January 8, 2014
Taxation of works contract is more complicated and the provisions are different under different taxation rules. Since the provisions related to service tax on works contract is broad, here we are going to discuss only the definition of works contract.
Definition of Works Contract under Service Tax
Section 65B (54) defines Works Contract as 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, 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.
Therefore, works contract involves both the transfer of property in goods and the services for the above-mentioned purposes. Suppose, a contract is carried out for repairing of any machinery and all the tools are provided by the owner of the machinery, such contract is not considered as works contract as there is no transfer of property in goods involved. Such services would be taxable as how any other service is taxed.
Another example, if a contract is carried out for renovation of a building and all the materials like bricks, cements are provided by the contractor himself, such services are considered as works contract and service tax levied on the service portion of renovation and not on the goods.
Earlier only the service related to construction of building were considered as works contract. With the inclusion of word ‘any movable’, the definition of works contract has been widened to include all other contracts of such services including those on immovable properties.
Applicability of Definition of Works Contract in other Tax Laws
Though the definition of works contract is similar to most of the state’s VAT laws, some states have different definition for works contract. Such definitions does not affect the definition mentioned in the section 65B (54) for service tax purpose.
Clarification of Definition for some Services
In order to clarify some doubts, the department of service tax has given the guidance notes for the definition of works contract for some specific services as follows:
- Labour contracts are not covered in the definition of works contract as there is no transfer of property in goods involves in such contracts. Such contracts are taxable like any other service and on full value.
- Contracts for repair and maintenance of movable properties are also considered as works contract if property in goods is transferred while executing the contract.
- Pipelines or conduits are structures on land, so construction of such contracts also included in works contract definition.
- Contracts for erection, commissioning or installation of plant, machinery, and equipment or structures where prefabricated or otherwise are treated as works contract if transfer of property in goods involved.
- Contracts for painting, repairing and renovation of a building, wall tiling, and flooring are covered under works contract if the materials for the service are provided by the contractor.