Date : 19.03.2016
M/s. ABC LLP ( Service Provider )
M/s.
XYZ Limited ( Service Recipient )
Ref: Service Tax on Works Contract
and RCM
Opinion
Before giving opinion on the
issues it will be useful to refer the questions related with this transaction.
Assume ABC is LLP and XYZ Ltd is Body Corporate.
A.
ABC LLP is a sub
contractor of XYZ Limited. XYZ Ltd sub contracted Works Contract work as well
as Labor work also some time.
B.
Both parties would like to know the applicability and
discharging method of Service Tax under Service Tax Law and under Reverse
Charge Mechanism.
E. My Understanding View & Opinion on above
Before going ahead I have
confirmed following things from both the parties.
- Contract under question is a works contract job & Labor job.
- XYZ Ltd is Principal Contractor and Body Corporate and ABC is
subcontractor and LLP
- Both are located in Taxable Territory
Fact of the Case:
XYZ Limited is a Body
Corporate while ABC is a LLP registered with ROC. XYZ Limited has certain
contract and this contract has been further sub contracted to ABC LLP. Some of
these contracts comes under definition of Works Contract and some as a Labor
Contract. Now both the parties want to know the impact of VAT Chargeability on
both the cases and set off mechanism.
Opinion
Before classifying any contract
under works contract we should satisfy following condition as prescribed u/s of
service tax which is as follows then
chargeability should be applied in such referred transaction and fact of the
case.
Statutory Back
Ground
1- Section
65. Definitions – In this Chapter,
unless the context otherwise requires, -
(105) "taxable service" means any [service
provided or to be provided ],-
(zzzza) 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.
Explanation.—For
the purposes of this sub-clause, “works contract” means a contract wherein,—
(i) transfer of property in goods involved in
the execution of such contract is leviable to tax as sale of goods, and
(ii) such
contract is for the purposes 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 or
airconditioning including related pipe work, duct work and sheet metal work,
thermal insulation, sound insulation, fire 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;
2- 65B. Interpretations : In this Chapter, unless the context otherwise
requires,–
(54) "works
contract" means 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 construction, erection,
commissioning, installation, completion, fitting out, improvement, repair,
renovation, alteration of any building or structure on land or for carrying out
any other similar activity or a part thereof in relation to any building or
structure on land; (
(37) "person"
includes,–– (i) an individual, (ii) a Hindu undivided family, (iii) a company,
(iv) a society, (v) a limited liability partnership, (vi) a firm,
(vii) an association of persons or body of individuals, whether incorporated or
not, (viii) Government, (ix) a local authority, or (x) every artificial
juridical person, not falling within any of the preceding sub-clauses;
3- 66E. Declared Services.-The following shall constitute declared services,
namely:––
(h) service portion in the
execution of a works contract;
4- 66B. Charge of Service Tax on services received from
outside India.**** ] There shall be
levied a tax (hereinafter referred to as the service tax) at the rate of twelve
( now fourteen ) per cent. on the value of all services, other than those
services specified in the negative list, provided or agreed to be provided in
the taxable territory by one person to another and collected in such manner as
may be prescribed.
5- 66BA. Reference to section 66 to be construed as
reference to Section 66B (1) For the
purpose of levy and collection of service tax, any reference to section 66 in
the Finance Act, 1994 or any other Act for the time being in force, shall be
construed as reference to section 66B thereof. (2) The provisions of this
section shall be deemed to have come into force on the 1st day of July, 2012.”]
6- Notification
No.3/2012 - Service Tax
[TO BE PUBLISED IN THE GAZETTE OF INDIA,
EXTRAORDINARY, PART II, SECTION 3, SUB SECTION (i)]
Government of India
Ministry of Finance
(Department of Revenue)
New Delhi, the 17th
March, 2012
Notification No.3/2012 - Service Tax
G.S.R. (E)- In exercise of the powers conferred by
sub-section (1) read with subsection (2) of section 94 of the Finance Act, 1994
(32 of 1994), the Central Government hereby makes the following rules further
to amend the Service Tax Rules, 1994, namely:—
1. (1) These rules may be called the Service Tax
(Amendment) Rules, 2012.
(2) They shall come into force on the 1st day of
April, 2012. 2. In the Service
Tax Rules,
1994 (hereinafter referred to as the principal rules), in rule 2, —
“(cd) “partnership
firm” includes a limited liability partnership;”
Note : Only relevant part of
notification reproduced above.
7- Rule 2.
Definitions –
Rule 2 (cd)- “partnership firm” includes a limited
liability partnership;”].
