WORK CONTRACTS A PRSENTATION BY GYATI GUPTA SERVICE TAX ON

What is a service ?

 An activity carried out  By one person for another  For consideration

 Includes : Declared Services  Excludes: - Sale/Deemed sale/Gift etc. Of movable/Immovable property - Transaction in money & Actionable Claim - Employee Employer Relationships - Court fee - Services mentioned under Negative List

What are declared service ?

 Specifies the list of Declared Services and contains 9 Declared Services  These include Renting of immovable property, Construction services, IPR services, Information Technology software, Right to use, Hire Purchase, Works Contract, Catering, and Agreeing to act or Not to act or tolerance an act: forbearance.

Why was there a need for declared service ?

 The definition of service in the first instant is very wide to cover any txn done for a consideration.  However, there exists a few activities which would overlap with the other levies of state with a marginal difference, thereby questioning the constitutional validity of the levy under service tax. Some of these are specifically included as these are partly covered under List II i.e. State List (like works contract, supply of food, hire, financial lease, hire purchase)  In some cases, there may be a doubt whether that activity could possibly called a service at all  To rest a doubt about the validity of a txn to considered as service, the authority has intended to declare such activities to be a service.

Work Contract is one of the 9 declared services

What is a Work Contract ?

Defined by clause 2[ja] inserted by The Finance Act, 2005 in the Central Sales-tax Act, 1956

A contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection,installation, fitting out, improvement, repair or commissioning of any movable or immovable property

Simplified Version (In a layman’s language)

Work contract = a single contract for (Material + Labour )

Guidelines to ascertain works contract

There must exist an INDIVISIBLE WORKS CONTRACT; divisible contracts are outside the scope. GOODS MUST BE INVOLOVED IN THE EXECUTION OF THE WORKS ; transfer of property in goods does qualify as works contract when it is incorporated in the works.

 Transfer of PROPERTY IN GOODS MUST PASS as goods or in some other form. Form of goods has no relevance ; may have a relevance for determination of rate of tax  Some WORK HAS TO BE DONE ON THE PROPERTY by the contractor.

PURE LABOUR CONTRACTS OR SERVICE CONTRACTS are outside the purview of the sales tax/VAT law. If during the execution of works contract GOODS ARE CONSUMED and their identity is lost THEN NO TRANSFER OF PROPERTY occurs in those goods.

Taxabilitiy of work contract

Work contract Labour (Service) Service Tax (Revenue of CG) Material (Goods) VAT/ Sales Tax(Revenue of SG)

Service Tax Labour and other service charges incurred VAT/ Sales Tax Value of goods in which the property would pass during execution of works contract

Sales Tax Liability

 Taxable Turnover  Tax Rates

 Cost of Acquisition of the goodsxxxxx  + Margin of profit on them prevalent in the trade xxxxx  + Cost of transferring the property in goods xxxxx  + All other expenses in relation there to till the property in them passes to the Contracteexxxxx

Tax Rate Value of each item of material t/f in course of execution of a works contract If identifiable : Tax is charged on the value of individual items /materials If not identifiable: Tax is charged on basis of specified percentages Composite Rate* To be applied on the entire contract value of the works contract.

CENVAT CREDIT RULES, 2004 The contractor is not entitled to avail of input tax credit on INPUT/ CAPITAL GOODS procured from within the state under composite scheme whereas the same can be availed in the other two situations already discussed.

Another Tax under State Vat Laws: WORK CONTRACT TAX (WCT) W.C.T. Is also deducted under state vat law. (Payment is made to the contractor after deducting TDS (for VAT) under particular state VAT Specified % (for eg. 4% in D-VAT) (Sec. 36A of D-VAT)

Service tax liability

Requirements: Determination of value of service portion in the execution of work contract (As per Rule 2A of Valuation Rules)

Value of Service portion : Clause (i) Gross amount charged for the work contract xxxx Less: Value of property in goods t/f in the execution of the said work contract xxxx xxxx

V ALUE OF SERVICE PORTION (C LAUSE II ) a) Original Works : Pay Service tax on 40% of the total amt charged for the works contract. b) For Maintenance or Repair or Reconditioning or Restoration or Servicing of ANY GOODS (MOVABLE PROPERTY ) : Pay service tax on 70% of the total amt charged for the works contract.

.... CONTD. c) In case of other Works Contract, not covered under sub-clauses (a) and (b), incl. Maintenance,repair, completion and furnishing services such as glazing, plastering,floor and wall tiling, installation of electrical fittings of an immovable property: Pay service tax on 60% of the total amt charged for the works contract.

Direct Tax: Concept of TDS

 TDS is deductible u/s 194c on total value of contract. (1% on individual/HUF) (2% on companies, and others not submitting the PAN )  Individual Contract Lt. : Rs. 30,000/-  Agg Contract Lt in a year: Rs. 75,000/-

 Reverse Charge is also applicable in the case of Service Tax NOT on entire WORK CONTRACT  Partial Reverse Charge Mechanism (50%, 50%) shall be applicable : if Service Provider : any Individual / HUF / Proprietory concern and Service Receiver : Business Entity/ Registered Partnership Firm (L.L.P.) or a Company

What would be the provision of place of service ?

The place of provision of services provided directly in relation to an immovable property, including services provided in his regard by experts and estate agents, provision of hotel accomodation by a hotel, inn, guest house, club or campsite, by whatever name called, grant of rights to use immovable property, services for carrying out or co-ordination of construction work, including architects or interior decoraters, shall be the place where the immovable property is located or intended to be located.

What would be the Point of Taxation ?

- Rule 3 of POT Rules, 2011 for Normal Charge - Rule 7 of POT Rules, 2011 for Reverse Charge - It is also a continous supply of service

Rule 3 : a) On issue of invoice (where invoice is issued within prescribed time : 30/45 days) a) On completion of provision of service (where invoice is not issued within presribed time : 30/45 days) b) On receipt of payment in a case where the person providing the service receives the payment before the time specified in clause (a)

Rule 7 : Where the payment is made within a period of 6 months of the date of invoice : POT= the date on which payment is made Where the payment is not made within a period of 6 months of the date of invoice : POT = As per Rule 3

In case of continous supply of service POT shall be taken as 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.

Difference Between Works Contract and Construction Contract

BasisWorks Contract (Service) Construction Service GeneralNormally a single contract for material and labour There may be single or mutilple contracts for land, labour and material. CCR on Inputs Not Available under any scheme Total credit shall be allowed under every scheme. Reverse Charge Mechanis m Applicable (50%, 50%)N.A. Deemed Sale Goods t/f in execution of works contract = Deemed Sale & Liable to VAT. No Deemed Sale, so no question of VAT

 IDT- Service Tax book by CA Raj Kumar Sir  IDT Study Manual by ICAI  Online portals :