Sub-contractors liable to service tax: 

A taxable service provider outsources a part of the work by engaging another service provider, generally known as sub-contractor. Service tax is paid by the service provider for the total work. A question arises as to whether service tax is liable to be paid by the service provider known as sub-contractor who undertakes only part of the whole work.

A sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by the sub-contractor. The rationale is that the sub contractor‘s service tax charge can be availed as a credit by the main contractor whose burden of paying the tax would reduce to that extent. This is the essence of value added tax (VAT) of which service tax is part. The fact that the sub contractor in India is generally not literate and may not be able to understand or comply with these requirements is only mitigated upto Rs 10 lakhs of small service provider exemption.

The advantage of the sub contractor being in the CENVAT chain is that the credit of inputs, capital goods or input services utilized by him for providing the services can be passed onto the main contractor whereby the transaction would become tax efficient.

Services provided by sub-contractors are in the nature of input services. Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services. The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided.