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Service Tax - Works Contract Service - An insight into AP High Court decision

THE Hon'ble Andhra Pradesh High Court, on 7.6.2010 delivered a judgement in M/s Nagarjuna Construction Company Limited v. Union of India (W.P.No. 6558 of 2008) - 2010-TIOL-403-HC-AP-ST on the issue relating to payment of service tax under Works contract service, availing the composition scheme. The decision, coming after a period of exactly three years from the date of introduction of service tax on works contract service has sent anxious ripples across the construction industry. The High Court has held that a service provider who paid service tax prior to 1.6.2007 under the categories of ‘erection, commissioning or installation service/ construction services' is not entitled to avail the benefit of composition scheme provided under the Works Contract (Composition scheme for Payment of service tax) Rules, 2007 (hereinafter referred to as ‘Composition scheme'). With due respect to the Hon'ble High Court, the present article attempts to analyse the Hon'ble A.P High Court's decision in denying the composition scheme to Works contracts started prior to the introduction of Works Contract Service. (B) Position of Law:

Rule 3 of the Composition Scheme :

Rule 3(1) of the Composition scheme provides that a service provider liable to pay service tax under Works contract service has an option to pay tax at a reduced rate of 2% /4%, as the case may be on the gross amount charged for the works contract, instead of paying at the rate specified under Section 66 of the Act. Rule 3(3) further states that the service provider has to exercise such an option prior to payment of service tax in respect of the said works contract, which is applicable to the entire works contract and cannot be withdrawn until the completion of the said works contract.

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