Sub-contractor's Service for Works Contract to be exempted from Service Tax: CBEC issues Clarification

(Image taken from here)

The Indian position regarding subjecting Works Contract Service (hereinafter WCS) for building roads, bridges, tunnels, dams and other infrastructure projects to service tax has for quite some time been subject to debates. While WCS in relation to such matters is usually exempted from service tax, queries have been posed as to whether such exemption extends to the sub-contractors appointed by the WCS provider as architect, consulting engineer, constructor of complex service, designer, manager or maintenance personnel. Given that such service provided by those sub-contractors are ‘in relation to' the exempted WCS, thus there seems to be no reason as to why they shouldn’t be classified under WCS so as to avail aforesaid exemption. 

The Central Board of Excise & Customs (CBEC) had earlier, vide Circular No. 96/7/2007-ST, dated August 23, 2007, been of the opinion that any taxable service provided would be subject to service tax, irrespective of whether the provider is acting in his capacity as a sub-contractor and whether such services are being utilized as input services by another service provider. Therefore, according to CBEC Circular No. 138/07/2011–ST, dated May 6, 2011, the services provided by the subcontractors, consultants or other similar service providers can be classified as per Section 65A of the Finance Act, 1994 under respective sub clauses (105) of Section 65 of the Finance Act, 1944 and hence chargeable to service tax accordingly, This seemed to create a logical problem, to the effect that if the whole service provided by the WCS provider is being exempted from service, there appears to be no reason whatsoever as to why service tax should be levied on the partial service outsourced to a sub-contractor either! Having appreciated this problem, CBEC has recently come up with another clarification (vide Circular No. 147/16/2011-ST, dated October 21, 2011) that if the services provided by the sub-contractors to the main WCS provider can be independently classified under WCS, then such services too can avail the benefit of exemption insofar as they are related to infrastructure projects. 

Therefore, as per the current position, if in an infrastructure project, a sub-project is assigned to a sub-contractor and the latter can establish that he is only providing WCS to the main contractor for completion of the main project, then the service provided by the sub-contractor can be exempted from tax. The only problem seems to be a lack of specificity regarding whether this clarification is going to operate in a retrospective manner or not, given that ambiguity regarding such a matter can lead to needless litigation at a time when the number of pending taxation disputes is already increasing exponentially.

[This post has been authored by Shouvik Kr. Guha, LL.M., 1st Year, The W.B. National University of Juridicial Sciences]