Service Tax – Works Contract – On-going confusion?
NEARLY 14 years ago, the Supreme Court in Ranadey Micronutrients [] said, “consistency and discipline are of far greater importance than the winning or losing of court proceedings”.
Since the day the Service Tax was levied on works contract, there has been confusion and litigation all round.
Now the following confusion/disputes were brought to the notice of the Board, with respect to long term works contracts which were entered into prior to 01.06.2007 (when the taxable service, namely, Works contract came into effect) and were continued beyond that date:
i. While prior to the said date services like Construction; Erection, commissioning or installation; Repair services were classifiable under respective taxable services even if they were in the nature of works contract, whether the classification of these activities would undergo a change?
ii. Whether in such cases of continuing contracts, the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 under Notification No. 32/2007-ST dated 22/05/2007 would be applicable?
And the Board clarifies:-
i. As regards the classification, with effect from 01.06.2007 when the new service ‘Works Contract’ service was made effective, classification of aforesaid services would undergo a change in case of long term contracts even though part of the service was classified under the respective taxable service prior to 01.06.2007. This is because ‘works contract’ describes the nature of the activity more specifically and, therefore, as per the provisions of section 65A of the Finance Act, 1994, it would be the appropriate classification for the part of the service provided after that date. [if it is a new service as admitted by the Board, how could it be taxed from a date prior to its imposition?]
ii. As regards applicability of composition scheme, the material fact would be whether such a contract satisfies rule 3 (3) of the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007. This provision casts an obligation for exercising an option to choose the scheme prior to payment of service tax in respect of a particular works contract. Once such an option is made, it is applicable for the entire contract and cannot be altered. Therefore, in case a contract where the provision of service commenced prior to 01.06.2007 and any payment of service tax was made under the respective taxable service before 01.06.2007, the said condition under rule 3(3) was not satisfied and thus no portion of that contract would be eligible for composition scheme. On the other hand, even if the provision of service commenced before 01.06.2007 but no payment of service tax was made till the taxpayer opted for the composition scheme after its coming into effect from 01.06.2007, such contracts would be eligible for opting of the composition scheme.
iii. The Board’s previous Circular No. 98/1/2008-ST dated 04.01.2008 and the ratio of judgement of the High Court of Andhra Pradesh in the matter of M/s. Nagarjuna Construction Company Limited vs. Government of India () are in line with the above interpretation.
So, the Board wants ongoing contracts to be taxed under 'Works Contract', but no portion of that contract will be eligible for composition. Why? Because, the service provider did not have the wisdom to consult an astrologer before paying the service tax on the future works contract prior to 1.6.2007! Service Tax is so complicated that even seasoned tax experts cannot help you. Astrologers are more reliable, for they can accurately predict the movement of the stars – yours as well as revenue's!
Will the learned Board please clarify:
If works contract is also taxable prior to 1.6.2007 under different heads of construction/erection, commissioning etc, why they have introduced a new service called works contract? If the intention is only for providing an option of composition, why this needs to be termed as a new service?
And why the Board has selective respect for the judiciary? While it is readily accepting the AP High Court order, it has no respect for the Majority order in case of Indian Oil Tanking (), wherein it was held that the work contract service is not taxable prior to 1.6.2007.
In the whole bargain, tax consultants can smile all the way to the bank, for they are the only winners in this unproductive battle of wits.
CBEC Circular No.128/10/2010-ST Dated: August 24, 2010