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Service Tax , by Shashank Shekhar  on : March 16, 2017

Service Tax

Decoding works contract- In service tax.

Hey guys, do you know what is a works contract? Although it is an easy concept, still people find it difficult to understand. In this article, we have tried to explain in simple english what a works contract really is. A works contract is one under which there is a transfer of goods as part of a service contract. This is common during contracts involving repair, renovation and installation of heavy infrastructure. For ex- A person has asked a contractor to construct a house for him. Now, during this contract the contractor will need both goods (brick, cement etc. ) and services (labour). Thus, in this contract there is transfer of goods along with service hence this contract will be termed as works contract.
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Works contract in service tax.

section 65(105) of the Finance Act, 1994 defines works contract which has definition similar to above. In the invoice, the works contract will include both, the value of materials used as well as the value of the service provided in the installation, construction, completion, erection, fitting, renovation or alteration of the works contract.

Examples of Works contract in service tax.

  1. Renovation of Building:In case of renovation of a building, there are various jobs involved, including painting, demolishing, tiling, scraping, etc. All charges for labour in this case will attract service tax. However, any work outsourced to a sub-contractor by the contractor will not attract any service tax.
  2. Repair of Car:When a car is being repaired, there is material that is involved and a service element. Any materials used to repair the car will attract VAT, whereas the service component i.e., labour, primarily will attract service tax..

Note: Pure labour contracts are not considered works contracts as the essential conditions of work contract is to have transfer of property in goods. Architectural and consultancy services are provided in relation to works contracts and are, therefore, not exempt.

 Valuation of Service Tax

According to this method, the value of work contract = Gross amount charged for the works contract LESS Value of transfer of property involved in the execution of work contract, where:

Gross amount includes:
1. Value of material transferred
2. Labour charges
3. Amount paid to sub-contractors for labour and services
4. Charges for planning, designing, and architects’ fees
5. Charges for obtaining, on hire or otherwise, machinery and tools used in the execution of the works contract
6. Cost of consumables such as water, electricity, and fuel
7. Other similar expenses related to supply of labour and services
8. Profit
 

Composition scheme according to Rule 2A

The government has unveiled three composition schemes, which, just like the VAT Composition scheme, allows the service provider to pick a fixed portion on which service tax is to be paid. This makes it easier to calculate the service tax component and, in most cases, cheaper than paying the actual amount. Of course, you need not opt for the composition scheme; however, if you do elect to use it, you cannot use any other exemption.

Scheme

Conditions

Value

A

Original works like new construction, erection, commissioning, installation

40% of total amount

B

Maintenance, repair, reconditioning, servicing of goods

70% of total amount

C

Other work contract (excluding A and B) including maintenance, repair, completion, finishing services of an immovable property

70% of total amount