Giving a blow to contractors, Budget 2008-09 has proposed that the service tax rate on the composite works contract scheme be doubled from 2% of the total value of the contract to 4%. The increase is applicable from March 1. This will significantly hike the tax rate for contractors registered under the scheme.
The scheme, introduced in the last Budget, brought works contract services in the service tax net. The services included integrated construction and turnkey projects on which value-added tax (VAT) is also levied. Contractors have the option to either register their projects started after June 1, 2007, under the scheme and pay a lower tax rate or pay the existing rate of 12.36% as service tax.
Sources pointed out that the decision to hike the service tax rate under the scheme was mainly to bring the tax rate on a par with the earlier works contract scheme that was applicable from 2004 to 2007. The earlier scheme also had an effective tax rate of about 4% on construction related services.
Commenting on the proposal, BMR & Co partner Rajeev Dimri said, ?It seems that the government has had a rethink on the tax rate for the composite works contract scheme. However, it is too short a time, since the scheme was introduced for revisiting it. This is likely to lead to a lot of confusion amongst the taxpayers,? he added. The proposal, along with the decision to bring contractors and sub contractors working as associations of persons and body of individuals in the tax deducted at source net, is likely to hurt industry. As reported by FE earlier, such groups will be brought under the TDS, as tax authorities feel such groups often manage to evade paying taxes.