The Finance Ministry has sought to soften the blow on service tax levy on services rendered by sub-contractors to a works contract service (WCS) provider engaged in infrastructure projects.

If the services provided by the sub-contractors to the main contractor are independently classifiable under the WCS, then they too will get the benefit of exemption so long as they are in relation to the infrastructure projects undertaken by the main contractor (WCS provider), the Central Board of Excise and Customs (CBEC) has clarified.

Currently, works contract service on construction of dams, tunnels, roads and bridges is exempt from service tax.

The Finance Ministry had in May this year clarified that sub-contractors will have to pay service tax on all “taxable services” provided by them to a WCS provider engaged in construction of infrastructure projects.

The May circular had prompted the industry to contend that service tax will be applicable on input services availed of by a WCS provider and thereby lead to increased project cost for contractors, as sub-contractors are expected to pass on the service tax burden to the WCS provider.

This had led to doubts on whether the exemption available to the WCS providers in respect of projects involving construction of roads, airports, railways, transport terminals, bridges, tunnels, dams etc., is also available to the sub-contractors who provide works contract service to these main contractors in relation to those very projects.

By a circular issued last Friday, the CBEC has now clarified that service tax exemption benefit will also be available to sub-contractors where the services rendered to the main contractor are independently classifiable under WCS.

“Thus, it may happen that the main infrastructure projects of execution of works contract in respect of roads, airports, railways, transport terminals, bridges tunnels and dams, is sub-divided into several sub-projects and each such sub-project is assigned by the main contractor to the various sub-contractors. In such cases, if the sub-contractors are providing works contract service to the main contractor for completion of the main contract, then service tax is obviously not leviable on the works contract service provided by such sub-contractor”, the CBEC circular said.

The latest circular is not a u-turn by the revenue department, but should be seen as a beneficial circular issued by CBEC as it expands on the clarification issued by it in May this year, say tax experts.

“The circular clarifies that if services provided by sub-contractor are per se exempt from service tax, it would continue to enjoy the exemption, even if the services are provided to main contractor. This is helpful for the industry and clears the ambiguity around the issue,” Mr Pratik Jain, Executive Director, KPMG India, told Business Line.

However, it would be important to ensure that the terms of the contract between the contractor and the sub-contractor clearly brings out the nature of work being performed, particularly in case where the contract involves multiple activities, which is common in industry, Mr Jain added.

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