Service portion in the execution of a works contract under service tax law:
Composite contracts can be bifurcated to compute value of goods sold/supplied in contracts for construction of buildings with labour and materials; and service portion of composite contracts can be made subject matter of service tax. Merely because no rules are framed for computation of a service component in case of a composite contract, it does not follow that no tax is leviable. (G.D Builders vs. UOI(2013)32 STR 673 (Del.)
As per Rule 2A of service tax (determination of value ) rules ,2006 , which reads as under – “Subject To the provisions of section 67 ,the value of service portion in execution of works contract shall be determined in the following manner” —
- The value of works contract service = Gross amount charged for the works contract ( net of sales tax paid ,if any ,on transfer of property in goods ) , minus value of transfer of property in goods involved in the execution of the said works contract.
Value of works contract service shall mean and include, –
- Labour charges for execution of works contract,
- Amount paid to sub-contractors for labour and services,
- Charges for planning ,designing and architect’s fees,
- Charges for obtaining on hiring or otherwise ,machinery and tools used for the execution of works contract,
- Cost of consumables such as water, electricity ,fuel, used in execution of works contract,
- Cost of establishment of the contractor relatable to supply of labour and services,
- Other similar expenses relatable to supply of labour and services and
- Profit earned by the service provider relatable to supply of labour and services.
Note – When VAT or sales tax has been paid on actual value of transfer of property in goods involved in execution of works contract ,then such value adopted for payment of VAT or sales tax ,shall be taken as the value of transfer of property in goods involved in execution of the said works contract.
- When the value has not been determined on actual basis as above ,the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely,-
| Particulars | Value of service portion |
| (I) Where the works contract is for execution of original works | 40% of total amount charged for the whole works contract. |
| (II)In case of works contract ,not covered under (I) above including works contract entered into for –
· Maintenance or Repair or reconditioning or restoration or servicing of any goods; or · Maintenance or Repair or Completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of Immovable Property |
70% of the total amount charged for works contract. |
Note – 1. The computation of ‘Total Amount’ as mentioned above shall be computed as under-
Gross Amount charged for the works xxx
Add: FMV of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract xxx
Less: (i) Amount charged for such goods or services ,if any, by the supplier from the service provider