India: Service Tax Rate Change on Works Contracts
Effective from October 1, 2014, the service portion of some works contracts will be subject to more tax based on a new valuation formula. Service tax on works contracts is shared equally by the provider and recipient and the valuation and tax rate is governed by Rule 2A of the Service Tax (Determination of Value) Rules 2006 which provide for two options to determine the value of the service element of a contract:
Option 1: The value should be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in execution of the contract.
Option 2: The value to be determined by a fixed percentage of the works contract based on three distinct categories:
- Type 1: Original Works. Valued at 40% of the total amount charged for the works contract.
- Type 2: Works contracts for maintenance, repair, reconditioning, restoration or servicing of goods. Valued at 70% of the total amount charged for the works contract.
- Type 3: Other works contracts including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, and installation of electrical fittings of an immovable property. Valued at 60% of the total amount charged for the works contract.
The 2015 Union Budget has amended the above so that Types 2 and 3 have been merged into a single category with a service valuation of 70%. The change will come into force on October 1, 2014.