OVERLAPPING OF SERVICE TAX AND VAT UNDER
WORK CONTRACT AND RESTAURANT AND CATERING SERVICE
TAXATION ON WORKS CONTRACT
1. Taxability
Section 66E of the Finance Act,
1994 provides for list of declared services wherein clause (h) of the above
section provides that the service portion in
the execution of a works contract is made liable to service tax.
Thus, services element in a works contract is liable
to tax
2. What is “works contract”
Works contract means a contract wherein
·
transfer of property in goods
involved in the execution of such contract
and
·
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, repair, maintenance, renovation, alteration of
·
any movable or
·
immovable property
or
·
for carrying out any other similar activity or a
part thereof
·
in relation to
such property.
It is to be noted that in respect
of movable property, only repair, maintenance, renovation, alteration is
taxable. Any original work or any work other than those mentioned above in
respect movable property is not under coverage of service tax.
3. Valuation
Value of service portion in the execution of a works
contract shall be
·
equivalent to gross amount charged for works contract
·
less value of transfer of property
in goods involved in execution of said works contract and
·
less VAT/Sales Tax.
Value of works contract service shall include, -
·
labour charges for execution of the works;
·
amount paid to a sub-contractor for labour and services;
·
charges for planning, designing and architect’s fees;
·
charges for obtaining on hire or
otherwise, machinery and tools used for the execution of the works contract;
·
cost of consumables such as water,
electricity, fuel used in the execution of the works contract;
·
cost of establishment of the
contractor relatable to supply of labour and services;
·
other similar expenses relatable to supply of labour
and services; and
·
profit earned by the service
provider relatable to supply of labour and services
In case VAT or Sales Tax is paid on
actual value of transfer of property in goods involved in execution of works
contract, then such value adopted for payment of VAT to be taken as value of
transfer of property for determining the value of works contract service as
referred above.
If the value of service portion in
the execution of a work contract has not been determined as above, then the
person liable to pay service tax shall determine the service tax payable as under:
|
Works Contract
|
Service tax payable on
|
|
Execution of original
works#
|
40% of the total amount* charged for the works contract
|
|
Maintenance or repair or reconditioning
or restoration or servicing of any goods
|
70% of the total amount* charged for the works contract
|
|
Works contract, not covered above, including
maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall
tiling, installation of electrical fittings of an immovable property
|
60% of the total amount* charged for the works contract
|
# “original works” means
·
all new constructions;
·
all types of additions and
alterations to abandoned or damaged structures
on land that are required to make them
workable;
·
erection, commissioning or installation of plant,
machinery or equipment
* “total amount” means
·
the sum total of the gross amount charged for the
works contract and
·
the fair market value of all goods
and services supplied in or in relation to the
execution of the works contract,
·
whether or not supplied under the same contract or any other contract,
·
after deducting-
o
the amount charged for such goods or services, if
any; and
o
the value added tax or sales tax, if any, levied thereon:
CENVAT credit of duties or cess
paid on any inputs shall not be taken, which are used in or in relation to the
said works contract. However, CENVAT credit of duties or cess paid on Capital
Goods and Input Service shall be available.
Example 1
|
Sr. No.
|
Particulars
|
Amount in Rs.
|
|
1
|
Gross amount received for Works Contract excl taxes
|
95,00,000
|
|
2
|
Fair market
value of goods supplied by the service receiver excluding taxes
|
10,00,000
|
|
3
|
Amount charged by service receiver for 2
|
5,00,000
|
|
4
|
Total amount charged (1+2-3)
|
1,00,00,000
|
|
5
|
Value of service portion (40% of 4 in case of original works)
|
40,00,000
|
Example 2
|
Sr. No.
|
Particulars
|
Amount in
Rs.
|
|
1
|
Gross amount received for Works Contract excl taxes
|
1,00,00,000
|
|
2
|
Fair market
value of goods supplied by the service provider excluding taxes
|
25,00,000
|
|
3
|
Amount
charged by service provider for 2
|
15,00,000
|
|
4
|
Total amount charged (1+2-3)
|
1,10,00,000
|
|
5
|
Value of service portion (40% of 4 in case of original works)
|
44,00,000
|
As seen in the above example, the service provider has
to discharge service tax liability on fair market value for the works contract.
