A works contract tax is the type of tax that is imposed on contract-based works. This contract may include works like carrying out erection, maintenance, installation, repair, alteration, renovation of either mobile or immobile property as well as the selling of items and so forth. All together, these types of work are collectively called works contract. Therefore, the works contract includes the provision of a service which can be taxed and the sale of that item which can be taxed. It is to be noted that an additional service tax can be applied on the portion of the contract that includes service.
Definition of Works Contract
The type of contract that involves transportation of the ownership in terms of goods, with a levy on the tax on the sale of the items, is typically called works contract. A list of services included within the scope of works contract is given below:
- Installation, commission or erection of any equipment, machinery or plant or other structures, either prefabricated or not, installing the electronic and electrical equipment, drain laying, plumbing or other works with the inclusion of transfer of fluids, air-conditioning, ventilation, heating as well as other pipe related works, sheet metal work, duct tape work, sound insulation, thermal insulation, proofing from fire or water or both, escalators and elevators, staircases for fire escape or the elevators and so on.
- Setting up of any new civil structure or a building or any part thereof as well as of a conduit or a pipeline, initially made for the purpose of industry or commerce.
- Building up of any new complex for residents.
- Finishing and completion services such as restoration, renovation, alteration, repair or alike services.
- The projects of turnkey such as commissioning, construction, procurement or engineering of any project of the EPC category.
Eligibility for Tax
Within the scope of execution of the works contracts, the sales tax or simply VAT has been made eligible for levy on the transfer of the ownership of the goods involved in this scope. The tax can only be imposed on the service portion of a works contract, if the services are included in the form of execution.
Composition Scheme for the Works Contract
As mentioned above, the service tax can only be imposed on the service portion of a works contract, if the services are included in the form of execution. Within the scope of execution of the works contracts, the sales tax or simply VAT has been made eligible for levy on the transfer of the ownership of the goods involved in this scope.
Generally, the value of the services which can be taxed are calculated on the actual basis. It is based on the records which are maintained by the company. But at the same time, the companies are also allowed to avail the composition scheme. According to the composition scheme, about 4 percent of the total value of the work contract tax counting as service tax are to be paid by the company. However, it should be mentioned that the companies which choose the composition scheme will not be able to opt for the credit of CENVAT of the input, input services or the capital goods that are required for the use within the contract.
Calculation of the Taxable Service
The works contract tax is calculated keeping in mind that the sales tax or VAT is included within the gross amount that has been charged for the whole works contract. The value of the taxable service for the sake of generating the service tax will be calculated as said below.
The gross amount that is charged is generally the value of the transport of the property in the form of goods that is involved in the execution of the works contract and the sales tax or the VAT paid, if there is any, on the transport of the said property in the form of the goods that are involved within the execution.
Credit of the Excise Duty
The value of the transferring of the property in terms of goods are not included within the scope of the value for the aim of levying the service tax under the rules of the works contract tax service. Furthermore, the value of the transferring of the property in terms of goods is included in the execution of the works which are leviable following the sales tax or VAT guidelines. Hence, the works contract tax on the service provider has not been made eligible to take the credit of any excise duty that is paid on those goods that are involved in the execution.
To know more about the work contract tax, consult with a Consultant of Service Tax through our website- Company Vakil