Millions of people, across India lack access to proper roads, transport, electricity, potable water, and communication facilities. Inadequate and inefficient infrastructure is one of the biggest challenges as it not only adds to transaction costs but also prevents the economies from realizing their full growth potential. The importance of infrastructure for rapid development cannot be overstated. The most glaring deficit in India is the infrastructure deficit. Keeping such infrastructure tax free helps keeping its low cost. Mostly infrastructure projects are undertaken by companies as a ‘works contract’. Works contract means a contract to complete certain work. Such works contracts are taxed under specific category termed as ‘Works Contract Service’ under Service Tax law. Certain activities are defined under the ambit of works contract. Keeping in mind that cost of developing public infrastructure should be lowered, and the same should not bear the burden of Service Tax, the definition of the Works Contract service (WCS) specifically excludes works contract undertaken in respect of construction of Dams, Tunnels, Road, Bridges etc. Therefore the contractor undertaking such work need not pay Service Tax.. But the government is now in a habit of giving with one hand and snatching with the other , eventually nullifying the benefits extended earlier.
Circular No. 138/07/2011 – Service Tax dated 06.05.2011, in once such action in the said direction. Generally, when the Contractor In whose favour Tender is passed, undertakes a Works Contract, he engages various sub-contractors who provide services such as Architect’s Service, Consulting Engineer’s Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc. Now such sub-contractors also provide taxable services and accordingly they charge Service Tax to the main contractor. But as the activity of the main contractor is out of purview of taxable service, he cannot avail credit of Service Tax paid on the input services received by him. Thus, ultimately it adds to his cost of completing the project. Now, to lower the infrastructure costs, it is plain and simple that such sub-contractors who are working on infrastructure projects should have benefit of non-payment of service tax by classifying them under Works Contract Service so as to extend them the exclusion from Service Tax. But, Board though otherwise and clarified in this regard on receiving the representation by Jaiprakash Associates Limited. The Jaiprakash Associates Limited sought to extend the benefit of such exemption to the sub contractors providing various services to the WCS provider by arguing that the service provided by the sub contractors are ‘in relation to’ the exempted works contract service and hence they deserve classification under WCS itself. Hon High court of Delhi directed them to approach the CBEC for clarification .
The board came out with above said Circular No. 138/07/2011 – Service Tax dated 06.05.2011, rejecting the argument of the works contractors .
The said circulars states that Section 65A of the Finance Act, 1994 provides for classification of taxable services, which mentions that classification of taxable services shall be determined according to the terms of the sub-clauses (105) of section 65. When for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected under the sub-clause which provides the most specific description and not the sub-clauses that provide a more general description. It furthers states that In this case the service provider is providing WCS and he in turn is receiving various services like Architect service, Consulting Engineer service, Construction of complex, Design service, Erection Commissioning or installation, Management, maintenance or repair etc., which are used by him in providing output service. The services received by the WCS provider from its subcontractors are distinctly classifiable under the respective sub clauses of section 65 (105) of the Finance Act by their description. When a descriptive sub clause is available for classification, the service cannot be classified under another sub clause which is generic in nature. As such, the services that are being provided by the sub contractors of WCS providers are classifiable under the respective heads and not under WCS.
Earlier too , the board had issues clarifications vide Circular No. 96/7/2007-ST, dated 23rd August, 2007 –wherein they clarified that in case A taxable service provider outsources a part of the work by engaging another service provider, generally known as sub-contractor. Service tax is paid by the service provider for the total work. In such cases, service tax is liable to be paid by the service provider known as sub-contractor who undertakes only part of the whole work. – because A sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by the sub-contractor. Services provided by sub-contractors are in the nature of input services. Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services. The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided.
Finally the Board concluded that, it is clarified that the services provided by the subcontractors / consultants and other service providers are classifiable as per Section 65 A of the Finance Act, 1994 under respective sub clauses (105) of Section 65 of the Finance Act, 1944 and chargeable to service tax accordingly. Thus, benefit of works contract service exclusion is not extended to sub-contractors. Such clarification defies logic that when the whole activity is not taxable, how come a part of the same will be taxed.