If the amount of works contract is not at fair market value, then such fair
market value has to be arrived at by generally accepted accounting principles.
However, there are no accounting standards/ principle
prescribed by ICAI to derive such fair market value.
4. Reverse Charge Mechanism:
Section 68(2) of the Finance
Act, 1994 read with Rule 2(1)(d) of Service Tax Rules, 1994 provide that in
case of certain types of services, the recipient is liable to pay tax and in
other cases, both the provider of service and recipient of service are liable
to pay tax on percentage basis as prescribed in Notification No. 30/2012 – ST,
dated 20/06/2012.
|
Nature of service: Service portion in execution of works contract
|
|
|
Service
provider
|
Service
Receiver
|
|
Any individual, Hindu Undivided Family
or partnership firm whether registered or not, including association of persons, LLP located in taxable territory.
|
Business Entity registered as Body Corporate,
located in the taxable territory.
|
|
50 %
|
50 %
|
5. Builder’s and Developer’s
Taxability
Section 66E of the Finance Act, 1994 provides for list of declared services
wherein clause (b) of the above section provides that;
·
construction of a complex, building, civil structure
or a part thereof,
·
including a complex or building intended for sale to
a buyer, wholly or partly,
·
except where the entire
consideration is received after issuance of
completion-certificate by the competent authority
·
is liable to service tax.
Hence service portion in sale of any commercial or residential or
any other property is leviable to service tax.
Abatement
·
As the above value of above transaction
includes value of goods, value of land and value of service, abatement to
Builder’s and Developer’s has been provided vide Notification No. 26/2012-ST
dated 20th June,
2012 to bring parity for taxing the transaction.
·
Vide entry no. 12 of the said
notification, abatement of 75% was provided in respect Construction of complex,
building, civil structure or part thereof intended for a sale to a buyer
subject to the condition;
o
Cenvat credit of Inputs has not been taken
o
Value of land in included in the amount charged from
service receiver.
·
W.e.f. 1st March, 2013
the rate of abatement was reduced from 75% to 70% in respect to high-end
residential construction where carpet area exceeds 2000 sq.ft. and value charged exceeds Rs. 1 crore and in
respect of Civil Construction.
·
Now w.e.f. 8th May, 2013
rate of abatement of 70% has been set high-end residential construction where
carper area is equal to or greater than 2000 sq.ft or value charged is equal to or greater than Rs.1 Crore.
·
The summary of the above is provided below;
|
Description
|
% of Abatement
|
|
Construction of Residential units having carpet area of less than 2000 square
feet and where the amount
|
75%
|
|
charged is less than Rs. 1
Crore
|
|
|
Construction of Residential units having carpet area of 2000 or more
than 2000 square feet or where the amount charged is Rs. 1 Crore or above
|
70%
|
|
Any other construction including commercial and industrial
|
70%
|
6.
Issues: M/s Redevelopers Ltd. is redeveloping
a society having 24 flats, each measuring 500 sq.ft. Under the agreement with
society, M/s Redevelopers are given right to redevelop the society totaling to
25000 sq.ft. Out of the above space, 24 flats each measuring 625 sq.ft,
totaling to 15000 sq.ft. shall be allotted to members of society and M/s
Redevelopers shall sell the balance flats to outside Parties. M/s Redevelopers
shall also pay Rs. 5 Lacs as Rent Compensation, Rs. 10 lacs to each member of
society as lump sum compensation. What shall be value chargeable to service tax
under works contract?
