Checklist For A Works Contract Startup

Taxation of Works Contract is a subject matter of interpretations, controversies and complexities. The difficulties arise due to multiplicities of provisions in this particular area of taxation i.e.
• Valuation Rules
• Composition Scheme
• Reverse Charge Mechanism
Till GST Act is introduced, integrated Service Tax and VAT planning in case of WC can reduce tax costs.
Checklist for a person starting a Works Contract business
Service Tax
 Undertand whether you actually fall within the ambit of Works Contract.
 If yes, analyse various shemes of WC under Service Tax Laws.
 Then, obtain registrations under the service tax.
 Preparing a draft invoice.
 Determination of tax rates.
 Maintaining Cenvat Register.
 Calculation Of Tax
 Filing Of Returns And Payment Of Taxes
R VAT
 Whether to opt for Exemption Scheme Or Not?
 Getting Registered under VAT Laws
 Obtaining Work Order
 Checking the nature of works undertaken
 Determining tax rate
 Applying to VAT department for Exemption Certificate of the decided tax     rate
 Obtaining VAT 41 from the awarder of the contract
 Filing of return and payment of taxes
 If a person fails to opt for EC scheme, he would have to present the      purchase bill of the materials used in the works contract on the basis of which VAT would be calculated after adding suitable profit margin . The person would be eligible to claim credit of the input tax deducted and sales tax deducted by the awarder of the contract from the VAT output tax calculated above.

 

About Taxgranth
Founded in 1955, we are an independent firm of tax consultants that specialize in the area of taxation, accounting and compliance, business advisory and other support services for our client base in India.
We work on the principle of “Plan, Comply, Progress” in which we first understand our client’s requirement, work out an optimal plan to fulfil that requirement through tax , financial and legal planning and then engage our team to successfully comply with the drafted plan followed by constant monitoring so as to contribute to the success and progress of our client.

Feel free to connect with us on :
https://taxgranth.com/`
https://twitter.com/TAXGRANTH2
https://www.facebook.com/taxgranth/
https://www.linkedin.com/in/tax-granth-775068116?trk=hp-identity-name
taxgranth@gmail.com , info@taxgranth.com
+91 9782824693

Works Contract Under Service Tax

W O R K S    C O N T R A C T    U N D E R    S E R V I C E    T A X   

WHAT IS WORKS CONTRACT

  • It is a composite contract – involves both Goods and Services

 

  • Different from ‘General Sale Contract’
    In ‘General Sale Contracts’, property in goods pass in same form i.e. goods remain the same before and after delivery. However in WC, form of goods may or may not change.

“In a contract of sale, the main object is the transfer of Property and delivery of the possession of Chattel as a Chattel to the buyer, where it is not so, it is a contract of Works & Labour” (Hindustan Aeronautics Ltd. 55-STC 314-SC).

 

  • Different from ‘Pure Labour Contracts’

Pure labour Contracts are not works contracts. There has to be transfer of goods. Eg. Manpower Supply Contracts

 

  • Different from ‘Construction Services’

If a contract of construction involves transfer of property in goods which is leviable to sales tax or VAT under EC scheme of RVAT, it is Works Contract. If Sales tax/ VAT is leviable under lumpsum payment category of RVAT, it is a Construction service. Under RVAT, Generally builder/developer opts for lumpsum payment of VAT and hence are liable to service tax under construction services if they receive any advance payment from their clients before or during construction. If such builder developer gives a contract for building the property, then such contractor to whom contract is given shall be liable to service tax under works contract and will have to opt for EC scheme under VAT.

 

  • What if Material is not transferred but consumed?

In case goods are consumed and their identity is lost, then no transfer of property occurs in these goods, hence no WC arises. Eg. Lubricants, Power, Fuel.

 

  • Dominant Nature Test
    When a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client. There is transfer of goods (prescription/document) and provision of services (medical/legal). Is this also a works contract?

No, if there is an apparent composite contract, unless the transaction in truth represents two distinct and separate contracts wherein the parties intended separate rights arising out of sale and service, the state has no power to disintegrate the agreement and tax it separately twice. The test for deciding whether a contract falls into one category or the other is as to what is the substance of the contract aka ‘’The Dominant Nature Test.’’ The above case would fall under Service Tax.

 

  • A WC involves deemed sale as per constitution [Article 366(29A)] and declared service as per Finance Act, 1994 [Section 66E(h)].
  • Definition of WC under Service Tax Law [Sec 65(54)]

WC 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.

 

 

VALUATION FOR SERVICE TAX

RULE 2A(i) of Service Tax (Determination of Value) Rules, 2006 RULE 2A(ii) of Service Tax (Determination of Value) Rules, 2006
Regular Scheme Deemed or Ad hoc Scheme or Composition Scheme
Value of service portion in WC

=  Gross amount Charged for WC – Value of goods transferred

Value of service portion in WC

= 40%/70% of total amount charged for Works Contract.
[Original works i.e. new constructions, additions/ alterations to make damaged structures workable, erection/installation of machinery  –  40%

Repairs & Maintenance, completion & Fitting services, Installation of Electrical Fittings – 70%]

 

Cenvat Credit

on Input Goods used in Sales portion– Not Available
on Input Goods used in Service portion – Available
on Input Services – Available
on Capital Goods – Available

 

 

Cenvat Credit

on Input Goods used in Sales portion– Not Available  on Input Goods used in Service portion – Not  Available
on Input Services – Available
on Capital Goods – Available

 

 

Person Liable to Pay Service tax  – Partial Reverse Charge Mechanism

If service is provided by Individual, HUF, Partnership Firm, LLP, AOP located in India (whether registered or not) to a Body Corporate located in India

  • 50% of service tax shall be payable by Service Receiver.
  • 50% of service tax shall be payable by Service Provider.

Notes.

  1. A service receiver can choose valuation method independent of method chosen by service provider (i.e. both can opt for different methods)
  2. No service tax is payable by small service providers providing taxable services of aggregate value <= 10 Lacs during a financial year. If Service Provider is covered under service tax, then service receiver has to pay his portion of service tax under reverse charge irrespective of threshold exemption limit of 10 Lacs.

 

 

 

About Taxgranth

 

Founded in 1955, we are an independent firm of tax consultants that specialize in the area of taxation, accounting and compliance, business advisory and other support services for our client base in India.

We work on the principle of “Plan, Comply, Progress” in which we first understand our client’s requirement, work out an optimal plan to fulfil that requirement through tax , financial and legal planning and engage our team to  successfully comply with the drafted plan followed by constant monitoring so as to contribute to  the success and progress of our client.

 

Feel free to connect with us on :

https://taxgranth.com/

https://twitter.com/TAXGRANTH2

https://www.facebook.com/taxgranth/

https://www.linkedin.com/in/tax-granth-775068116?trk=hp-identity-name

taxgranth@gmail.com , info@taxgranth.com

+91 9782824693