The Hindu Business Line : Composition scheme only for deals done after June 1, 2007

New Delhi, Jan 16 The Finance Ministry has taken a view that the composition scheme for service tax payment on works contract would only have prospective effect, that is for fresh contracts entered after June 1, 2007.

This would imply that commercial or residential construction service providers cannot switch over to or opt for the composition scheme by rewriting an ongoing contract that commenced prior to June 1, 2007.

The Finance Ministry’s stance on this matter has come in response to clarification sought by the trade on whether a service provider could revise the classification of a single composite contract entered prior to June 1, 2007 into works contract and pay service tax on the amounts received after June 1, 2007 under the composition scheme.

Works contract services came under the service tax net on June 1, 2007. The composition scheme under a works contract provides an option to pay service tax at 2 per cent of the gross amount charged for such a contract.

“Vivisecting a single composite service and classifying the same under two different taxable services depending upon the time of receipt of the consideration is not legally sustainable”, the Ministry clarified.

Official sources pointed out that there was a condition in the composition scheme that barred service providers from entering and exiting the scheme during the term of the contract.

“To avail the benefits of composition scheme, one must enter at the beginning of a contract and stay till the end. You cannot in between switch or opt for the composition scheme under works contract”, a Ministry official said.

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