Service portion in the execution of a works contract under service tax
Definition and scope of service:
“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 activity.
Nature of service
Any service provided in execution of “works contract” means a contract wherein transfer of property in goods involved in the execution of such contracts leviable to tax as sale of goods and such contract is for the purpose 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
(f) Commissioning (EPC) projects
Service portion in the execution of works contract is covered in the definition of declared services and not the consideration received for transfer of property in goods. Works contract may be in relation to movable or immovable property. However in order to qualify as works contract the following conditions must be satisfied;
- There must be transfer of property in goods in the execution of such contract
- Such transfer of property in goods 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 activity.
There is also a composition scheme for ‘works contract service’, where 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 4% of the gross amount charged for the works contract. The gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax, paid on transfer of property in goods involved in the execution of the said works contract.
Liability under reverse charge
Where services are provided or agreed to be provided in relation to work contract by an individual/HUF/proprietary or partnership firm whether registered or not / AOP located in any taxable territory to any company formed or registered under the companies act act,1956 or a business entity registered as a body corporate located in taxable territory, service provider is liable to pay tax is 50% of service tax liability and remaining 50% shall be payable by service receiver.
Partial reverse charge wherein both service provider and service receiver are liable to pay service tax as per defined %
It may be noted that in partial reverse charge mechanism the service receiver is not bound by the valuation adopted by the service provider, when the service tax liability is required to be shared between them. Since the liability of service receiver and service provider are different and independent of each other the service provider can independently avail or forgo abatement or choose a valuation option depending on the data available with the person.
However, where service provider is located outside the taxable territory but the service is being provided in taxable territory, in terms of place of provision of services rules,2012, the tax shall be payable by service receiver.
Different situations under works contract for levy of service tax
Pure labour contracts are not works contract – labour contracts does not fall in the definition of work contract. It is necessary that there should be transfer of property in goods involved in the execution of such contract which is leivable to tax as sale of goods. Pure labour contracts are therefore not works contract and would be leviable to service tax like any other service and on full value.
Contracts for repair or maintenance of movable properties like motor vehicles are also work contract if property in goods is transferred in the course of execution of such contract. Service tax has to be paid in the service portion of such a contract.
Construction of a pipe line or conduit would be covered under works contract because these are structure on land and contracts for construction of such structure would be covered under works contract.
Contracts for painting of a building, repair of a building, renovation of a building, wall tiling flooring would be covered under ‘works contract’ if such contract involve provision of materials.
In case of works contract and ‘service wherein goods, being food or any other article of human consumption or any other drink (whether or not intoxicating) is supplied in any manner as part of the service’ the ‘dominant nature test’ does not apply and service portion is taxable as a ‘services’.