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Service tax on infrastructure sector sub-contractors to stay
May, 12th 2011

The Central Board of Excise and Customs (CBEC) has said infrastructure sectors such as dams, roads and tunnels will be liable to service tax if 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% 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 CBECs 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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