Works Contract Composition Scheme under Service Tax

Before introducing the new Service Tax Law w.e.f. 01-07-2012 the works contract composition scheme was governed by the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 [View/Download]. After 01-07-2012 the composition Scheme for works contract has been incorporated under Rule 2A of the Service Tax (determination of Value) Rules 2006. The definition of ‘Works Contract’ is as under:

Definition of Works Contract

Section 65B (54) of Finance Act, 1994:

“Works Contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

From the above definition it may be noted that any contract in which property in goods (leviable to tax as sale of goods) is transferred during the execution of such contract is termed as ‘Works Contract’.

Taxability of Works Contract in Service Tax

The works contract service is specifically included in the declared list of services under section 66E of Finance Act 1994. Therefore in new law of service tax w.e.f. 01-07-2012 there is no dispute over taxability of works contract in service tax.

Valuation of Works Contract Service

For valuation of ‘Works Contract Service’ specific rule is provided in Service Tax (Determination of Value of Services) Rules, 2006. The relevant rule is reproduced here for ready reference: 

“2A. Determination of value of service portion in the execution of a works contract:- 

Subject to the provisions of section 67, the value of service portion in the execution of a works contract , referred to in clause (h) of section 66E of the Act, shall be determined in the following manner, namely:- 

(i) Value of service portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in the execution of the said works contract.

Explanation.- For the purposes of this clause,-

(a) gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract;

(b) value of works contract service shall include, –

(i) labour charges for execution of the works;

(ii) amount paid to a sub-contractor for labour and services;

(iii) charges for planning, designing and architect’s fees;

(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

(v) cost of consumables such as water, electricity, fuel used in the execution of the works contract;

(vi) cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and services;

(c) Where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause. 

(ii) Where the value has not been determined under clause (i), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:- 

(A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent of the total amount charged for the works contract; 

(B) in case of works contract, not covered under sub-clause (A), including works contract entered into for,-

(i) maintenance or repair or reconditioning or restoration or servicing of any goods; or

(ii) maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property, 

service tax shall be payable on seventy per cent of the total amount charged for the works contract

Explanation 1.- For the purposes of this rule,-

(a) “original works” means-

(i) all new constructions;

(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

(d) “total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting-

(i) the amount charged for such goods or services, if any; and

(ii) the value added tax or sales tax, if any, levied thereon:

Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles. 

Explanation 2.- 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.”

From above legal provision it may be noted that there are two options to derive taxable value of ‘Works Contract Service’ which can be summarized as under:

Rule 2A : Option – I

Gross Amount charged (GAC) for Works Contract                                xxxxx

Less:

(i) Value of property transferred in goods xxx

(On the basis of documentary evidence)

(ii) VAT or Sales Tax xxx     

                               Taxable Value                                                          xxxx

Value of transfer of property in goods shall be the value taken for VAT purposes.

Value of Works Contract shall include:

  • Labour charges
  • Payment to sub-contractor for labour and services;
  • Planning, designing and architect’s fees;
  • Hire charges for machinery and tools
  • Cost of Consumables such as water, electricity, fuel
  • Cost of establishment of the contractor relatable to supply of labour and services;
  • Other similar expenses; and
  • Profit earned by the service provider relatable to supply of labour and services;

Rule 2A Option – II

Where Value cannot be ascertained as per Option-I then value shall be worked out as under:

S. No. Nature of contract Taxable Value
1. Execution of Original Works 40%
2. In case of works contract, not covered under above clause, including works contract entered into for:

(i) maintenance or repair or reconditioning or restoration or servicing of any goods; or

(ii) maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property

 70%

In the ‘Option-II’ taxable value of original work would be @40% of the total amount charged for the works contract. The meaning of ‘Original works’ is given in rule 2A reproduced above which covers the following works:

  • all new constructions;
  • 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 pre-fabricated or otherwise;

From the above definition of original works it can be noted that besides activities of new constructions, the erection, commissioning or installation of any equipment/plant & machinery is also covered in the definition of original works which is to be valued @40% of the total amount.

Exemption in Works Contract Service

There is no specific exemption is given in negative list u/s 66D of Finance Act 1994. However mega exemption notification no.25/2012-ST dated 20-06-2012 provided following exemption from service tax relating to Works Contract Service:-

12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of—(a) [***];

(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c) [***];

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or

(f) [***];
12A. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of—(a)a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(b)a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or

(c)a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause (44) of section 65B of the said Act;

under a contract which had been entered into prior to the 1st March, 2015 and on which appropriate stamp duty, where applicable, had been paid prior to such date:

Provided that nothing contained in this entry shall apply on or after the 1st April, 2020;
13. Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,—(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;

(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

(ba) a civil structure or any other original works pertaining to the ‘In-situ rehabilitation of existing slum dwellers using land as a resource through private participation’ under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana, only for existing slum dwellers.

(bb) a civil structure or any other original works pertaining to the Beneficiary-led individual house construction/enhancement under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;

(c) a building owned by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961)and meant predominantly for religious use by general public;

(d) a pollution control or effluent treatment plant, except located as a part of a factory; or

(e) a structure meant for funeral, burial or cremation of deceased;
14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,—(a) railways, excluding monorail and metro.

Explanation.—The services by way of construction, erection, commissioning or installation of original works pertaining to monorail or metro, where contracts were entered into before 1st March, 2016, on which appropriate stamp duty, was paid, shall remain exempt;

(b) a single residential unit otherwise than as a part of a residential complex;

(c) low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(ca) low cost houses up to a carpet area of 60 square metres per house in a housing project approved by the competent authority under:

(i) the “Affordable Housing in Partnership” component of the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana;

(ii) any housing scheme of a State Government.

(d) post-harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;
14A. Services by way of construction, erection, commissioning, or installation of original works pertaining to an airport or port provided under a contract which had been entered into prior to 1st March, 2015 and on which appropriate stamp duty, where applicable, had been paid prior to such date:Provided that Ministry of Civil Aviation or the Ministry of Shipping in the Government of India, as the case may be, certifies that the contract had been entered into before the 1st March, 2015:

Provided further that nothing contained in this entry shall apply on or after the 1st April, 2020;
29. Services by the following persons in respective capacities—
(h) sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt;

 

Note : The Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 [View/Download] [Rescinded by Notification No. 35/2012-S.T., dated 20-6-2012] [w.e.f. 01-07-2012]