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    Service Tax on works contract

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    pgadurai

    Posts : 35

    Service Tax on works contract

    Post by pgadurai on Sat Jan 18, 2014 9:28 pm

    Dear officers this is only a discussion based on my little knowledge on service tax liability of FCI on works contract being carried out by the Engineering officers. For details on typical cases has to be referred with the govt's notification in this regard from time to time. If there is any better suggestion over this or criticism on this are most invited rather the appreciation. Further to state that I am not a account officer or qualified accountant, so there may be mistakes in interpretation.
                         There are three type of contract in Engineering Works
    1.Supply contract which may not attract service tax as there is no services involved.
    2.Consultancy services involves Architectural, design consultancy, getting expert opinion etc. which attracts service tax for whole the     value and liability rest with the service provider and not by the service receiver. For this Necessery clauses in the contract may provided to clarify whether the rate to be quoted is inclusive of the tax or exclusive.If it is not clearly defined then it presumably thatthe rate is inclsive of the tax as the liability is rest with the service provider.
    3.Works Contract:
    3.1.  Original works - Such as the new construction, Projects, Minor Capital works or any other new works in the existing complex which are to be capitalised. For which the service value of the works can be arrived by multiplying factor of 0.4 with the total value of works billed as per the comprehensive Scheme of Service tax rules.
    3.2. Repair and Maintenance of immovable assets - Such as addition, alteration,renovation, resurfacing of roads,railways and buildings or any other immovable assets.  For which the service value of the works can be arrived by multiplying factor of 0.6 with the total value of works billed as per the comprehensive Scheme of Service tax rules.
    3.3.Repair and Maintenance of movable assets - Such as AMC or repair or servicing of the Lorry weighbridges (Excluding building part ie cabin), Transformer, Power generators sets, Lifts, housekeeping works of the building etc. For which the service value of the works can be arrived by multiplying factor of 0.7 with the total value of works billed as per the comprehensive Scheme of Service tax rules.

             The service tax payable for the works contract by the service provider from the year 2007 onwards. There was no liability for FCI till the reverse charge mechnism was introduced w.e.f 01.07.2012. According to this the FCI become liable to pay service tax w.e.f 01.07.2012. The Hqrs have also issued instructions on this.

             As per the contract clauses in the MTF the Rate Quoted by the contractor / agency prior to 01.07.2012 is with the service tax component for the 100% liability of ST on the part of the contractor. By the same clauses the Rate quoted by the contractor / agency is only for the 50% liability on the contractor. The remaining 50%liability become payable by the FCI to the Govt in addition to the bill payable to the contractor. The doubts arises for the accountability of service tax component for the works contract for which the tenders are opened before 01.07.2012 and bills are paid after the cut off date of 01.07.2012, as the rate quoted by the contractor are for the 100% service tax liability by the contractor as per the tender clauses. Hence the service tax for the bills paid after 01.07.2012 is payable by the FCI by making recovery from the bills of the contractor / agency. If the contract has finalised and settled earliar the agency is to be addresed to show the documentary evidence of the service tax payment to the Govt for 100% liability. If there is no evidences the amount is to be recovered from his future / pending payment if any to the extent of 50% tax liability of FCI. In the worst case (where the recovery could not be made) the ST to be paid by FCI to fulfil the statutory obligation and to be weived by the competant authority as this appears to be the infectutious.

    The Value of service  to be calculated taking into account that the value of bill is inclusive of service tax as given below
     The vaue of the bill divided by (1+0.4*x 0.1236) will gives you the value of service before tax ie 'A' =B.V/(1.04944)
    The Service tax payable by the service reciever by making recovery in bill  is = Ax0.4*x0.5x0.1236 = Ax0.02472
        * denotes 0.4 or 0.6 or 0.7 as the case may be depends on the nature of works

    For the contract entered on or after the cut off date of 01.07.2012 (ie Tender opening date) the liability of the FCI is born by the FCI as and accounted to the works expenditure as addition to the bill value  as the contractor may not quote for the FCI liability unless otherwise it is clearly indicated.However the rate should presumably  includes the ST liability of the contractor as per the clause.
    The Value of service  to be calculated taking into account that the value of bill is inclusive of service tax as given below

    The vaue of the bill divided by (1+0.4*x0.5x 0.1236) will gives you the value of service before tax ie 'A' =B.V/(1.04944)
    The Service tax payable by the service reciever by making recovery in bill  is = Ax0.4*x0.5x0.1236 = Ax0.02472
        * denotes 0.4 or 0.6 or 0.7 as the case may be depends on the nature of works.
    As per the CPWD manual, the justification should be made market rate of material and labour and also taking in to account of the VAT 2%, cess for construction labour welfare at 1% and the tenders are to be finalised by the competant authority. There is no provision for the Service tax component as the same is not applicable to Govt. building. However it has been told in their circular that the ST if paid by the contractor  which is reimbursible to them. Hence in Fci works contract the Servicetax component should also be taken into account to the extent of service provider's liability for justification. However the whole portion of service tax for individual works to be considered at the time of estimation so as to have the realistic cost of the works / project.

