Works contract service - How to compute small scale exemption?
RECENTLY, an assessee has encountered a strange problem. He is a service provider under works contract and opted to pay service tax under composition scheme at the rate of 4% on the gross amount. He wanted to avail the exemption of Rs 10 lakhs available under Notification No 6/2005-ST. He satisfied all the conditions of the Notification. The only issue is how to compute the aggregate value not exceeding rupees ten lakhs for works contract service. Since there is no separation of goods and service in his works contract, he does not want to limit the exemption to first 10 lakhs of the amount received as it includes material value.
The assessee informed us that he encountered different propositions from different sources. One theory is, (can we call CAG theory?) since the levy under works contract is at 4% under composition, the 10 lakhs exemption should be reduced on pro-rata basis to 10 lakhs multiplied by 4 divided by 10 ( normal rate of service tax).
Another theory is (can be called “the consultant theory”) that the exemption should be in fact, enhanced on pro rata basis by multiplying 10 lakhs with 10 divided by 4, which gives an exemption up to 25 lakhs for works contract. This theory is supported by the argument that under small scale exemption, the Government is ready to forego service tax of Rs 1 lakh ( at 10% on 10 lakhs value). So for works contract service, the value for revenue of 1 lakhs would be Rs 25 lakhs. Sounds convincing.
But apparently a clarification or an amendment would help the tax payers (stakeholders) .