Service tax liable on infrastructure sector and sub-contractors

The Central Board of Excise and Customs (CBEC) have decided to stay with the service tax on infrastructure sectors such as dams, roads and tunnels if the projects are executed through the sub-contracting route.
Clarifying its stand, the CBEC said, “Sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by sub-contractor.” This essentially means the 10.3 per cent service tax will continue to be applicable to sub-contractors.
The works contract service (WCS) in respect of construction of dams, tunnels, road, and bridges is exempt from service tax. WCS providers engage sub-contractors who provide services such as architects, consulting engineers, construction of complex service, design, erection commissioning or installation, management, maintenance or repair, among others.
In a representation, Jaiprakash Associates had sought to extend the benefit of such exemption to the sub-contractors providing various services to the WCS provider, arguing that the service provided by the sub-contractors are ‘in relation to’ the exempted WCS and hence they deserve classification under WCS itself. Jaiprakash Associates moved the Delhi High Court, which referred the matter to the competent authority in February this year.
Industry feels that with the CBEC’s reiteration of its stand, the large developers will continue to bear the additional liability. M Murali, director general, National Highways Builders Federation, said, “A repercussion in the range of at least 6-8% on the cost of the projects is seen owing to this. In build, operate and transfer project, the developer will not have the capacity to implement the entire project on his own. There are many aspects to an infrastructure project like deign, architecture, equipment procurement, which have to be arranged only through sub-contracting.”
Dharmesh Panchal, executive director, PricewaterhouseCoopers, said CBEC has rightly clarified that individual services provided by various sub-contractors for infrastructure projects such as road, dams, etc. will be taxable if they are classified under categories other than commercial or industrial construction services and WCS.

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