TAXATION ON RESTAURANTS
1. Taxability
Section 66E(i) of the Finance Act,
1994 provides for list of declared services wherein the service portion
in an activity wherein goods,
being food or any other article of human consumption, supplied as part of activity is
made liable to service tax.
Thus, services provided by
restaurants or eating joints or mess by whatever name called, in relation to
serving of food or beverages are liable to service tax.
2. Exemption
Notification No. 25/2012-ST, dated
20-6-2012 provides for exemption to all restaurants, eating joints, or a mess other
than those having:
Ø the
facility of air conditioning or central air heating in any part of the
establishment, at any time during the year and
Ø a license to
serve alcoholic beverages.
W.e.f. 1st April, 2013
the exemption will be available to only those restaurants, eating joints, or
mess other than those having:
Ø
the facility of air conditioning or
central air heating in any part of the establishment, at any time during the year.
3. Explanation of conditions relating to facility of air conditioning, central air heating and license to serve alcoholic beverages?
Facility of air conditioning
Ø
The restaurant can have the air
conditioning facility in any part of the establishment.
Ø The air
conditioning facility can be at any time during the financial year.
Ø The air condition
can be of any kind i.e. central, window or
split.
Facility of Central air heating
Ø
The restaurant having facility of
central air heating cannot avail the benefit of exemption
Ø
The air heating facility should be
centralised and not through individual machines.
License to serve alcoholic beverages
Ø
The restaurant must having the
license to serve alcoholic beverages is a pre condition for attracting service
tax. It is not necessary that the receiver has to consume alcoholic
beverages. However, w.e.f. 1st April, 2013 the condition to have a license to serve alcoholic beverages has been
dispensed with.
4. Valuation
Rule 2(c) of Service Tax
(Determination of Value) Rules, 2006 provides for the value of service portion involved in
supply of food or any other article of human consumption or any drink in a restaurant.
As per the said rule the service
portion in an activity wherein goods, being food or any other article of human
consumption or any drink (whether or not intoxicating) is supplied in any
manner as a part of activity, at a restaurant will be 40% of the total amount charged.
Total amount means the sum total of
the gross amount charged and the fair market value1 of all
goods and services supplied in or in relation to the supply of food or any
other article of human consumption or any drink (whether or not intoxicating),
whether or not supplied under the same contract or any other contract, after deducting
Ø The amount
charged for such goods or services and
Ø The VAT or Sales
Tax levied thereon.
Restaurants, etc. should not avail
the Cenvat credit of duties paid on any specified goods. However, they can take
Cenvat credit of duty paid on inputs and service tax paid on input services.
The aforesaid is tabulated below –
|
Particulars
|
Remarks
|
|
Service tax payable on
|
40%
|
|
Cenvat credit
of duty paid on specified inputs
|
No
|
|
Cenvat credit of duty paid on other than specified inputs
|
Yes
|
|
Cenvat credit of duty paid on capital goods
|
Yes
|
|
Cenvat credit of service tax paid on input services
|
Yes
|
5. Clarification
It has been clarified by CBEC vide Circular No. 139/8/2011-TRU dated
10-5- 2011 that the taxable services
provided by a restaurant in other parts of the
1 Fair Market Value of goods and services, so
supplied, may be arrived at in accordance with the generally accepted
accounting principles. restaurant e.g. swimming pool, or an open area attached to the
restaurant are also liable to service tax as these areas become extensions of
the restaurant.
6. Issues
In case of McDonalds or Subway, the
patrons are required to adopt self service wherein the patron places his order
at the cash counter, collects his order and then seats himself. In such a
situation, the element of serving the patron (like in restaurant) is
eliminated. Whether service tax is still leviable in such situation?
Malls have in-house food courts
owned and maintained by the mall. The patron like in above case, are expected
to place their orders at respective kiosk and serve themselves. What is the service tax implication in such case
Restaurants having ‘Drive-thru’ or
‘Home delivery’ are merely selling the food items. The element of serving the
customers is completely eliminated. Whether service tax is still leviable?
