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Implementation of any law in letter and spirit is complementary to the clarity of language used in its drafting and formulation. If either of the factors suffers, the purpose and intention of enacting such a law is defeated. Service Tax was introduced in India in the year 1994 and presently levies taxes on more than hundred services. With each passing budget, Service Tax as a major source of revenue is slowly but steadily assuming growing in proportions and the threat of it overshadowing other sources like Income Tax, Customs & Central Excise is turning into reality.
The taxation of composite contracts involving sale of goods or materials as well as provision of service has been a grey area under Service Tax laws.corum replica watches To do away with the confusion and for ease of taxing such composite contracts, the Government came out with “Works Contract Service” on 01.06.2007. This service provided for levy of Service Tax on the gross value of the contract minus value of goods and materials transferred to the service receiver, where the value of goods and materials transferred shall be the value on which sales tax or VAT is paid. At the same time to take care of such contracts where the value of goods and materials and value of service cannot be separately determined, the Works Contract (Composition Scheme for Payment of Service Tax) Rules 2007 was introduced, which provided for a composition scheme for payment of Service Tax at the rate of 4% on the gross amount charged for the works contract instead of paying tax at the rate of 10%.
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Although the Works Contract Service provided for exemption to contracts in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams, extending such exemption to sub-contractors used by main contractor engaged in such development work posed a problem. The department entertained the view that exemption was available only to main contractors engaged in such work, whereas the trade held a contrary view. The Central Board of Excise and Customs through Circular No. 138/07/2011 dated 06.05.2011 held that sub-contractors who provide services to the WCS (Works Contract Service) providers engage cannot be exempted. The circular clarified that the input services received by WCS provider from sub-contractors like Architect service, Consulting Engineer service, Construction of complex, Design service, Erection Commissioning or installation, Management, maintenance or repair etc 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 and hence will not be exempted under Works Contract Service.
This circular although provided some clarity to the issue did not touch the issue of taxability of WCS provided by the sub-contractor to the main contractor as input service. Realising the omission, the board has now in Circular No. 147/16/2011 dated 21.10.2011 clarified that that in case the services provided by the sub-contractors to the main contractor are independently classifiable under WCS, then they too will get the benefit of exemption so long as they are in relation to the infrastructure projects. Thus, it may happen that the main infrastructure projects of execution of works contract in respect of roads, airports, railways, transport terminals, bridges tunnels and dams, is sub-divided into several sub-projects and each such sub-project is assigned by the main contractor to the various sub-contractors. In such cases, if the sub-contractors are providing works contract service to the main contractor for completion of the main contract, then Service Tax is obviously not leviable on the works contract service provided by such sub-contractor.
This service being one of the major contributors to the revenue from Service Tax, the anxiety of the Government to leave no stone unturned on this issue is quiet understandable. This clarification will be a shot in arm to the infrastructure developers engaged in the exercise of nation building and also will assume critical importance in the coming years with the government showing keenness to loosen its purse string on infrastructure spending.