Rule 2 (d)(i)(F) “person liable for paying service
tax”,- (i) in respect of the taxable services notified under sub-section (2) of
section 68 of the Act, means,- (F) In relation to services provided or agreed
to be provided by way of :- (a) renting of a motor vehicle designed to carry
passengers, to any person who is not engaged in a similar business; or (b)
supply of manpower for any purpose; or 3 [security services]; (c) service
portion in execution of a works contractby any individual, Hindu Undivided
Family or partnership firm, whether registered or not, including association of
persons, located in the taxable territory to a business entity
registered as a body corporate, located in the taxable territory, both the
service provider and the service recipient to the extent notified under
sub-section (2) of section 68 of the Act, for each respectively.
8- Notification
No. 30/2012-Service Tax
Government of India
Ministry of Finance
(Department of Revenue)
Notification No.
30/2012-Service Tax
New Delhi, the 20th June, 2012
GSR......(E).-In
exercise of the powers conferred by sub-section (2) of section 68 of the
Finance Act, 1994 (32 of 1994), and in supersession of (i) notification of the
Government of India in the Ministry of Finance (Department of Revenue),
No. 15/2012-Service Tax, dated the 17th March, 2012, published in the Gazette
of India, Extraordinary, Part II, Section 3, Sub-section (i),vide number
G.S.R 213(E), dated the 17th March,
2012, and (ii) notification of the Government of India in the Ministry of
Finance (Department of Revenue), No. 36/2004-Service Tax, dated
the 31st December, 2004, published in the
Gazette of India, Extraordinary, Part II, Section 3, Sub-section
(i), vide number G.S.R 849 (E), dated the 31st December,
2004, except as respects things done or omitted to be done before such
supersession, the Central Government hereby notifies the following taxable
services and the extent of service tax payable thereon by the person liable to
pay service tax for the purposes of the said sub-section, namely:-
(v)
provided or agreed to be provided by way of renting of a motor vehicle designed
to carry passengers to any person who is not in the similar line of business or
supply of manpower for any purpose or service portion in execution of
works contract by any individual, Hindu Undivided Family 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 the taxable territory;
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9.
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in
respect of services provided or agreed to be
provided in service portion in execution of works contract
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50%
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50%
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Explanation-II. - In works
contract services, where both service provider and service recipient is the
persons liable to pay tax, the service recipient has the option of choosing the
valuation method as per choice, independent of valuation method adopted by the
provider of service.
Note : Only relevant part of
notification reproduced above.
9- MY Analysis
If we see the above statutory
provisions in chronological order you will find that
I.
Section 65(105)(zzzza), which is chargeable as
per section 66, establish the taxability on works contract and its explanation
define the works contract also
II.
Section 65B(54) again interpret the Works
Contract, unless the context otherwise require
III.
Section 65B(37) again interpret the Person,
unless the context otherwise require and in this sub section clause (v)
Limited Liabaility Partnership define separately from Firm which is defined in
sub clause (vi). It means unless the context otherwise require both has
distinction as per Section 65B(37)
IV.
Section 66E(h) define the works contract service
as a declared services
V.
On 17.03.2012,
Through Notification no 3, dated 17.03.2012 Central Government notify the
changes in rule 2 of definition and as per this changes, Rule 2(cd) state “partnership
firm” includes a limited liability partnership;” Now as per
this notification when context is otherwise required, LLP should be intent as a
firm for the context required w.r.t. Rule 2(d)(i)(F).
VI.
On 20.06.2012, Through notification no 30/2012
dated 20.06.2012 Central Government notify the reverse charge mechanism in
certain taxable services and redefine the person liable to pay service tax and
make liable to pay service recipient also. In case of works contract it is
50:50 between service provider and service receiver. In this notification if
works contract service provided by any individual, HUF or partnership
firm, whether registered or not, including AOP, located in the taxable
territory to a business entity registered as body corporate, located in the
taxable territory. This notification came after notification no 3 dated
17.03.2012 which enabling the LLP to be understood as a partnership firm unless
the context otherwise required. So for this notification LLP to be understood
as Partnership firm hence reverse charge mechanism referred in this
notification for firm to be read as it is applicable on LLP also, if he provides
the service to body corporate. The extent of payable define in this notification
in case of works contract, between LLP & Body corporate is 50:50.
VII.
We should note that RCM is applicable on certain
services on service recipient because of “service recipient” define as a person
liable to pay service tax under statute, hence even 100% taxes paid by service
provider, service recipient himself shall not be free from this liability, he
has to pay off his part irrespective of billing done by SP. Hence it is highly
advisable that SP to be educated about how to bill.
