The Hindu Business Line : Sub-contract is service tax-free

When a contractor of services subcontracts a portion of services, is it necessary for the sub-contractor to add the service tax in his bill raised against the contractor? As the contractor will raise his bill against the client, will it not be double taxation if the sub-contractor adds the service tax in his bill?

S. Krishnamoorthy

When a service is provided to a client by a person, in some cases it may happen that a portion or a part of the service is carried out by a sub-contractor engaged by that person. This situation arises in respect of services involving different types of work. One example is construction of commercial or residential complexes. In such cases, the services of independent sub-contractors such as carpenters and electricians may be used.

In such cases, it is not necessary that the sub-contractor should pay the service tax for his part of the work. A service is rendered by a person to his client. In respect of a sub-contract, the sub-contractor does not render any service to a client. He only undertakes a part of the job to be carried out by the contractor. Therefore, in such cases, it will be sufficient that the cost of such service provided by the sub-contractor is included in the bill that will be raised by the service provider on the client. As per Section 67 of the Finance Act 1994, the value of a taxable service is the gross amount charged by the service provider for such a service. This way, the cost of the entire service is taken into account and the main contractor or service provider pays the service tax only once. As a result, there will not be any double taxation.

In the context of Custom House Agent services, the CBEC issued an instruction letter dated June 6, 1997 referring to a situation where the agent sub-contracts a part of his work to another person and it was clarified in that letter that the sub-contracting agent is not required to pay any service tax on the bill raised by him on the main agent. It was further stated that the service tax will be payable by the main agent who provides actual service to the client and raises the bill on the client.

Property under construction

I heard from my friend that a recent rule says that Service Tax and Value Added Tax are not applicable for properties under construction. I booked a flat in March 2006 and the flat will be ready soon. How does this work out, if it is true?

Gandhi Gurunathan

There does not appear to be any rule that states that Service Tax and VAT are not applicable for all properties under construction. Probably, you would have heard that construction activities being undertaken in Special Economic Zones will not attract any Service Tax/VAT.

For these activities there is specific exemption. In other cases, construction activities will come under two categories of taxable services, one relating to commercial or industrial construction services and the other for residential complex construction services.

At the same time, it is to be noted that all construction activities relating to construction of residential flats will not come under taxable services. A residential complex is defined in Section 65(91a) of the Finance Act, 1994.

As per the definition, "Residential complex means any complex comprising,

(i) a building or buildings, having more than 12 residential units;

(ii) a common area; and

(iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system... "

In the light of the above definition, if the complex where you have booked your flat has more than 12 residential units with a common area and common facilities, only then service tax will be payable by you.

Send in your queries to MentorAtYourService@gmail.com

http://MentorQA.blogspot.com

S. Murugappan

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