Calculation of Service Tax on Works Contract Example

Works contract is a specialized contract that involves both goods and services. In India, Service Tax is charged on works contract. In this article, we will discuss how to calculate Service Tax on works contract with an example.

First, we need to understand what works contract is. Works contract is a contract where goods are supplied and services are also provided. For example, if a contractor is asked to build a house, he will have to supply the raw materials and also provide the services of construction. In such a case, it is a works contract.

The Service Tax on works contract is calculated based on the value of the contract. The value of the contract is the total amount charged by the contractor for the supply of goods and services. However, there are some deductions that can be made from this value to calculate the taxable value of the contract. These deductions include:

1. The cost of goods supplied is deducted from the total amount charged.

2. The value of any exemption or abatement granted is deducted from the total amount charged.

3. The value of any contract for which Service Tax has already been paid is deducted from the total amount charged.

Once these deductions are made, the taxable value of the contract is calculated. The Service Tax is then charged on this taxable value.

Here is an example of how to calculate Service Tax on works contract:

A contractor is hired to build a house. The total amount charged by the contractor is Rs. 10,00,000. The cost of materials supplied by the contractor is Rs. 3,00,000. An exemption of 25% is granted on the value of the contract.

To calculate the taxable value of the contract, we need to deduct the cost of materials and the value of the exemption from the total amount charged.

Total amount charged = Rs. 10,00,000

Cost of materials supplied = Rs. 3,00,000

Value of exemption = 25% of Rs. 10,00,000 = Rs. 2,50,000

Taxable value of the contract = Total amount charged – Cost of materials supplied – Value of exemption

Taxable value of the contract = Rs. 10,00,000 – Rs. 3,00,000 – Rs. 2,50,000

Taxable value of the contract = Rs. 4,50,000

The Service Tax on the taxable value of the contract is then calculated. The Service Tax rate in India is currently 18%.

Service Tax = Taxable value of the contract x Service Tax rate

Service Tax = Rs. 4,50,000 x 18%

Service Tax = Rs. 81,000

Therefore, the total amount payable by the contractor for Service Tax is Rs. 81,000.

In conclusion, calculating Service Tax on works contract requires careful consideration of the deductions that can be made from the total amount charged. By following the above example, contractors and service providers can accurately calculate their Service Tax liability, ensuring compliance with legal and financial requirements.