WORKS CONTRACT COMPOSITION SCHEME

Works Contract Composition Scheme under Service Tax

Before introducing the new Service Tax Law w.e.f. 01-07-2012 the works contract composition scheme was governed by the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. After 01-07-2012 the composition Scheme for works contract has been incorporated under Rule 2A of the Service Tax (determination of Value) Rules 2006. The definition of ‘Works Contract’ is as under:

Definition of Works Contract

Section 65B (54) of Finance Act, 1994:
“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 contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.
From the above definition it may be noted that any contract in which property in goods (leviable to tax as sale of goods) is transferred during the execution of such contract is termed as ‘Works Contract’.

Taxability of Works Contract in Service Tax

The works contract service is specifically included in the declared list of services under section 66E of Finance Act 1994. Therefore in new law of service tax w.e.f. 01-07-2012 there is no dispute over taxability of works contract in service tax.

Valuation of Works Contract Service

For valuation of ‘Works Contract Service’ specific rule is provided in Service Tax (Determination of Value of Services) Rules, 2006. The relevant rule is reproduced here for ready reference: 
“2A. Determination of value of service portion in the execution of a works contract:- 
Subject to the provisions of section 67, the value of service portion in the execution of a works contract , referred to in clause (h) of section 66E of the Act, shall be determined in the following manner, namely:- 
(i) Value of service portion in the execution of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in the execution of the said works contract.
Explanation.- For the purposes of this clause,-
(a) gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract;
(b) value of works contract service shall include, –
(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;
(c) Where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then, such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract for determination of the value of service portion in the execution of works contract under this clause. 
(ii) Where the value has not been determined under clause (i), 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:- 
(A) in case of works contracts entered into for execution of original works, service tax shall be payable onforty per cent of the total amount charged for the works contract; 
(B) in case of works contract, not covered under sub-clause (A), including works contract entered into for,-
(i) maintenance or repair or reconditioning or restoration or servicing of any goods; or
(ii) 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, 
service tax shall be payable on seventy per cent of the total amount charged for the works contract
Explanation 1.- For the purposes of this rule,-
(a) “original works” means-
(i) all new constructions;
(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;
(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;
(d) “total amount” means the sum total of the gross amount charged for the works contract and the fair market value 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, after deducting-
(i) the amount charged for such goods or services, if any; and
(ii) the value added tax or sales tax, if any, levied thereon:
Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles. 
Explanation 2.- For the removal of doubts, it is clarified that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.”
From above legal provision it may be noted that there are two options to derive taxable value of ‘Works Contract Service’ which can be summarized as under:

Rule 2A : Option – I

Gross Amount charged (GAC) for Works Contract                                xxxxx

Less:
(i) Value of property transferred in goods xxx
(On the basis of documentary evidence)
(ii) VAT or Sales Tax xxx     
                               Taxable Value                                                          xxxx
Value of transfer of property in goods shall be the value taken for VAT purposes.
Value of Works Contract shall include:

• Labour charges
• Payment to sub-contractor for labour and services;
• Planning, designing and architect’s fees;
• Hire charges for machinery and tools
• Cost of Consumables such as water, electricity, fuel
• Cost of establishment of the contractor relatable to supply of labour and services;
• Other similar expenses; and
• Profit earned by the service provider relatable to supply of labour and services;

Rule 2A Option – II

Where Value cannot be ascertained as per Option-I then value shall be worked out as under:

In the ‘Option-II’ taxable value of original work would be @40% of the total amount charged for the works contract. The meaning of ‘Original works’ is given in rule 2A reproduced above which covers the following works:

• all new constructions;
• all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;
• erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

From the above definition of original works it can be noted that besides activities of new constructions, the erection, commissioning or installation of any equipment/plant & machinery is also covered in the definition of original works which is to be valued @40% of the total amount.

Exemption in Works Contract Service

There is no specific exemption is given in negative list u/s 66D of Finance Act 1994. However mega exemption notification no.25/2012-ST dated 20-06-2012 provided following exemption from service tax relating to Works Contract Service:-