GUEST COLUMN

COMPLETION AND FINISHING SERVICES

ANALYSIS OF THE VALUATION UNDER SERVICE TAX

By Lakshmi Ratna.K

[Advocate and Senior Associate, Lakshmi Kumaran & Sridharan]

I. Introduction

With effect from 1^st July 2012 after the introduction of taxing services on the basis of a negative list of services, works contract has been defined in manner so as to encompass a wide range of activities.

In this article the author seeks to analyse the present provisions pertaining to valuation of completion and finishing activities under the Finance Act and State Value Added Tax Laws, the impact and suggest plausible solutions/amendments which can be effected vide the Budget 2015-16.

Broadly, the existing framework with respect to completion and finishing works under the Finance Act and the State Value Added Tax Laws is elucidated as follows.

II. Current Scenario

Legal Framework under Service Tax

Service is defined under Section 65B(44) of the Finance Act to mean an activity provided by one person to another for a consideration and includes declared service.

Works contract is defined under Section 65B(54) of the Finance Act to mean 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, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land.

Under the negative list regime, the completion and finishing works provided undertaken qualifies as a works contract of which the service portion in the execution of works contract is a declared service under Section 66E(h) of the Finance Act.

Completion and finishing works involve activities such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure.

The fact that service tax is to be paid on the service portion in the execution of works contract it becomes imperative to ascertain the ‘service portion’ of the works contract.

Valuation Under The Finance Act And Allied Rules

Rule 2A of the Service Tax (Determination of Value) Rules, 2006 (hereinafter referred to as ‘Valuation Rules’) offers two options to the provider of works contract i.e.,

(a) pay service tax on the actual value of the service or

(b) pay service tax based on a percentage of the value of the contract depending on the nature of the contract.

S.No.

Nature of the Activity

Service Tax Payable on

(A)

Original works ( means all new constructions, all new types of additions and alterations to abandoned or damaged structures on land that are required to make them workable and erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise)

40% of the total amount charged for the works contract

(B)

Works Contract not covered under the above Serial No. (A)

i. maintenance or repair or reconditioning or restoration or servicing of any goods

ii. maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property*

70% of the total amount charged for the works contract

*Prior to the amendment, assesses providing works contract not covered by Serial No.(A) and (B)(i) and those in the nature of completion and finishing were liable to discharge service tax on 60% of the total amount charged.

Completion and Finishing Works-Value of Service

Due to the nature of the activity it is not feasible for the service providers to follow the actual value method insofar as completion and finishing works is concerned. Hence, the service providers ascertain the value of the activity on the basis of the percentage method and accordingly discharge service tax.

Under the existing Valuation Rules, there is a specific category for completion and finishing services (under Rule 2A(ii)(B)) which stipulates the percentage on which Service tax is payable. This specific category does not make any distinction between completion and finishing services undertaken for a new building or an old building (as repairs).

Original works covers all new constructions for which the service provider can claim abatement of 60%. In the scenario a service provider undertakes the construction of the building along with the completion and finishing works, the activity would be treated as an original work. However, standalone completion and finishing services merits valuation in terms of Serial No. (B)(ii) i.e., pay on 70% of the value of the contract since a separate category has been carved for ‘completion and finishing services’.

Valuation under Sales Tax/ Value Added Tax Laws

Value added tax (hereinafter referred to as ‘VAT’) is levied on the ‘goods’ portion of the works contract. Under VAT, similar to the percentage method in the situation it is not possible to ascertain the value of goods and services in case of the completion and finishing service, assesses can opt for the labour abatement method (wherein the value attributable to services can be abated to arrive at the value of the material). Accordingly, assesses can discharge sales tax only on the portion of the contract which represents the material portion.

Most of the State VAT legislations provide an abatement of around 25%-30% for completion and finishing activities which implies that VAT is payable on 70% of the total amount charged.

Net Effect

The percentage abatements offered under Service tax and value added tax extrapolate the value of the service on which the taxes are payable (70%+70%=140%). To simplify, the assessee (service provider) ends up paying both service tax and VAT for around 40% of the consideration.

III. Suggestion

Completion and finishing services have not been treated on par with the construction of residential complex service or commercial and industrial construction services for the purpose of abatement in the erstwhile regime as well. One of the plausible reasons could be that such tasks involve lesser material and more service/labour component. However, differential treatment though warranted should not affect the Assesses i.e., the service provider adversely by taxing the value of activity twice. The abatement fixed under the service tax/ the allied Rules cannot be in isolation and in ignorance to the value of contract on which VAT is being discharged by the assesses under various State Value Added Tax laws.

In the light of this, it is suggested that suitable amendments be made with respect to the following:

· Insofar as the existing category Rule 2A(B)(ii) of the Valuation Rules is concerned, reduce the percentage on which service tax is to be paid in case of completion and finishing services. The percentage can be ascertained/arrived at by taking into consideration to average labour abatement offered in various State Value Added Tax legislations.

· A distinction is to be made for the completion and finishing services for new building and completion and finishing services for old buildings which would be in the nature of repair/renovation. After all there is element of originality in completion and finishing services undertaken for new buildings. A suitable clarification may be issued stating that the completion and finishing works carried out for a new building/constructions qualify as original works and that service tax is to be discharged by the service provider on 40% of the value of total amount charged for the contract.

Disclaimer: Views expressed are strictly personal. It doesn’t constitute professional advice or recommendation. Neither the author nor VATinfoline Multimedia accepts any liabilities for any loss or damage of any kind arising out of any information in this article for any actions taken in reliance thereon.