Works Contract Abatement Under Service Tax: What You Need to Know
Service tax is a tax imposed by the government of India on services rendered by service providers. Works contract services are a specific type of service that also falls under the ambit of service tax. Works contract abatement is a provision under service tax that allows for a deduction from the taxable value of works contract services. Here`s what you need to know about works contract abatement under service tax.
What is Works Contract Abatement?
Works contract abatement is a provision under service tax that allows for a deduction from the taxable value of works contract services. In simple terms, it means that a certain percentage of the total value of the works contract can be deducted before calculating the service tax payable. This deduction is known as the abatement rate.
Abatement Rates for Works Contract Services
The abatement rate for works contract services varies depending on the type of works contract and the services involved. The current abatement rates for works contract services under service tax are as follows:
– Works contract for original works (i.e., construction of new buildings, roads, bridges, etc.): 60%
– Works contract for maintenance, repair, renovation, or alteration of existing buildings or structures: 30%
– Works contract for other than original works and maintenance, repair, renovation, or alteration of existing buildings or structures (e.g., works contract for mechanical, electrical, or plumbing services): 70%
Calculation of Service Tax on Works Contract Services
The calculation of service tax on works contract services involves the following steps:
Step 1: Determine the total value of the works contract (including all materials, labour, and service charges).
Step 2: Apply the applicable abatement rate to calculate the taxable value.
Step 3: Calculate the service tax applicable on the taxable value (currently 18%).
For example, if the total value of a works contract for original works is Rs. 1,00,000, the taxable value would be calculated as follows:
Total value of works contract: Rs. 1,00,000
Abatement rate: 60%
Taxable value: Rs. 40,000 (i.e., Rs. 1,00,000 x 60%)
Service tax @ 18%: Rs. 7,200 (i.e., Rs. 40,000 x 18%)
Conclusion
Works contract abatement under service tax is an important provision for both service providers and service recipients. It helps to reduce the service tax liability on works contract services, which can be substantial considering the total value of works contracts involved. As a professional, it`s important to understand the nuances of works contract abatement under service tax to effectively communicate the information to the target audience.