10- If we summarize
the above analysis in table format then it will be as follows
However table look in
notification 30/2012 very simple, it should be noted that the ST is applicable on a composite works
contract, only on the service component
of the transaction and not on goods. Hence In order to determine the
service component , Rule 2A of the
Service Tax (Determination of Value) Rules,2012 has been amended with effect
from 01.07.2012. The following chart
explains the tax liability in case of composite transaction of works contracts:
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11- Table B : Exact effect on SP & SR
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Sr. No
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Situation
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Service Provider
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Service Recipient
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Component of Tax Liability
Payable
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Effective Tax rate payable
w.e.f.01.06.2015
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Component of Tax Liability
Payable
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Effective Tax rate payable
w.e.f.01.06.2015
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1.
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Where the service value is
determined by the service provider ( irrespective of the nature of the works
contract)
100% Service
Value*14.50%*50%=7.25%
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50%
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7.25% of the identified
service component
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50%
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7.25% of the identified
service component
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2.
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Where the service value
is not determined by the service
provider (“presumptive option”) and the works contract is of the original
works
( 40%*14.50%*50% = 2.90%
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50%
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2.90% of the gross amount
(including free issue materials)
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50%
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2.90% of the gross amount
(including free issue materials)
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3.
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Presumptive Option in
respect other work contracts
70%*14.50%*50% = 5.075%
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50%
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5.075% of the gross amount
( including free issue
materials)
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50%
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5.075% of the gross amount
( including free issue
materials)
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Note 1 :
For Clarity Following Services to be not read as a Works Contract
a)
If pure labour service are provided,
then the same won’t be covered under
works contract category;
b)
If only material is provided, then
again it would not be covered under works contract category as not being a service only.
c)
If separate divisible contracts are
issued for supply of material and supply of services, the same is not a works
contract and again it won’t be covered under the works contract category
Note 2 : Clarity on Supply of
Manpower does not come under works contracts however some confusion exist
between Supply of Manpower and labor charges.
a)
Supply of Manpower as well as Labor
Charges both are subject to service tax
b)
However under RCM there is distinction
between Supply of Manpower & Labor Charges and Both are not similar
c)
RCM is applicable on Supply of
Manpower and on Labor Charges FCM is applicable
d)
So for billing RLLP has to test
whether the services provided is coming under Supply of Manpower or Pure labor
Charges, accordingly RCM should be applied otherwise FCM will be applied.
e)
In case of RCM on Supply of Manpower,
if service provider is Individual, Firm, AOP or LLP as referred in said above
notification, 100% tax shall be payable by Service Recipient.
12- Final Wording
Ø Being ABC, a LLP and XYZ Ltd a Body Corporate, RCM is
applicable in case of notified services provided by ABC LLP being Service
Provider to XYZ Ltd who is Service Recipient.
Ø Any Transaction between ABC & XYZ to be tested whether it
is Works Contract, Labor Job or Supply of Manpower or any notified service as
mentioned in notification no 30.
Ø If it is Labor Job FCM will apply and service tax to be
charged as 14.50% or as the rate from time to time prescribed.
Ø If it is works contract, taxable value shall be determined as
per Rule 2A which is certain % of total value according to the nature, for
detail of taxable value please refer table B here.
Ø After determining this taxable value it will be divided
between SP & SR in 50:50 ratio which is current ratio prescribed.
Ø And after this division both the parties will charge service
tax @ 14.50% on own part, which is current rate prescribed. For effective rate
please refer Table B.
Ø So Total Value > Service Taxable Value > Division
Between SP & SR > Apply ST rate
Ø In
works contract services, where both service provider and service recipient is
the persons liable to pay tax, the service recipient has the option of choosing
the valuation method as per choice, independent of valuation method adopted by
the provider of service.
Ø We should note that RCM is applicable on certain services on
service recipient because of “service recipient” define as a “Person liable to
pay Service Tax” under statute, hence even 100% taxes paid by service provider,
service recipient himself shall not be free from this liability, he has to pay
off his part irrespective of billing done by SP. Hence it is highly advisable
that SP to be educated about how to bill.
13- Disclaimer & Limitation
This opinion is provided on
knowledge sharing basis which I have as per my best of knowledge study and
understanding. This opinion does not create or establish any advise, direction
and/or instruction to any one to follow as per the said opinion. This I want to
clear that, I will not be personally liable or indemnify to company or to any,
if authority take another view. Any one are free to follow as per its own best
judgment. This is to confirm that we have not covered the Recent Central
Budget 2016 impact on this draft.
Understanding, View & Opinion Prepared BY
CA
Pankaj Kumar Jaiswal
Partner
: Asutosh & Pankaj
Chartered
Accountants
+91-9819680011
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