Calculation of Service Tax on Works Contract

GST & IDT

We have received many queries regarding Calculation of Service tax on Works Contract Service. Here in this blog, a short summary for service tax on works contract is given:

W.e.f 01-07-2012, All services are taxable except services in negative list and exemption list. To remove doubt a list of declared service is given which are taxable services. In the list of declared services, there is a service of “Service portion in the Execution of a Works Contract“. Hence in case of works contract, Service tax is levied only on service portion.

SR=Service Receiver, SP= Service provider, WC= Works Contract, SR-RC= Service tax Reverse charge

What is Works Contract for the purpose of Service tax?:

Works contract means a contract to do a work(service) but wherein some transfer of property from SP to SR, is also involved. But such property (goods) needs to be taxable as sale of goods. In short,

A contract for Service and Supply both is a works contract.

Note: A contract is works contract or not, it should be decided on the basis of contract and not on the basis of individual invoice.

How to Calculate Service Tax on Works Contract?

A works contract is under Partial Reverse Charge for Service tax, 50% of service tax payable by SP and 50% by SR.But Reverse charge is not applicable where service provider is a company. In case of company, 100% of service tax is payable by SP after claiming ST in his invoice.

A step by step procedure for calculation of Service tax on Works contact is given below:

(A) If Service provider is a Company: (NO ST-RC)

  1.   If Supply and service portion of work value (Running Bill) is separable then service provider will raise a invoice by adding service tax only on service portion. Service receiver will pay the bill value to service provider and service receiver need not pay any service tax under Reverse charge Mechanism.

ST=Service portion X  15%

2.  If Supply and service portion of work value(Running Bill) is not separable then

  • First you need to calculate the value of Free of cost(FOC)material if any issued by SR to SP excluding sales tax if any.
  • Add FOC value in work done value.
  • Then find the applicable percentage to arrive at service value:

Original Work like new construction, erection etc. : 40%

Other work like repair and maintenance etc.          : 70%

Service Tax payable by SP: (work done value + FOC value) * applicable percentage*15%

  • SP will raise an invoice adding above value of ST in his invoice. SR will make payment of invoice only and SR is not liable to pay anything under RCM.

 

(B) If Service provider is not a Company: (ST-RC-50%)

  1.   If Supply and service portion of work done value is separable then service provider will raise a invoice by adding 50% of service tax only on service portion. SR will pay the bill value to service provider and service receiver is also required to pay balance 50% of service tax under RCM to ST authorities.

ST Payable by SP=Service portion X  15% X 50% (this part is paid by SR to SP against invoice)

ST payable by SR = Service portion X 15% X 50% (this part is paid by SR to ST authorities)

2.  If Supply and service portion of work done value is not separable then

  • First you need to calculate the value of Free of cost(FOC)material if any issued by service receiver to service provider excluding sales tax if any.
  • Add FOC value in work done value.
  • Then find the applicable percentage to arrive at service value:

Original Work like new construction, erection etc. : 40%

Other work like repair and maintenance etc.          : 70%

Service Tax payable by SP: (work done value + FOC value) * applicable percentage*15%*50%

Service Tax payable by SR: (work done value + FOC value) * applicable percentage*15%*50%

  • SP will raise an invoice adding above value of ST in his invoice. SR will make payment of invoice  and SR is also liable to pay his portion of ST under RCM to ST authorities.

Note:

  1. Service tax rate is taken as 14% + 0.5% SBC + 0.5% Krishi Kalyan Cess (from 01-06-2016)
  2. Cenvat Credit can not be utilized for payment of ST-RC. But Cenvat credit can be taken for sum paid under ST-RC because ST-RC is an input tax not output tax.
  3. Cenvat Credit of SBC in not available.
  4. But Cenvat Credit of KK Cess paid on input service is available for payment of KK Cess on output service.

(Click Here for Works contract in GST Regime)