A Study on Sec 65(105)(zzzza) Works Contract Service:

1. Means a contract of service in which transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods (VAT etc).

2.  Does not include Works Contracts in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

3. To differentiate with Work Contact  services with Other Construction services under various other sections, If transfer of property is not involved leviable under VAT then it shall be  classified  as Works Contract  or in all other cases it taxable as services  under the respective their sections. Assesee may make  pre analysis, plan and choose the best alternative as a matter of tax planning.

Rules related to Works Contract Services:

            1. Rule 2A of Service Tax ( Determination of Value)Rules 2006

            2. Works Contract (Composition Scheme for payment of Service Tax) Rules,2007

A.Provisions of  Rule 2A of Service Tax ( Determination of Value)Rules 2006

1. Value of transfer of property in goods involved  - the valve adopted for the purpose of VAT

2. Gross values does not include VAT or sales Tax amount.

3. Value of Works contact service shall include:

            a. Labour charges

            b. Amount paid to Sub contactors for labour and Services.

            c. Planning, designing, and architect fee charges.

            d. Hire charges for machines, tools used.

            e. Cost of consumables ,water, electricity, fuels etc.

            f. Profit earned.

4. No Cenvat credit on inputs whose property is transferred under VAT.

B. Provisions of  Works Contract (Composition Scheme for payment of Service Tax) Rules,2007

1.     Has an option to pay 4% of gross amount as Service Tax instead of rate specified U/s 66 (10.3%).

2.      Gross Amount shall be:

a. Includes-    1. Value of all goods used in the contract whether supplied under any contract or not (Eg: Goods provided by the service receiver).

2. Value of any services required to be provided.

b. Excludes-   1.       Value of VAT or Sales Tax.

2. Value of Machines and Tools used in the execution ( ie, Value of asset owned by service provider which is  used for the service).

3.  Cenvat Credit

a. No Cenvat credits on Inputs ( ie, on goods), but credits on capital goods can be taken.

b. Full Cenvat credit on Input services.

c. But Cenvat credit on Input services on following services only @40 % thereof ( Applicable only if the input service provider has paid tax on full value of service, ie , without availing abatement U/n no 1/2006 ST dt 1/3/2006).

1. Erection, commissioning & Installation Services (Sec 65(105)(zzd).

2. Commercial or Industrial construction Service (Sec 65(105)(zzq).

3. Construction of Complex Services (Sec 65(105)(zzzh).

4. Option once exercised cannot be withdrawn until completion of works contract.

5. Option permissible only when declared value of works contract is less than or equal to the gross amount charged (Actual bill).

6. Works contract on the following cases is exempt:

1. In relation to port or other port (Finishing and repairing services are not exempted).

2. Canals used primarily for other than commercial and industry.

3. Construction or finishing of residential complex under JNNURM & RAY (Even completion and finishing services is exempt).

4. Construction of Dams, Buildings, Infrastructure etc by Government.

C. Illustration

Service tax liability U/s Sec 65(105)(zzza)  Works Contract Service

Details of M/s Veda Constructions Mumbai is as follows in respect  of a proposed project which as the following budgeted figures.

Particulars	Amount in Lakhs (Rs)
Value of Contract (Inclusive of VAT)	520
VAT @ 4%
Value of inputs used  (Incl: Excise duty @8.24%)-Treated as sale for VAT	324.72
Value of Services used (Input credit @10.3%)	100
The above services includes 1. Commercial or Industrial construction Service U/s 65(105)(zzq).- input service provider has paid tax on full value of service, ie ,without availing abatement U/n no 1/2006 ST dt 1/3/2006.	20
Capital goods purchased during the year (Excise duty @8.24%)	75

Assesee can choose either of the options ( Rule 2A or Composition scheme)

A. Value  under the Provisions of  Rule 2A of Service Tax ( Determination of Value) Rules 2006 and Service tax Liabilitiy – IF OPTED

Particulars	Amount in Lakhs (Rs)
Value of Contract (Inclusive of VAT)	520
Less :VAT @ 4% (520*4/104)	20
Gross Value	500
Less:  Value of inputs used Treated as sale for VAT (Inclusive of Cenvat credit, because i.e.  the actual cost to the assesee)	324.72
Gross Value under the  Provisions of  Rule 2A	175.28
Service tax liability@ 10.3%	18.054
Less:
Cenvat credit on inputs	NIL
Cenvat credit on input services (on all services) ( Rs 100@10.3%)	10.3
Cenvat credit on capital goods (Rs 75*8.24%)@50%	3.09
Net Service tax liability	4.664

B. Value under the  Provisions of  Works Contract (Composition Scheme for payment of Service Tax) Rules,2007 and Service tax Liability – IF OPTED    

Particulars	Amount in Lakhs (Rs)
Value of Contract (Inclusive of VAT)	520
Less :VAT @ 4% (520*4/104)	20
Gross Value under the  Provisions of  Composition Scheme	500
Service tax liability@ 4.12%	20.6
Less:
Cenvat credit on inputs	NIL
Cenvat credit on input services (Rs 100- Rs 20)@10.3%	8.24
Cenvat credit on input services on Commercial or Industrial construction Service  U/s 65(105)(zzq).- input service provider has paid tax on full value of service, ie ,without availing abatement U/n no 1/2006 ST dt 1/3/2006.  (Rs 20 @10.3% but limited to 40%)	0.824
Cenvat credit on capital goods (Rs 75*8.24%)@50%	3.09
Net Service tax liability	8.446

On the basis of above it can be concluded that opting the Provisions of  Rule 2A of Service Tax ( Determination of Value) Rules is the best option  for the assesee.