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Applicability of VAT and Service Tax on Annual Maintenance Contract

Mr.Sudarshana is a Partner of Top Class Services, a service provider in photocopier, scanners, etc. They take up Annual Maintenance Contract (AMC) of photocopier machines. While providing the service (AMC), apart from their labour, they also change or replace parts. They want to know the applicability of VAT and Service Tax on AMC.

Take for example, an AMC bill is raised for Rs.1,00,000 on ABC Company by M/s.Top Class Services.

Both Service Tax and VAT are applicable

When the service provider cannot bifurcate the value of services in a contract, it amounts to composite contract or indivisible contract. In such cases both Service Tax and VAT are applicable on such contracts.

Service Tax (ST)

By virtue of Rule 2A of the Service tax (Determination of value) Rules, 2006 – (B) in case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods; service tax shall be payable on 70% of the total amount charged for the works contract.

In the above example, ST at 14.50% is on 70% of Rs.100000, i.e., Rs.70000*14.50% = Rs.10,150

Value Added Tax (VAT)

As per Section 2(37) of Karnataka Value Added Tax Act 2003 ‘Works contract’ includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.

Rule 3(2)(m) of  Karnataka Value Added Tax  Rules 2005 specifies  the rate  at which  Labour  charges and other like charges will be calculated in the execution of a works contract when such  charges are not ascertainable from the books of accounts maintained by a dealer. Such specified rate for all the works contract except the ones specified in Sl. No. 1 to 13 of the table is 25% of the Total Value of the Contract. For the purpose of VAT, Value of transfer of Goods is considered, so the Value for the purpose of Charging VAT shall be 75% of the Total value of the Contract (100-25 =75).

In the above example, VAT at 14.50% is on 75% of Rs.100000 i.e. Rs.75000 * 14.50% =10875.

What? Tax on Rs.1,45,000 on an Invoice of Rs.1,00,000?

Yes. You read it right. Unfortunately, one has to pay ST on Rs.70,000 and VAT on Rs.75,000 at 14.50%. It is a big joke, but true!

Who has to pay VAT and ST?

  • VAT – to be collected from the customer and paid to the government
  • ST – to be collected from the customer and paid to the government. However, where a works contract is executed by an individual, HUF or a partnership firm and rendered to a body corporate (i.e., a company), 50% of the service tax shall be paid by the Company (service recipient) on reverse charge mechanism and the balance to be collected and paid by the service provider.

Will GST help? Yes. If GST comes, this kind of anomaly will disappear.

 

Thought for the day

Everything is simpler than you think and at the same time more complex than you imagine.

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