TAXATION ON CATERERS
1. Taxability
Section 66E(i) of the Finance Act,
1994 provides for list of declared services wherein the service portion
in an activity wherein goods,
being food or any other article of human consumption, supplied as part of activity is
made liable to service tax.
Thus, services provided by the outdoor caterers are
liable to service tax.
2. Valuation
Rule 2(c) of Service Tax
(Determination of Value) Rules, 2006 provides for the value of service portion involved in
supply of food or any other article of human consumption or any drink as
outdoor catering.
As per the said rule the service
portion in an activity wherein goods, being food or any other article of human
consumption or any drink (whether or not intoxicating) is supplied in any
manner as a part of such outdoor catering will be 60% of the total amount charged.
Total amount means the sum total of
the gross amount charged and the fair market value2 of all
goods and services supplied in or in relation to the supply of food or any
other article of human consumption or any drink (whether or not intoxicating),
whether or not supplied under the same contract or any other contract, after deducting
Ø The amount
charged for such goods or services and
Ø The VAT or Sales
Tax levied thereon.
Restaurants, etc. should not avail
the Cenvat credit of duties paid on any specified goods. However, they can take
Cenvat credit of duty paid on inputs and service tax paid on input services.
The aforesaid is tabulated below –
|
Particulars
|
Remarks
|
|
Service tax
payable on
|
60%
|
|
Cenvat credit of duty paid
on specified inputs
|
No
|
|
Cenvat credit of duty paid on other than specified inputs
|
Yes
|
|
Cenvat credit of duty paid on capital goods
|
Yes
|
|
Cenvat credit of service
tax paid on input services
|
Yes
|
2 Fair Market Value of goods and services, so supplied, may be arrived at in accordance with the generally accepted accounting principles.
TAXATION
ON BUNDLED SERVICE BY WAY OF SUPPLY OF FOOD, ETC. TOGETHER WITH RENTING OF
PREMISES
1. Taxability
Banquet halls, etc. given on hire
by hotels, restaurants, etc. along with supply of food, etc. were classified
under Mandap-keeper services or Convention Services in the erstwhile provisions.
Currently, there is specific entry
in the Notification No. 26/201-ST, dated 20-6- 2012 with respect to abatement
for bundled services by way of supply of food or any other article of human
consumption or any drink, in a premises (including hotel, convention center,
club, pandal, shamiana or any other place, specially arranged for organising a
function) together with renting of such premises.
Thus, any hotel, convention center,
club, pandal or shamiana is providing any bundled services by way of supply of
food or any other article of human consumption or any drink, in a premises
together with renting of such premised it would be liable to service tax on
such bundle of services.
2. Valuation
Notification no. 26/2012-ST, dated
20-6-2012 provides for abatement for the said
services:
Ø
The abatement is allowed to the
extent of 30% of the gross amount charged from the customer i.e. service tax
payable is on 70% of the gross amount.
Ø
Service provider cannot avail
Cenvat credit on specified inputs; however it can avail Cenvat credit of duty
paid on capital goods and of service tax paid on input services.
The aforesaid is tabulated below –
|
Particulars
|
Remarks
|
|
Abatement
|
30%
|
|
Service Tax payable on
|
70%
|
|
Cenvat credit of duty paid on specified inputs
|
No
|
|
Cenvat credit of duty paid on other than specified inputs
|
Yes
|
|
Cenvat credit of duty paid on capital goods
|
Yes
|
|
Cenvat credit of service tax paid on input services
|
Yes
|
Disclaimer:- The
opinion and views expressed in these notes are those of the complier and are
general in nature and may differ according to
facts of the case. TKG
Corporate Advisors does not necessarily concur with the same. While every care
is taken to ensure the accuracy of the contents of this compilation, compiler
or TKG Corporate Advisors not liable
for any inadvertent errors.
