‘Sub-contractors in infrastructure projects exempt from service tax'

Services provided by sub-contractors to a works contract service (WCS) provider engaged in infrastructure projects will not have to pay service tax — if they are independently classifiable under the WCS — if they are in relation to the infrastructure projects undertaken by the main contractor.

The Central Board of Excise and Customs (CBEC) clarified this today.

Currently works contracts services on construction of dams, tunnels, roads and bridges are exempt from service tax. In May the Finance Ministry had said 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.

Industry had protested that the service tax will be applicable on input services availed of by a WCS provider and lead to increased project cost as sub-contractors would 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 and dams would also be available to the sub-contractors who provide Works Contract Service to these main contractors in relation to those very projects.

The latest circular issued last Friday makes it clear 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 contracts 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 can obviously not be levied on the works contract service provided by such sub-contractor,” the CBEC circular said.

The latest circular is not an about-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 a sub-contractor are per se exempt from service tax, it would continue to enjoy the exemption, even if the services are provided to the 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 the work being performed, particularly where the contract involves multiple activities, which is common in industry, Mr Jain added.

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