Payment of Service Tax on Works Contract: Everything You Need to Know

Works contract is a type of agreement where a contractor undertakes to complete a specific project or work for their client. Such a contract includes labor, services, and materials supplied by the contractor. Service tax is applicable on works contracts under the Finance Act, 1994. If you are a contractor or a business owner, it is essential to understand the payment of service tax on works contract.

What is a Works Contract?

A works contract is any agreement that results in construction, repair, renovation, alteration, or maintenance of immovable property. It may also include a contract for the fabrication or manufacture of any movable property. Works contract is a composite supply of goods and services, where goods and services are supplied together as a single package.

Payment of Service Tax on Works Contract

Service tax is levied on works contracts as per the Service Tax Rules, 1994. The amount of service tax payable is calculated as a percentage of the gross value of the works contract. The rate of service tax applicable on works contract varies based on the type of contract and the nature of services provided. Currently, the rate of service tax applicable on works contract is 18%.

The service tax on works contract is payable by the service provider or contractor. The contractor can either pay the service tax themselves or deduct it from the amount payable to the subcontractor. In case the subcontractor is a small-scale service provider, the contractor can issue a certificate stating that they have not exceeded the limit of Rs. 10 lakhs in the preceding financial year. In such cases, the contractor does not have to deduct service tax from the amount payable to the subcontractor.

Under the GST regime, works contracts are now classified as either supply of goods or supply of services. To avoid any confusion and ensure compliance, it is essential to understand the implications of GST on works contracts.

Conclusion

Payment of service tax on works contract is an important aspect that businesses and contractors need to understand. It is essential to comply with the applicable tax laws and regulations to avoid any legal issues or penalties. As a contractor or business owner, it is advisable to consult an expert or seek professional advice to ensure compliance with the tax laws applicable to works contracts.