Meaning of Work Contract

“Work Contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.-SEC 65(54) of Finance Act, 1994.

Scope of work contract

  1. work contract is joint contract in which service is provided and some material is also transfer as sale.
  2. Vat should be payable on transfer of material.So activity of sale under contract is necessary.
  3. Following activities are covered under work contract: commission, erection and installation of plant, machinery, equipment, structure ; construction of buildings; turnkey projects; maintenance services -AMC contracts; Job work contracts.
Valuation for service tax:


Method
Tax rate
Input tax credit
Calculate value as per rule 2A(i) of service tax rules, 2006
14.5%
Input services and capital goods, input consumed during work contract
Pay service tax under rule 2a(ii)
14.5%*40%/70%
Input services and capital goods, input consumed during work contract
 
 
 

Note that cenvat credit for duty paid on material on which vat is paid and property in goods is transferred is not available.

 *Budget 2015 service tax rate update
Service tax calculation as per rule 2A (i)
 
According to this method, value of work contract = 
  1. The gross amount charged for the works contract LESS
  2. The value of transfer of property involved in the execution of work contract
Gross amount Includes
  1. value of material transferred
  2. Labour charges
  3. amount paid to sub contract for labour and services
  4. charges for planning, designing,architects’fees.
  5. Charges for obtaining on hire or otherwise,machinery and tools used for execution of the work contract.
  6. Cost of consumables such as water, electricity, fuel etc.
  7. Other similar expenses related to supply of labour and services.
  8. Profit involved on above.

 

Vat or sales tax paid will not form part of value for service tax.

COMPOSITION SCHEME AS PER RULE 2A(ii) :

Scheme
Conditions
Value
A
Original works like new construction, erection, commissioning, installation
40% of total amount
B
Maintenance, repair, reconditioning, servicing of GOODS
70% of total amount
C
Other work contract (excluding A and B) including maintenance, repair, completion, finishing services of an immovable property
70% of total amount


Under composition scheme,
Service provider can pay service tax on portion of value shown above. Total amount means value of work contract including free material supplied by customer .

Composition scheme is optional to assessee but once opted for composition scheme, other exemption can not be claimed.

COMPOSITION SCHEME FOR BUILDERS

SCHEME
CONDITIONS
VALUE
A
1.       Construction contract is for residential complex includes value of land (need not be work contract)
2.       Carpet area of residential unit is less than 2000 sq.ft.
3.       The amount charged is less than 1 crore.
30% of total amount*
B
1.       Construction contract is for residential complex includes value of land (need not be work contract)
2.       Carpet area of residential unit is more  than 2000 sq.ft. or
The amount charged is more than 1 crore.
30% of total amount
C
Construction contract is for Industrial or commercial construction includes value of land (need not be work contract)
30% of total amount

*From 1/4/2016 as per budget 2016 changes.


It is up to service provider to choose scheme. He can follow composition scheme for one contract and may pay service tax on entire value of services without taking abatement.