              Any thing found misleaded or misinterpretted to any officers please neglect this. This is only for the discussion among the all concerned. The expression of mistakes, errors and criticism on the above is most appreciable rather than any appreciation.

    Thank you officers. Hope we have better year 2014 before us

    pgadurai

    Posts : 35

    Re: Service Tax on works contract

    Post by pgadurai on Fri Jan 24, 2014 10:43 pm

    FAQ on service tax on works contract
    1. What is the effect, if service tax calculated on the total bill vaue of the service provider?
     This is correct if the total tax 100% is to be paid by the FCI. Where as the rate is inclusive of the service tax component of the service provider as per the agreement conditions. Hence the bill value is addition of the service value provided by the contractor and also the tax liability of the contractor. The service provider's part of tax 50% caculated on total bill value to be paid, then tax amount includes the tax  on the tax amount to be paid by the service providers which may not be correct. So the value of service provided is to be seperated from the bill amount and then the tax liability of the service receiver is to be calculated. For one small bill it may appears to be small in value, but for the annual expenditure on works contract the FCI has to pay excess tax to a ransum money.
    Typical example:
    For a bill of Rs25000  
    Service value provided Rs24397 for original and Rs 24106 for repair works
    Tax to be paid by the service provider is Rs603 for original and Rs Rs894 for repair works
    Tax to be paid by the service receiver is Rs 603, Rs894 respectively
    Tax if calculated on bill value Rs 618 for original and Rs927 for repair works
    The difference is Rs 15 if it is original works Rs 33 if repair works.
    If Total bill values on all works contract for a year is 2.5 crore on FCI maintenance works then FCI may likely to pay excess tax of about an amount of Rs 33000 if calculated directly on bill value with out separating the value of services provided by the service providers from the bill amount.
    2.Why the service provider has to face recovery of the service provider's liability of service tax in the the contract bills whose tender are opened prior to 01.07.2012?
    The tax liability of service provider is for the 100% of theservice tax from the date from which the works contract included in the list of service tax. As per the conditions the rate 'the contract amount' is inclusive of any tax, leavies, cess, loyalties, and statutory  liabilities if any exists at the time of tendering. On 01.07.2012 as per the govt's notification of reverse charge mechanism the service tax liability is paid by both the service provider and the service receiver in equal ie 50% and 50% respctively. As the tender opened prior to 01.07.2012 includes amount of 100%tax liability and the service provider is liable to pay tax of 50% for the bills paid as per the point of taxation of the ST ACT, the tax amount has to be recovered from the bills if paid after 01.07.2012 for contract entered prior to this date.
    3.When the contractor is of small traders, then the contractor need not pay the service tax and the rate of contract price may not includes the liability, in that case if the tender opened before 01.07.2012 the FCI liability whether recoverable based on the above discussion?
    As said earliar the contractor has to produce the documentary evidence for the proof of the turn over does not exeed the ceiling limit of Rs10lakhs in the financial year, then the service provider has to pay the 50% liability. This may not arise in the case of tenders / quotqtions opened on or after 01.07.2012 where the same paid by service receiver automatically with out effecting recovery from the service provider.

    pgadurai

    Posts : 35

    Re: Service Tax on works contract

    Post by pgadurai on Sat Jan 25, 2014 3:08 pm

    As this is the central act, it is better, if the HQrs Engineering division issue a detailed circular in consultation with the HQrs finance to have uniformity through out the country as far as Engineering works are concerned.

    Admin
    Admin

    Posts : 179

    Re: Service Tax on works contract

    Post by Admin on Sat Apr 26, 2014 9:05 pm

    The Enginering contracts are inclusive of service tax. Hence, the service tax payable by FCI (as TDS) is to be deducted from the total amount payable to the contractor and NOT in addition to it. Hence the question of FCI paying anything in excess under any circumstances does not arise.
    Tax related circulars are always issued by the Finance Division. Engineering division does not have any authority to issue any communication in this regard.

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