WORKS CONTRACT (COMPOSITION SCHEME FOR PAYMENT OF SERVICE TAX) RULES, 2007

[Mr. M. GOVINDARAJAN]

                        Section 65 (105) (zzzza) of Finance Act, 1994 defines the terms 'works contract service' as any service provided or to be provided to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.  The explanation to this subsection gives the meaning of 'works contract' as 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-

(a)Erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation of air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, file proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b)Construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) Construction of a new residential complex or a part thereof; or

(d)Completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e)Turnkey projects including engineering, procurement and construction or commissioning (EPC) projects.

Section 93 of the Finance Act, 1994 grants power to the Central Government to grant exemption from service tax. Section 94 of the Finance Act, 1994 gives powers to the Central Government to make rules by notification for carrying out the provisions of the Act.

                        By virtue of the powers conferred by Section 93 and 94 of the Finance Act, 1994 the Central Government made the Rules, namely 'Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 ('Rules' for short) by means of Notification No. 29/2007-ST, dated 22.05.2007. The said Rules were amended twice one by Notification No.7/2008-ST, dated 01.03.2008 and by Notification No.23/2009-ST, dated 07.07.2009.

                        The Rules came into effect from 01.06.2007. Rule 3(1) provides that notwithstanding anything contained in Section 67 of the Act and Rules 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in Section 66 of the Act (now 10%) by paying an amount equivalent to four per cent of the gross amount charged for the works contract. The rate four per cent was effect from 01.03.2008. Before that period the percentage is two. Sec.67 of the Finance Act deals with the valuation of taxable service for charging service tax. Sec. 2A of Service Tax (Determination of Value) Rules, 2006 deals with the determination of value of services involved in the execution of a works contract.

                        The value of works contract service determined, under Sec. 2A of Service Tax (Determination of Value) Rules, 2006, shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said contract.  For the purposes of this rule-

Gross amount charged for the works contract shall not include value added tax or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract;

Value of works contract service shall include-

Ø      Labour charges for execution of the works;

Ø      Amount paid to a sub contractor for labor and services;

Ø      Charges for planning, designing and architect's fees;

Ø      Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

Ø      Cost of consumables such as water, electricity, fuel, used in the execution of the works contract;

Ø      Cost of establishment of the contract relatable to supply of labor and services;

Ø      Other similar expenses relatable to supply of labor and services; and

Ø      Profit earned by the service provider relatable to supply of labor and services;

Where value added tax or sales tax, as the case may be, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of value added tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service.

For the purpose of Rule 3 the gross amount charged for the works contract shall be the sum-

 (a) including-

The value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and

The value of all the services that are required to be provided for the execution of the works contract;

(b) excluding-

The value added tax or sales tax as the case may be paid on transfer of property in goods involved; and

The cost of machinery and tools used in the execution of the said works contract except for the charges for obtaining them on hire;

Nothing in the above shall apply to a works contract, where the execution under the said contract has commenced or where any payment, except by way of credit or debit to any account, has been made in relation to the said contract on or before the 7^th day of July, 2009.

                        Rule 3(2) provides that the provider of taxable service shall not take CENVAT credit of duties or cess paid on any inputs, used or in relation to the said works contract, under the provisions of CENVAT Credit Rules, 2004.

                        Rule 3(3) provides that the provider of taxable service who opts to pay service tax under these rules shall exercise such option in respect of a works contract prior to payment of service tax in respect of the said works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of the said works contract.

                        Rule 3(4) provides that the option shall be permissible only where the declared value of the works contract is not less than the gross amount charged for such works contract.  This is the latest condition put forth to this service.