SERVICE TAX

Emerging issues
Works Contract

Content
Taxability
Works Contract Concept

Taxability
Valuation
Cenvat credit
Issues

Taxability under Negative List

Negative List regime most of the services are
taxable
Services not taxable only if:Sale / deemed sale of goods (moveable / immovable)
Transaction only in money or equivalent

Falling under Negative list

Exempted by notification

Widen tax base and reduce tax litigation

Easy integration with GST

Works Contract - General

Contract which involves goods as well as services and
goods are transferred to the customers
Goods can be transferred either in the same form or
in a different form
Not dependent on quantum of material may vary
from contract to contract
Incidental transfer of goods in predominantly
service contract may not be a works contract

Works Contract - Concept

VAT only on transfer of property involved in the
execution of contract
Works contracts could be
Composite / Indivisible
Divisible value of goods and services

Activity covered assembling, construction, building,

altering, manufacturing, processing, fabrication,
installation, fitting out, improvement, repair or
commissioning of any moveable or immovable
property

Works Contract definition Service tax

Contract where transfer of property in goods

involved in the execution of such contract is leviable to
tax as sale of goods; and

For the purpose of carrying out

Construction
Erection, commissioning, installation
Completion, fitting out,
Repair, maintenance, renovation, alteration
of any moveable or immovable property
or any other similar activity in relation to such property

Exclusion from Service definition

Transfer of title in goods or immovable property

Transfer deemed to be sale as per article 366(29A) of

the constitution

Tax on sale or purchase of goods - Article 366(29A)(b)

Tax on the transfer of property in goods (Whether as goods or in
some other form) involved in the execution of a works
contract

Can Service tax be levied on Works contract

Yes, only on value of services

Negative list .

Trading of goods

Process amounting to manufacture or process of goods

Services by Govt., RBI, foreign diplomatic Mission,

Service relating to Agriculture

Toll charges, renting of residential unit, recognized education, interest on

loans, distribution of electricity

Transport of goods / passengers by specified method

State subject gambling/lottery, entertainment events

Funeral, burial, crematorium or mortuary services

Declared services .

Construction of complex / building, civil structure

Excludes sale of building (whole or a part) after issuance of
completion-certificate by the competent authority

Service portion in execution of a Works contract

Service portion during supply of food

Renting of immovable property

Right to use of IPR

Information technology software

Hiring, leasing of goods (without transfer of right to use goods)

Mega Exemption Notf.

Specified works contract for Govt. / Local authority / Governmental

authority
Structure for use other than for commerce or industry
Canal, dam or other irrigation works

Structure for education, clinical, cultural establishment

Construction / repair of Infra projects including

Road, bridge, tunnel etc. for general public

Building owned by Section 12AA entity for religious use

Construction etc. (original works) of

Airport, port, railways, metro rail

Works contract services of Sub-contractor provided to another

contractor whose services are exempt from service tax

WC - Valuation of Services
1st method
Gross amount charged for execution of contract

Exclude - Value Added Tax / Sales tax

Include - Value of service includes labour charges, amount paid to

sub-contractor, planning, designing, hire charges for machine / tools,
consumables, establishment cost, similar expenses, profit earned (for
labour and services)

Exclude Actual value of goods method adopted for the purpose of

payment of state VAT
Regular scheme under State VAT - Not abatement / Composition

WC - Valuation of Services
2nd method - Where the value has not been determined under 1st
Gross amount charged for execution of contract excluding VAT

Original Works contract 40% of the Contract value

All new construction,
Erection, commissioning installation of equipment, Plant, machinery
Addition / alteration to abandoned structure

Other works contract 70% of the contract value (repair of goods,

maintenance/repair or completion services for immovable property)

Scheme opted under VAT

Regular scheme under VAT - 1st method applicable
Composition / Abatement - 2nd method applicable
Method under Service tax Not an option dependent on VAT

Place of provision .
General rule location of service receiver
Repairs, re-conditioning of goods location where
services are actually performed
Directly in relation to immovable property (located /
intended to be located ) location of property
Implication on Import / Export of services and
services provided from / received in Jammu &
Kashmir

Point of taxation .
Continuous supply of service
Service portion in execution of works contract
Services to be provided exceeding 3 months

Advances received Date of receipt of advance

Invoice issued within 30 days from date of
completion of specified event which entitle payment
from client Date of Invoice
Otherwise completion of service (event)

Cenvat Credit Customer

Input service excludes
Service portion in the execution of works contract and
construction services used for
Construction of building or civil structure
Laying of foundation / structure for support of capital goods

Establishment in taxable and non-taxable territory of the

same entity to be considered as different

Eligible only if customer engaged in provision of

above specified services

Cenvat Credit Contractor

Input excludes
Any goods used for construction or execution of works
contract
Construction of building or civil structure
Laying of foundation / structure for support of capital goods

Establishment in taxable and non-taxable territory of the

same entity to be considered as different

Only goods used in execution of service portion of

works contract are eligible for Cenvat Credit

Cenvat Credit Control

Inputs part of Goods VAT applicable

Contractor No cenvat credit
Customer No cenvat credit (break in chain)
Goods procured directly No (only if capital goods)

Inputs Not part of Goods VAT not paid

Contractor Eligible to take cenvat credit
Customer converts into input service

Input services
Contractor all input services including works contract
Customer - Restriction under input service works contract

Threshold exemption

Aggregate value of taxable services upto Rs 10 lacs

No service tax

Value of taxable services to exclude

Value of goods
Value of exempt services

Reverse charge

Service portion in the execution of works contract services

provided by
Individual
HUF
Partnership firm (including LLP)
Association of persons
by Aggregate value of taxable services upto Rs 10 lacs
No service tax

Received by business entity registered as body

corporate

Provider / recipient to pay 50 : 50 Service tax

Works contract issues

Classification of contract as Works contract

Deduction for value of goods
Reverse charge for service receipient

Cenvat credit to receiver of services

Even though regular scheme under VAT

Service tax charged generally on total value of the contract to
avoid sharing of goods replaced details with customer

Project eligible for exemption

Cenvat credit Rule 6 (3) for goods supplied

Emerging issues

From 01/10/2014 Interest rate 18, 24 and 30% p.a. as per delay
6, 12 and beyond 12 months

Pay and litigate

First Stage Appeal before Comm. (Appeals) / CESTAT
Pay 7.5% of total service tax demand
Earlier discretion of Commissioner (A) / CESTAT

Second Stage Appeal before CESTAT

Pay 10% of total service tax demand
Presently discretion of CESTAT

Pending appeals / stay applications to be governed by existing law (till

enactment of finance bill appeal files before 6th Aug 2014)

THANK YOU

bhupendra.agarwal@karvy.com
Mobile: 99597 30001