You cannot apply composition scheme to ongoing projects

We are contractors engaged in construction of buildings. For the period starting April 1, 2007, we were charging service tax under composition scheme @2% for projects which were already ongoing, based on the budget speech. Recently, the department has asked us to pay service tax at full rate after taking abatement, stating that we cannot opt for works contract scheme for ongoing projects. Can composition scheme option be exercised for ongoing works contracts? —Pravin Bagadia

The works contract scheme was made effective from June 1, 2007. Hence, you cannot charge service tax @ 2% from April 1, 2007 as the category was not in existence prior to June 1, 2007. The board’s circular —- No .98/1/2008 ST, dated January 1, 2008 —- denied the option of the composition scheme to ongoing works contracts. Hence, works contracts could not be made applicable to ongoing projects.

In the case of Nagarjuna Construction Co Ltd vs Government of India, 2010 (19) STR 321 (AP), the brief facts were as under:
The petitioner, engaged in execution of civil works which are ‘works contract’ under Andhra Pradesh VAT laws, took centralised registration under the categories of consulting engineering , commercial construction service, erection, commissioning & installation, construction of residential complex, maintenance or repairs service & site preparation & clearance & transport of goods by road .The petitioner opted for the composition scheme.

However, circular No .98/1/2008 ST, dated January 1, 2008 denied the option of the composition scheme to ongoing works contracts. The petitioner challenged it as irrational, discriminatory, ultra vires under Section 65 (105) (zzzza) of the Finance Act, 1994 & inconsistent with Rule 3 (3) of Works Contract Rules, 2007.

The high court observed that the Central Government under its powers notified the composition scheme which provided a choice to the service provider, in relation to works contract, to discharge service tax liability by paying 4% of the gross amount charged for such works contracts. Rule 3 (3 ) of such rule makes it clear that the service provider must expressly opt for the composition schemes before  payment of service tax thereon and must continue with it till the conclusion of such contract.

The high court dismissed the petition on the following grounds:
The petitioner challenged the circular and not the provision of the Works Contract Rules, 2007 & the circular is in conformity with the Works Contract (Composition Scheme) Rules, 2007.

The petitioner’s claims that services provided by petitioner previously fell under erection, commissioning & installation, commercial or industrial construction and construction of residential complex service but now come under Works w.e.f. June 1, 2007, does not merit any consideration in the facts and circumstances of the case.

The circular merely reiterates the eligibility criteria specified in the Rules and impliedly recognises that certain services taxable earlier under other categories can get satisfied under works contracts after introduction of Section 65 (105) (zzzza).

The writer is with M Sheth & Co, a chartered accountancy firm in Mumbai, and can be reached at mshethco@yahoo.co.in.