Service Tax On Works Contract

A contract issued to carry out construction, installation, erection repair, renovation, maintenance, alteration of any movable or immovable property and more work related to a transfer of property is called works contract. Works contract attracts service tax and those executing works contract must obtain service tax registration in India. In this article, we look at the levy of Service Tax On Works Contract in detail:

Types of service that are works contract

The following types of services are considered works contract:

Contracts for construction of pipeline or conduit
- The laying of the pipeline will be treated as service and that will attract service tax
Contracts for erection or installation of plant, machinery equipment etc. is treated as works contract and the service portion that includes installation job will attract service tax.
Painting, repairing, renovation, wall tiling etc. of a building is treated as works contract and will attract service tax for the service portion carried out by the labourers.
- A sub-contractor providing these services to the main contractor is exempt from paying service tax however this exemption is not extended to any other work such as consultation or architect work for main contractor.
Repair of vehicle, automobile or any movable machinery forms a part of works contract especially if the transfer of goods takes place during the repair work. Service tax has to be paid towards the service portion for contracts of repair and maintenance.

Types of service that are NOT works contract

If a business sells consumable products like oil for lubrication of the machines - in this case the oil is being consumed and not sold hence it is not a works contract and only VAT would be applicable. Also, if a contract is purely for labour work, then it’s is not works contract.

Service Tax On Works Contract

Service tax is payable on the value of works contract after deducting value of goods from the gross value. The gross amount included will not include value added tax and sales tax. The value of works contract shall include:

Labour charges
Amount paid to sub-contractor for labour and other services
Planning and designing charges
Charges for Machinery and tools taken on rent/ hire
Profit earned by the supplier for supplying labour and other services

Service tax is payable at composite rate on:

40% of the value of the original work (original work will include all types of new construction, alteration or additions made to damaged structures)
70% of the value in case of maintenance work
70% in case of all other works contract

Point of taxation

The service provider as well as the service recipient have to possess invoice and invoice copy showcasing the receipt of payment which is the point of taxation for the service provider. For the service recipient, the point of taxation will be when the payment is made towards the service received. The liability of the service provider and service recipient are different from each other. Therefore a service provider can indicate abatement based on the invoice raised and a service recipient can either choose to let go of the abatement or avail the abatement by choosing the easy way of obtaining data and evaluating it.

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Frequently Asked Questions

Common questions about Service Tax on Works Contract.

A works contract is a contract issued to carry out construction, installation, erection, repair, renovation, maintenance, alteration of any movable or immovable property, and other work related to a transfer of property. It involves both goods and services.

Some services that are considered works contracts include contracts for construction of pipelines or conduits, erection or installation of plant machinery or equipment, painting, repairing, renovating, or wall tiling of a building, and repair of vehicles or movable machinery involving transfer of goods.

No, not all repair or maintenance services are considered works contracts. If a contract is purely for labor work without any transfer of goods, it is not a works contract.

Yes, service tax is payable on the value of works contracts after deducting the value of goods from the gross value.

The value of works contract includes labor charges, amounts paid to sub-contractors, planning and designing charges, charges for hired machinery and tools, and profit earned by the supplier for supplying labor and other services.

Service tax is payable at a composite rate of 40% of the value for original works (new construction, alteration, or additions) and 70% of the value for maintenance work or other works contracts.

For the service provider, the point of taxation is when the invoice for the service is raised and payment is received. For the service recipient, the point of taxation is when the payment is made for the service received.

Sub-contractors providing labor or other services to the main contractor are exempt from paying service tax on works contracts. However, this exemption does not extend to other services like consultation or architect work for the main contractor.

No, if a business sells consumable products like lubricating oil, which are consumed and not sold as part of a works contract, then service tax is not applicable, and only VAT would be applicable.

The service provider and service recipient have different liabilities for service tax on works contracts. The service provider can indicate abatement based on the invoice raised, while the service recipient can either choose to avail or not avail the abatement by evaluating the data.