Infra projects to turn costlier with sub-contractors to pay service tax

The construction of dams, tunnels, roads and bridges is set to become costlier.

This is because the Finance Ministry has ruled that sub-contractors and consultants will have to pay service tax on all taxable services provided by them to a works contract service (WCS) provider engaged in the construction.

The service tax will be applicable on input services availed of by a WCS provider and thereby lead to increased project cost for contractors. Sub-contractors are expected to pass on the service tax burden to the WCS provider.

Moreover, this principle is likely to be followed by the Excise Department, which administers service tax, in all WCS cases including those service providers engaged in construction of airports and ports, say tax experts.

Exemption

Currently, WCS on construction of dams, tunnels, road and bridges is exempt from service tax. Jaiprakash Associates Ltd had approached the Revenue Department seeking extension of this exemption benefit to the sub-contractors providing services to the WCS provider.

The company had argued that the services provided by the sub-contractors are ‘in relation to' the exempted works contract service and hence deserve classification under WCS itself.

However, the Revenue Department rejected the suggestion that services provided by the sub-contractors need to be classified under WCS for service taxation purposes.

Receiving services

In this case, the service provider is providing WCS and he in turn is receiving various services such as architect services, consulting engineer services, construction of complex, design service, erection, commissioning or installation, management, maintenance or repair etc, which are used by him in providing output service.

Descriptive sub-clause

The Revenue Department noted in a circular that the services provided by sub-contractors of WCS providers are classifiable under the respective heads and not under WCS. When a descriptive sub-clause is available for classification, the service cannot be in another sub-clause which is generic in nature, the Department said.

“By this circular, the Revenue Department has reinforced the principle that input services need not be necessarily service tax exempt just because the output service is service tax exempt. Input services will have to be taxable under the individual heading they belong to. A contractor will have to factor in this service tax on input services in his project cost,” Mr Pratik Jain, Executive Director, KPMG, told Business Line .

COMMENT NOW