June 19, 2013
Smt. Praveen Mahajan
Chairperson
The Central Board of Excise & Customs
Ministry of Finance
Department of Revenue
Room No.158-B, North Block
New Delhi – 110 001
Madam,
Sub:
Need of clarification regarding Rule ‘2A’ in determination of ‘Value of Taxable
Services’ in respect of ‘Works Contract’.
Construction Federation of India (CFI) is the representative body of leading engineering and
Civil construction firms of the country, engaged in the execution of various infrastructure
projects viz. dams, power stations, highways, ports, Buildings and similar works etc. thereby
playing a critical role in nation’s development and creation of infrastructure.
The members of CFI are of the view that there is ambiguity on the captioned subject and
therefore, on their behalf the CFI would like to bring the following facts pertaining to the issue
for your kind consideration.
Facts pertinent to the issue:
In order to execute various infrastructure projects, the Contractors are being awarded ‘Works
contracts’ by various Govt. / Semi Govt./ Private bodies and other Entities incorporated
through Public Private Partnership etc.
1. Usually, these ‘Works contracts’ are awarded as a ‘Composite contract’, wherein
Contract Price is on all inclusive basis i.e. Supply of materials, Services and all
applicable ‘Taxes & Duties’.
The applicable ‘Taxes & Duties’ generally consist of:
a) Service Tax – Levied on ‘Value of Taxable Services’ and payable @12.36% to the
respective Central Govt. authorities as per Statutory Provisions.
b) VAT, CST, Entry Tax – Levied on ‘Value of materials’ and paid to respective State
Govt. authorities as per their Statutory provisions.
c) Octroi, Local Body Tax authorities.
Levied on ‘Value of Materials’ and paid to respective local
d) Labour Cess – Usually levied @ 1% on ‘Cost of construction’ and deducted by the
employer, from Contractor’s gross certified bill amount, for onward payment to
‘Building & Labour Welfare Board’ as per statutes of respective state.
2. Since the ‘Works contract’ is a Composite contract, which involves complexities in
determination of ‘Value of Taxable Services’, therefore to simplify the process, statute
provide rule 2 (A) of valuation of Service tax rules, wherein for ‘Works contract’ related
to original work, the ‘Value of Taxable Service’ is to be considered 40% of the turnover
less VAT amount paid/payable on ‘Value of incorporated materials’.
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3. Usually, these Construction contracts i.e. Works contracts, are executed in 3 to 5 years
time or more and therefore, the payments to the contractors (Service Providers) are
made as intermediate payments in the form of Running Account bills (RA bills).
4. During the currency of the Contract various amendment in ‘Taxation rules’ and
enactment take place affecting the contract price and Contractors. The Latest example is
introduction of ‘Entry Tax’ and Local Body Tax on goods and Labour cess on the
Contract value, which are recently levied by various State Govt.
5. It is to be appreciated that ‘Service Tax’ rules are still undergoing changes year after year
and are still to attain its maturity. Moreover, the taxation rules on Sale of goods is a
‘State subject’ and vary from State to State. Therefore, enactment of uniform ‘Service
Tax’ rules with due care of all State Taxation rules is a challenge; which sometimes result
cross taxation anomalies, defeating the principles of taxation.
In the background of above facts, the following anomalies need to be clarified and
addressed.
I.
In general, the ‘Service Tax’ rules are governed in consonance with the Central
Excise rules / Cenvat credit rules and accordingly there should also be parity in
determination of ‘Value of Taxable services’ for payment of Service Tax V/s
determination of ‘Transaction value’/ ‘Valuation of Excisable goods’ for levy of
Excise duty.
II.
As per Section ‘4’ & ‘4A’ of Central Excise Act, the amount of VAT (Sales tax) and
other taxes, (local or otherwise) if any, actually paid or actually payable on such
goods are excluded for determination of ‘Transaction value’/ ‘Valuation of Excisable
goods’ for levy of Excise duty.
III.
Whereas, the similar rules for determination of ‘Value of Taxable Service’ i.e. rule 2A
of ‘Service Tax’ provide only exclusion of ‘VAT’ and silent regarding exclusion of
other ‘Taxes & Duties’ levied on goods by the state Govts./ Local body Viz. ‘Entry
Tax’, CST, Labour cess and other Local Taxes – Octroi / LBT etc.
IV.
Most of the state Governments has introduced Entry Tax, Labour cess and Local
Body Tax, subsequent to enactment of Service Tax rules and probably for that very
reason, the explicit provision for same is missed out in the enactment of Service Tax
rules.
Moreover, on transactions related to inter-state procurement of goods, some state
Govts. (Viz. Bihar, Karnataka) enacted provision of ‘Entry Tax’, which is payable at
the time of entry of goods in the state. However, for subsequent sale of such goods
the dealer is entitled to claim remission in the VAT payment equivalent to ‘Entry
Tax’ paid by him i.e. the total sum of amount of state levy remains the same (
equivalent to VAT), but it is paid as two different nomenclature of tax i.e. Entry Tax
and VAT. Thus, the ‘Entry Tax’, collected/ paid in lieu of applicable VAT, should
also be added in the exclusions list, while determination of ‘Valuation of Taxable
Service’ in ‘Works Contracts’.
V.
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VI.
Similarly, the employer deducts 1% of the Gross bill amount as labour cess for
payment to ‘Building & Labour Welfare Board’ as per statutes of respective state. It
is to be noted that the Labour cess is payable @ 1% on the ‘Cost of Construction’,
which includes ‘Service Tax’, it implies that ‘Labour cess’ is payable @ 1% on ‘Service
Tax component embedded in the cost of construction.
However, while determining the ‘Value of Taxable Service’, there is no clarity
regarding exclusion of ‘Labour cess (Rule 2A), thereby resulting payment of ‘Service
Tax’ on ‘Labour cess’ also. In other words, it is cross-taxation of two different tax
amounts i.e Labour cess is levied on ‘Service Tax’ amount at the same time Service
Tax is also levied on Labour cess amount.
Similarly, CST is also a Central sales tax collected on Inter-state procurement of
goods transactions. Beside it, the Octroi and LBT is also collected on the goods. Nonclarity regarding exclusion of the same in determination of ‘Valuation of Taxable
Services’ has resulted payment of ‘Tax over Tax’, which is against the general
principles of taxation and also do not match with the excise rules.
In view of anomalies explained herein above, Rule 2A of Service Tax may be suitably
modified to exclude not only VAT but also all other State levies/Cess including Central Sales
Tax from the value of taxable services to be considered under “Works Contracts” in
consonance with the Section `4’ & `4A’ of Central Excise Act, 1944.
CFI sincerely hopes that a positive consideration is given to our submissions and appropriate
clarification /instructions are issued for overall facilitation.
We shall also be thankful to have an opportunity for explaining our submissions on the subject
matter in person, in case of need, at your convenience and time.
With kind regards,
Yours sincerely,
(Siddharth Singh)
Secretary General
CC: Shri V K Garg
Joint Secretary (TRU –II)
CBEC