What is Works Contract

A contract issued to carry out construction, installation, erection repair, renovation, maintenance, alteration of any movable or immovable property and sale of goods is called works contract. Works contract thus involves providing of a taxable service and sale of a taxable good. Service tax is applicable for Works Contract on the service portion.

What is a Works Contract?

Works Contract is a contract that involves transfer of property in goods (tax on sale of goods would be leviable) and the carrying out any of the following service:

Erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators.
Construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry.
Construction of a new residential complex.
Completion and finishing services, repair, alteration, renovation or restoration of, or similar services.
Turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.

Applicability of VAT

VAT or sales tax is leviable on transfer of property in goods involved in the execution of a works contract. Taxable service in a Works Contract is only applicable on the services involved in the execution.

Works Contract Composition Scheme

As detailed above, service tax is applicable only on the service part of the value of the contract.The value of taxable service is usually determined on actual basis - based on the records maintained by the business. However, businesses can also opt for a composition scheme. Under the composition scheme, the business is required to pay 4% of the total value of the Works Contract as service tax. Businesses opting for the composition scheme is not entitled to avail CENVAT credit of capital goods, inputs and input services required for use in the contract.

Calculating Taxable Service

In a works contract, of the gross amount charged for the Works Contract is inclusive of VAT or sales tax, the taxable service value for the purposes of service tax will be computed as follows:

[Gross amount charged- (Value of transfer of property in goods involved in the execution of Works Contract and VAT or sales tax paid, if any, on the said transfer of property in goods involved in the execution)].

Excise Duty Credit

Value for the purposes of levy of service tax under works contract service does not include the value pertaining to transfer of property in goods involved in the execution of a works, leviable under VAT/ sales tax. Works Contract service provider is, therefore, not eligible to take credit of excise duty paid on such goods involved in the execution.

To know more about Works Contract, consult a service tax consultant through IndiaFilings.com

Back to Learn

Frequently Asked Questions

Common questions about Works Contract Services and Tax Details for Compliance.

A works contract is a contract that involves the transfer of property in goods (which is subject to VAT or sales tax) and the provision of a taxable service, such as construction, installation, repair, renovation, or maintenance of movable or immovable property.

Some of the services covered under a works contract include erection, commissioning or installation of plant, machinery, equipment or structures; installation of electrical and electronic devices; plumbing and drainage work; construction of new buildings, civil structures, pipelines or conduits; and completion, repair, alteration, renovation or restoration services.

Yes, service tax is applicable on the service portion of a works contract. The value of the taxable service is determined either on an actual basis or through the composition scheme.

Under the works contract composition scheme, businesses can pay service tax at a flat rate of 4% of the total value of the works contract, instead of calculating the service tax on the actual service portion. However, they cannot avail CENVAT credit on inputs and input services used in the contract.

If the gross amount charged for the works contract is inclusive of VAT or sales tax, the taxable service value is calculated as: Gross amount charged - (Value of transfer of property in goods involved in the execution + VAT or sales tax paid on the transfer of property in goods).

No, a works contract service provider is not eligible to take credit of excise duty paid on goods involved in the execution of the works contract, as the value for service tax levy does not include the value pertaining to transfer of property in goods.

Yes, VAT or sales tax is leviable on the transfer of property in goods involved in the execution of a works contract.

Turnkey projects, including engineering, procurement and construction (EPC) projects, are considered works contracts.

Yes, the construction of a new residential complex is included under the scope of a works contract.

Yes, the installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, is considered a service covered under a works contract.