Introduction of Negative List based Service Tax is one step forward for new GST regime. North Block is still to learn lesson “Aiming high without losing ground”. By way of trying to simplify complex tax structure babus have made it like a Pandora's Box. The consequential amendments have increased complexities.
Smooth sailing of Works Contract (Composition Scheme for payment of service tax) Rules, 2007 has come to an end as it has been done away from 01.07.2012. A new definition of works contract under section 65 B encompasses a wide range of services like construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property. However, a sigh of relief has been given to assessee by extending works contract scheme to movable property which was not there prior to introduction of Negative List based Service Tax. Therefore, assessee can also enter into agreement of works contract in respect of movable property also.
Service Tax on Works Contract was in force since 01.06.2007. Before the introduction of Finance Act, 2012 assessee can either opt to pay Service Tax at full rate on service portion after deducting the material value or to pay under Composite Scheme. However the scenario now has changed. The valuation of Works Contract is to be done in accordance amendments made in Service Tax (Determination of Value) Rules, 2006 issued vide Notification No 24/2012-ST dated 06.06.2012. As per newly inserted Rule 2A valuation of Works Contract can be done as follows:
As per Rule 2A(i)Value of service portion in the execution of a works contract = Gross amount charged for the works contract - the value of property in goods.
Gross amount charged for the works contract shall exclude value added tax or sales tax paid or payable, on transfer of property in goods involved in the execution of works contract. Value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract.
However if valuation of Works Contract Services is not possible as per Rule 2A(i), than valuation of service portion involved in the execution of the works contract shall be determined in the following manner.
In case of works contracts entered into for execution of original works, service tax shall be payable on 40% of the total amount charged for the works contract. As per Explanation given original works means, (i) all new constructions; (ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable; (iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise.
In case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods, service tax shall be payable on 70% of the total amount charged for the works contract;
In case of other works contracts, not covered under sub-clauses (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property , service tax shall be payable on 60% of the total amount charged for the works contract.
However, Cenvat Credit of Input services and capital goods is available subject to provisions of Cenvat Credit Rules, 2004.
The question as to whether works contract is for original work will always remain burning issue between department and assessee. Further as per Notification No. 30/2012-ST dated 20.06.2012, if the service provider is an Individual/Firm/LLP and the service receiver is the body corporate, it is prescribed that 50% of Service Tax on Works Contract is to be paid by Service Provider and remaining 50% of Service Tax on Works Contract is to be paid by the Service Receiver. Liability to pay service tax, where both service provider and service receiver both are liable to pay tax, is independent of each other and both the service provider and service receiver have option to adopt valuation method of their choice. This is again a litigative issue where it may happen that service provider may opt for tax on sixty percent value where service receiver may opt for tax on forty percent value only.
Works Contract Service along with new valuation rules and reverse charge mechanism is now going to create more ambiguity under new scheme which in turn will lead to more litigations. By bringing different rates of service tax for works contract, the aim to simplify tax structure, will never be achieved rather it would lead to frivolous litigations only which will in turn bend the back of already burdened judiciary system.