Service Tax on service portion in Works Contract (effective from 1st October, 2014)

Service portion in the execution of a work contract is subjected to provisions of partial Reverse Charge Mechanism in case such service has been provided by any individual, HUF or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate located in taxable territory. As per existing rules in such cases 50% of service tax is payable both by service provider
and service recipient.

The valuation of service portion in Works Contract is governed by Rule 2A of Service Tax (Determination of Value) Rules,2006 which provides two options for the same.

OPTION I: Value of service portion in execution of work contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in execution of said works contract.

OPTION II: There were three categories. The categories and there valuation of service portion is tabulated as under:-

Sl No.CategoriesValuation principle
1Original works40% of the total amount
2Works contract entered for maintenance or repair or70% of the total amount
3Other work contracts including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling installation of electrical fittings of an immovable property 70% of the total amount charged60% of the total amount charged for works contract

The change that has been brought by Union Budget, 2014-15 is amendment of Rule 2A of Service Tax (Determination of Value) Rules, 2006 wherein they have merged the categories 2 and 3 above into asingle category with percentage of service portion as 70%.

This change will come into effect from 1st October, 2014 and same has been notified vide Notification No. 11/2014-ST dated 11th July, 2014. It has been explained in the TRU, MoF, GoI letter No D.O.F No. 334/15/2014-TRU dated 10th July, 2014 that this rationalisation by way of merger of categories has been made to avoid disputes of classification between these two categories.

It is pertinent to mention here that the service provider and recipient would continue to pay 50% each of total service tax payable.