplied Less: Amount paid to service receiver Total Amount Charged (A) Taxable Value of Service (40% of A) (inclusive of service tax) Taxable Value of Service (24,00,000/112.36*100) Service Tax Payable : 2,64,008 : 21,35,991 : : : : 50,00,000 20,00,000 10,00,000 60,00,000 24,00,000

(21,35,991*12.36%) This is how the service tax shall be computed under the two available options where contract price is inclusive of service tax. Service provider may choose different option for valuation of taxable service & computation of service tax for different contracts. Position of Inclusive Rate Contracts under Reverse Charge: As we all know that Reverse Charge Provisions under service tax regime have been widened w.e.f. 01 July, 2012 and is now applicable on works contract services also. In terms of these provisions, where works contract services are being provided by a non-corporate person to a corporate entity then liability of service tax shall be discharged by service provider and service receiver in equal proportion. Thus, in such arrangements the service provider (i.e. Individual, Firm, HUF, AOP etc) has to deposit only 50% of the total service tax liability and rest 50% shall be paid by service receiver (i.e. Body Corporate). Now cases where inclusive rate contracts are being entered between a body corporate and a non-body corporate assessee for providing works contract service then service receiver will recover the amount of service tax payable by him under reverse charge from the payments due to service provider. Therefore, in such cases service receiver has to make a deduction of 50% of totalservice
st

tax liability (like TDS under Income Tax Act) from the payment made to service provider and the same shall be deposited to the Government within the prescribed time limit. Every such deduction will largely affect the cash flows of the service provider since CENVAT credit available with the service provider will be utilized against 50% of the service tax liability only. Undue Hardship on Small Service Provider: It is amply clear from the provisions of Reverse Charge that such provisions will be applicable irrespective of the size of the business of service receiver as no threshold exemption is available to them under such provisions. Further, service receiver shall remain be liable to pay his part of service tax liability on notified services even if service provider is availing benefit of threshold exemption of Rs.10 Lakhs and is not charging/depositing any service tax. Lets assume a small service provider, who is not liable to pay service tax, enters into a works contract where prices are inclusive of all taxes and provisions of Reverse Charge also applies. Even in such cases, the service receiver shall be liable to pay 50% of total service tax liability under reverse charge. Since the contract price includes service tax also, service receiver will recover such amount from the value of contract itself by way of deduction. Under such circumstances, any deduction made by service receiver, from the amount payable to service provider, on account ofservice tax will adversely affect the return of service provider. In view of above, it is suggested to every service provider (other than body corporate) that inclusive rate contracts should be avoided where recipient of service is a body corporate. However, in case such contracts cannot be avoided, service provider should consider the service tax deduction to be made by receiver while determining the cost of the work involved. I hope this article will help people working for this industry at large. Please share your feedback at info@ashishca.com