Service Tax in a Works Contract

If you are in business where you provide turnkey key solution from design stage to building a house or complex or do some part of the process. Then you might have to pay service tax as this comes under the purview of works contract in service tax regime

Examples are: Painting Contractor, Interior Designing and Renovation, Leasehold Addition and other relevant activities

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

How to Calculate Service Tax

Direct Method

Indirect Method

Direct Method

Service Tax is payable on value of service portion in the execution of a works contract  which 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.

Also the value of VAT or sales tax will be not included in the value of Works Contract

What all Value to be Included

Labour charges for execution of the works;

Amount paid to a sub-contractor for labour and services;

Charges for planning, designing and architect’s fees;

Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

Cost of consumables such as water, electricity, fuel used in the execution of the works contract;

 Cost of establishment of the contractor relatable to supply of labour and services;

Other similar expenses relatable to supply of labour and services; and

Profit earned by the service provider relatable to supply of labour and services;

Rate of Service Tax:  Service Tax has to be 15% on the above value. However if the service provider is an individual or partnership firm providing service to Body Corporate then Service Tax has to be paid at rate as as prescribed in reverse-charge mechanism which will be lower than the regular rate of 15%

Indirect Method

If the service provider is not able to differentiate between services and goods components then service tax has to be paid at abated value. Below are the slabs:

At 40% of the Value

For execution of Original Works

At 70% of The Value

In case of works contract, other than Original Works contract entered into for,-

Maintenance or repair or reconditioning or restoration or servicing of any goods; or

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

So the key here is to understand Original Works Contract. Following is included in the definition

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

Rate of Service Tax: Service Tax has to be paid on abated value. Therefore in option one, it has to be paid at 6% and in option 2 it has to be paid at 10.5%. However if the service provider is an individual or partnership firm and providing services to Body Corporate then Service Tax has to be paid at a rate prescribed in reverse-charge mechanism

Point to be Noted: Cenvat Credit cannot be taken in Indirect Method