`More clarity needed in rules regarding works contracts'
Service tax, despite covering 96 services now, is still not a fully evolved system of taxation and is largely administered through notifications and circulars by the Directorate-General of Service Tax (DGST) due to the absence of a full-fledged Service Tax Act.
Speaking at a one-day workshop on `Service Tax: Issues & Controversies', organised by Suvidha Consultants, Mr Bhanu Prakash Agarwal, a practising chartered accountant and expert on VAT and service tax, said that more clarity is needed in the existing Rules with regard to works contracts or export of services "as service tax collections in the next five years may catch up with the combined collections of both direct and indirect taxes."
Levy of service tax is enabled through insertion of Chapter V of Finance Act 2004 and is governed by Service Tax Rules, 1994, Cenvat Rules, 2004 and Export of Services Rules 2005.
Suggesting that total collections under this head are set to leapfrog from Rs 2,613 crore in 2000-01 to nearly Rs 40,000 crore this fiscal, Mr Agarwal said that in coming years collections may touch Rs 2 lakh crore.
On works contracts complications vis--vis service tax, Mr Agarwal said that the Tax Research Unit of the Department of Revenue, through a recent clarification, has cleared many doubts pertaining to applicability of service tax levy on real estate developers/builders.
As per this, where a builder, promoter or developer builds a residential complex having more than 12 units by engaging a contractor for construction, the said contractor is liable to pay service tax on the gross amount charged for services provided, under section 65 (105) of the Finance Act 2004.
If no contractor is engaged and the builder undertakes work on his own, then in the absence of service provider and recipient relationship, the question of providing taxable service to any person by any other person does not arise, he added.
Also, a residential complex intended for personal use and constructed by an individual by directly availing services of a construction service provider is not liable to be taxed under this head.
On whether payment of service tax was a responsibility of service provider or recipient in the construction business, he said that as per section 68 of the said Act and "commercial or industrial construction service falling under relevant sections, every person providing taxable service to any another shall be liable to pay service tax."