Before we discuss the problems faced by an Assesee engaged in the Works Contract Service and intends to make a declaration under VCES, 2013, we must understand the Taxability of Works contract Service prior to 01-07-2013.
LEGAL POSITION PRIOR TO 01-07-2013
“Works contract”, for the purposes of section 65(105)(zzzza), means a contract wherein,-
(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and
(ii) such contract is for the purposes of carrying out,—
(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or
(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or
(c) construction of a new residential complex or a part thereof; or
(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or
(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;
OPTIONAL COMPOSITION SCHEME FOR WORKS CONTRACTER – Clarifications Based on M.F. (D.R.) Letter F.No. B1/16/2007-TRU, dated 22.5.2007-2007 (6) S.T.R. (C124):-
(1) Services provided in relation to the execution of a works contract [section 65(105)(zzzza)] is a taxable service. Works contract for the purposes of levy of service tax has been defined to mean a contract wherein:
(i) Transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and
(ii) Such contract is for the purposes of carrying out,-
(a) Erection, commissioning or installation,
(b) Commercial or residential construction and related completion and finishing services, and
(c) Turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.
(2) Works contract is a composite contract for supply of goods and services. A composite works contract is vivisected and,-
(i) VAT/ sales tax is leviable on transfer of property in goods involved in the execution of works contract [Art.366(29A)(b)of the Constitution of India], and
(ii) Service tax will be leviable on services provided in relation to the execution of works contract.
(3) Service tax is chargeanle on the gross amount charged by the service provider for the taxable services provided 9section 67). In the case of works contract, the taxable value of services is to be determined by vivisecting the composite works contract. Rule 2A of Service Tax (Determination of Value) Rules, 2006 [Notification No. 29/2007-Service tax, dated 22.5.07], provides that value of works contract service shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. Thus, wherever the service provider maintains records, the value of services shall be the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of works contract.
(4) Wherever VAT/ sales tax on transfer of property in goods involved in the execution of works contract is paid on actual value, the same value is also taken for the purpose of determining the value of works contract service. In other cases, value of works contract service shall be determined based on the actual. It has also been explained that 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 uses for the execution of the works contract;
(v) cost of consumables such as water, electricity, fuel, used in the execution of the works contract, the property in which is not transferred in the course of execution of works contract;
(vi) cost of establishment of the contract 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;
(5) If the gross amount charged for the works contract is inclusive of VAT or sales tax, the value for the purposes of service tax shall be computed as follows:
[Gross amount charged- (Value of transfer of property in goods involved in the execution of works contract and VAT or sales tax paid, if any, on the said transfer of property in goods involved in the execution of said works contract)].
(6) As a trade facilitation measure and also for ease of administrative convenience, the service provider has been given an option to adopt the composition scheme for payment of service tax on works contract service. The Works Contract (Composition Scheme for Payment of Service tax) Rules, 2007 has accordingly been notified vide Notification No. 32/2007-Service Tax, dated 22.5.07.
(7) * * *
(8) The provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and cannot be withdrawn until the completion of the said works contract.
(9) Presently, erection, commissioning or installation service [section 65(105)(zzd)], commercial or industrial construction service [section 65(105)(zzq)] and construction of complex service [section 65(105)(zzzh)] are separate taxable services.
(10) Various trade and industry associations have raised apprehension in respect of classification of a contract either under the newly introduced works contract service or under erection, commissioning or installation and commercial or residential construction services.
(11) Contracts which are treated as works contract for the purpose of levy of VAT/ sales tax shall also be treated as works contract for the purpose of levy of service tax. This is clear from the definition under section 65(105)(zzzza).
Budget 2009-10- Changes in the Works Contract (Composition Scheme for Payment of service Tax) Rules, 2007.[Based on M.F. (D.R.) Letter D.O.F. No. 334/13/2009-TRU, dated 7.7..2009]
These rules provide a simplified procedure for working out the tax liability by the service providers providing works contract service. Instead of working out the service element fromthe value of works contract and paying service tax at full rate (i.e.10%) the service provider is allowed to pay 4% on the ‘gross amount charged’ for the works contract. The reason for prescribing the lower rate under the scheme is that the service provider need n0t bifurcate the gross value of works contract. It was expected that the gross value should be shown to include the total value of materials as well as services used in providing the taxable services. However, it has been reported that in certain cases, the taxpayers are not including the full value of the goods required for execution of works contract for working out service tax liability under the Composition Scheme by either excluding the value of goods received free of cost from their client or splitting the contract into a sale contract (for a portion of goods required to execute the works contract) and works contract (for only a portion of the total value of goods and the labour charges), thus reducing the value of works contract for the purposes of calculating service tax. In order to plug this loophole, the Explanation appearing in sub-rule (3) is being amended to provide that the composition scheme would be available only to such works contracts where the gross value of works contract includes the value of all goods used in or in relation to the execution of works contract whether received free of cost or for consideration under any other contract. This condition would not apply to those works contracts, where either the execution of works contract has already started or any payment (whether in part or in full) has been made on or before the date of amendment, i.e. 7.7.2009, from which the said amendment becomes effective 9refer Notification No. 23/2009-S.T.,dated 7.7.2009).
PROBLEM IN DECLARATION
1. If the assessee does not opt under Works Contract (Composition Scheme for Payment of service Tax) Rules, 2007 then he will have to evidence the Material (Transfer of Goods) Component of each contract separately and after elimination the material component the service tax liability on the balance amount has to be calculated.
This process is not only cumbersome, lengthy and complicated for a person who has been a defaulter already and in most of the cases we have found that even sufficient records were not available to justify the bifurcation with the contractor.
2. If the assessee wants to benefit by the Composition Scheme, he has to give the option prior to payment of the Service Tax in respect of each works contract.
As the assessee is already a defaulter, it is natural that he has also not filled the option letter with the department and now the problem comes if he has already paid any part of the service tax liability in respect of the works contract service rendered by him.
The department is taking a view that where the option is not submitted before, the assessee cannot avail the benefit under the composition scheme.
ANY PERSON WHO INTENDS TO FILE A DECLARATION UNDER VCES 2013 FOR THE WORKS CONTRACTOR SERVICE, HAS TO UNDERSTAND AND PLAN HIS DECLARATION KEEPING IN MIND THE LEGAL ASPECTS AS WELL AS DEPARTMENTAL VIEW ON THE SUBJECT AND SHOULD PREPARE HIS DECLARATION IN SUCH A MANNER THAT DEPARTMENT VIEW IS ALSO PROPERLY ADDRESSED IN THE VCES, 2013.