Accommodation Times Bureau
By CA Kakarla Manindar
New Definition for “Work Contract”
A new definition for the “Work Contract” has been introduced through Sec 65B (54) and is as follows:
“works 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 contrat is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land;
Two services specified under “Declared Service”
Under the present Negative List approach, certain activities are declared as services, though they may not be considered as services in commercial parlance.
Section 65B (22) has been introduced now and according to which the definition of declared service is as follows
“declared service” means any activity carried out by a person for another person for consideration and declared as such under section 66E”
The following two services relating to constructing industry are declared as services.
1. Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly except where the entire consideration is received after issuance of completion certificate by the competent authority.
• Therefore construction of building, complex or civil structure cannot be treated as service in case where the entire consideration is received after issuance of completion certificate by the competent authority.
• An explanation has been inserted to provide the meaning of competent authority as follows:
The Government or any authority required to issue completion certificate under any law for the time being in force. In case there is no requirement to issue such certificate then the competent authority shall be any as follows:
1. Architect- Registered with Council of Architects
2. Chartered Engineer- Registered with Institution of Engineers (India)
3. Licensed Surveyor of the respective local body of the city or town or village or development or planning authority.
Earlier under the Circular No. 1/2011(CE&ST PuneIII TF) dated 15/02/2011, the competent authority includes architects, chartered engineers, licensed surveyor besides any Government Authority. Now the position is that in case if the Government Authorities are required to issue “Completion Certificate” under the state laws then they are the only ‘Competent Authority’. Only in case of no such requirement under the State Law, the only the above specified persons are competent to issue ‘Completion Certificate’.
2. Service portion in the execution of a “Works Contract”
Valuation of Works Contract:
The valuation of service portion in a “Works Contract” which is presently guided by Rule 2A of the “Service Tax (Determination of Value) Rules, 2006 is been proposed to substitute by the New Rule 2A.
Similar to the present Rule, under this Rule also, the value of service portion involved in the execution of a works contract shall be determined in any of the following ways
1. The value of the service portion involved can be ascertained by way of including the following
i. labour charges for execution of the works;
ii. amount paid to a sub-contractor for labour and services;
iii. charges for planning, designing and architect’s fees;
iv. charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;
v. cost of consumables such as water, electricity, fuel used in the execution of the works contract;
vi. cost of establishment of the contractor relatable to supply of labour and services;
vii. other similar expenses relatable to supply of labour and services; and
viii. profit earned by the service provider relatable to supply of labour and services;
2. The other way is by reducing from the gross amount charged for the Works Contract, the value of transfer of property in goods involved in the execution of said works contract.
Gross amount charged for the works contract shall not include VAT/CST as the case may be paid on the value of property in goods transferred in the execution of the works contract.
Note: In case if VAT/CST has been paid on actual value of the property in goods involved in the execution of works contract, (i.e. VAT is paid under the Regular Scheme but not under Composition Scheme) then in such cases, value adopted for that purpose shall be taken into consideration.
Where the value cannot be determined under the two purposes, then the value can determined as follows:
1. Original Works: Service portion shall be 40% of the total amount charged for the works contract.
2. In case if value of land is also included, then Service portion shall be 25% of the gross amount including land value.
3. Other Contracts: Service portion shall be 60% of the total amount charged.
For this purpose, Original Works means all new constructions, all types of additions and alterations to abandon or damaged structures on land that are required to make them workable.
The Service provider is eligible to take CENVAT Credit of the capital goods and input services and not goods, the property in which is transferred in execution of works contract .
Further the rate of service tax under composition scheme is now changed to 4.8% to keep it in line with the service tax rate payable under the normal scheme.