Service Tax on works contract

As per section 65B(54) of the Finance Act, 2012, “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, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof  in relation to any building or structure on land.

From the emboldened words, we can make out what types of activities are covered under works contract. Section 66E of Finance Act, 1994 gives a list of “declared” services.

Section 66E (h) defines the service portion in the execution of a works contract as a service. In simple words, in composite contracts i.e. contracts involving goods as well as services; the service portion is chargeable to service tax.

Valuation of  works contract services:

Rule 2A of Service Tax (Determination of Value) Rules, 2006 explains the different methods of valuation of works
contract services. As per rule 2A(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.

It is important to note the following explanations provided with Rule 2A.

1. As per Explanation (a) to rule 2A(i), the 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;
2.  As per Explanation (b) to rule 2A(i), 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;

3.  As per Explanation (c) to rule 2A(i), 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.

If valuation is not calculated by the above method, the service provider can adopt an alternate method as follows:

A.  Works contract for Original Works:

As per explanation 1 to Rule 2A(ii), (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; service tax shall be payable on forty per cent of the total amount charged for the works contract

B. If works contract is for maintenance or repair or reconditioning or restoration or servicing of any goods,  service tax shall be payable on seventy percent of the total amount charged for the works contract;

C.  in case of other works contracts, not covered under sub-clauses (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical  fittings of an immovable property , service tax shall be payable on sixty per cent. of the total amount charged for the works contract;

Chart showing service tax payable on different types of works contracts