Service Tax is only applicable on the service portion of a service. There are many services which include the sale of goods as integral part of it since these goods are used in providing the services. To remove the confusion of separating the service portion & goods portion, a concept of declared services is introduced in service tax. Under declared services, a list of various services is given and there explanation to separate the service portion from the total service is provided in Service Tax(Determination of Value) Rules, 2006. Work contract is also part of these declared services and service tax on work contract is determined accordingly.
As per section 66E(h) of the Finance Act, 1994 service portion in execution of works contract is a declared service.
Section 65B(54) provides the meaning of work contract. Work contract means:
- A contract wherein transfer of property of goods involved in the execution of such contract, is leviable to tax as sale of goods; and
- Such contract is for the purpose of carrying out construction, erection, commissioning, in or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.
So every work contract must have two portions:
- Sale of goods; and
- Provision of services
Transfer of property in goods involved in execution of work contract is deemed to be sale of such goods.
How to separate the service portion from the total work contract
As the service tax is only applicable on service portion of work contract, Rule 2A of service Tax (Determination of Value) Rules, 2006 provides for separation of service tax portion and sale of goods portion from the total service.
Value of work contract service [Rule 2A(i)]
Value of works contract service = Gross amount charged for the works contract less Value of property in goods transferred in execution of the said works contract.
Gross amount charges: It does not include VAT or sales tax.
Value of property in goods transferred in execution of work contract: If VAT or sale tax is paid, then such value on which VAT or sale tax is paid shall be taken as Value of property in goods transferred in execution of work contract. Otherwise you may determine the value of goods.
Valuation on adhoc basis or deemed basis [Rule 2A(ii)]
Where value cannot be determined by Rule 2A(i), then it is determined by Rule 2A(ii) on adhoc or deemed basis.
| Particulars | Value of the service portion |
| Where the work contract is for execution of original works. Original Work means : All new constructions, alterations & addition to abandoned or damaged structures on land, erection, commissioning or installation of plant, machinery or equipment or structures, whether pre fabricated or otherwise. | 40% of the total amount charged for the work contact |
| Cases other than above including work contract entered for maintenance or repair or reconditioning or restoration or servicing of 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 the work contract.[ prior to 1.10.2014 the rate was 60%] |
Work Contract & Cenvat Credit
No Cenvat Credit is available for duties paid for any input goods used in work contact. However input credit of duties paid on input services and capital goods is available for work contract.
Work Contact & Exemptions
Notification No 25/ 2012-ST, dated 20-6-2012 provides a list of various work contract services which are exempted from service tax. These services are as follows:
- Service provided to the Government, a local authority or a governmental authority [Entry 12].
- Construction etc. for use of General Public [Entry 13].
- Original work pertaining to Infrastructure [Entry 14].
- Sub contractor services [Entry 29].
Other points:
- Architect or Consultancy services are provided in relation to work contract, hence they are not exempted.
- Construction of two house floor and if both floors are capable of transferred separately, then service tax is leviable on both of them separately.
- Pure Labour contracts are not considered as work contract as the essential conditions of work contract is to have transfer of property in goods.
- Contract for repair or maintenance of motor vehicles treated as work contract if property in goods is transferred
- Contracts for construction of a pipe line or conduit are covered under work contract.
Work contact and Reverse charge mechanism
- If work contract service is provided by any individual, HUF, Firm, AOP to a business entity as body corporate, then 50% of service tax is paid by service provider and 50% is paid by service receiver.
- In case of Work contact in the nature of support service provided by government or local authority then 100% service tax is paid by service receiver.
- In all other cases 100% service tax is paid by service provider.