The Hindu Business Line : Service in the works

Taxation of works contracts has always been a tricky issue in India. Ever since the early 1970s when the Supreme Court gave a landmark judgement in the Gannon Dunkerly case, the issue has not gone undisputed.

It did not take very long after the service tax was introduced for Daelim Industrial Company to win a case at the CESTAT stating that an indivisible works contract cannot be fragmented into a material and labour contract and the labour portion brought to service tax.

It was made clear that an EPC (Engineering, Procurement and Construction) contract is more in the nature of a works contract and cannot be called a pure-play consultancy contract.

The apex court did not waste any time in dismissing the Revenues petition against the CESTAT order though an uneasy calm prevailed even after that.

Consequent to this, the Apex Court also had an opportunity to discuss as to what constitutes a sale in Uttar Pradesh vs Union of India and the overriding rationale behind those judgements was that a sale of goods is exigible to sales tax which means that the rendition of service should be exigible to service tax.

The Finance Ministry decided to nip this in the bud in 2007 by bringing the services portion of a works contract under the umbrella of service tax but gave an easier composition scheme to the affected tax-payers.

The table below summarises the effect of the composition scheme: Works contract players have not exactly been snow-white in their accounts and they would certainly adopt the composition scheme with open arm since they seem to be better off in most cases.

The effect of Cenvat credit on the players who do no adopt the composition scheme is assumed to be minimal enough to dissuade the contractors from opting for it.

One interesting fallout would be in case the works contractors outsource the services portion to a couple of contractors who are within the threshold limits, then there could be a possibility of the services portion going untaxed. However, the motive behind the composition scheme could be to get as much of moolah as possible instead of thinking up ways to counter the tax-evaders.

The service tax law in India today has become wide enough to bring within its reach any transaction that has even a whiff of a service component in it. With the Goods and Service Tax (GST) not far away, one can only expect more such provisions to tax all and exempt few services.

(The author is a Hyderabad-based chartered accountant.)