indirect tax implication on lstk contracts
TRANSCRIPT
Indirect Tax Implication
on
LSTK Contracts
LSTK contracts involve supply of material and services.
Hence it is covered under definition of works contract
under VAT/CST Act as well as Service Tax Laws.
Indirect tax implications on material & service
component of LSTK (works) Contract:
- Customs/Excise Duty on Material Component
- VAT/CST on Material Component
- Service Tax on Service Component
- Constructional Machinery/Equipment imported for
execution of LSTK Contracts
LSTK is a Works Contract
Tax on Material Component of LSTK Contract
Customs Duty on Import of specified Goods for LSTKContract of E&P:
Sl. No. 356/358/359 of N/N 12/2012-Cus allows Contractor toimport goods (as specified in List-13) for execution of LSTKcontract in eligible PEL/ML area without payment of CustomsDuty, subject to:
Production of Essentiality Certificate (EC) from Directorate
General of Hydrocarbons (DGH);
Undertaking from ONGC that contractor is a bonafide
contractor of ONGC and ONGC undertakes to pay
Customs Duty, Fine or Penalty in case of non-compliance.
Cont….
Tax on Material Component of LSTK Contract
Customs Duty on Import of parts & raw materials formanufacture of goods to be supplied in Offshore forE&P:
Sl. No. 357 of N/N 12/2012-Cus allows Contractor to importparts & raw materials for manufacture of goods to be suppliedin connection with the purposes of offshore oil exploration orexploitation, subject to:
Production of Essentiality Certificate (EC) from Directorate
General of Hydrocarbons (DGH);
Tax on Material Component of LSTK Contract
If import of line pipe is covered under N/N 2/2014-
Customs (SG), the Safeguard Duty as mentioned below
shall be levied, on import from developed countries or
from Republic of China. Such duty is leviable even if
imported goods are for PEL/ML/Exempt:
Cont…
Period Rate of Duty
From 13.08.2014 to 12.08. 2015 20% Ad valorem
From 13.08.2015 to 12.08. 2016 10% Ad valorem
From13.08.2016 to 12.02. 2017 5% Ad valorem
Tax on Material Component of LSTK Contract
Cont…
- No Safeguard duty on domestic supply of specified pipes.
- Safeguard duty to be levied on assessable value of imported pipes
from specified Countries.
- As per N/N 112/2009-Cus, if raw material are imported for
manufacture of final goods covered for levy of Safeguard Duty,
then import of such raw material against Advance Authorization
shall be exempt from Safeguard Duty.
Tax on Material Component of LSTK Contract
Import of Constructional Machinery/Equipment without
payment of Custom Duty:
If Constructional Machinery/Equipment was imported without
payment of Custom Duty in terms of Sl. No. 356/358 of N/N
12/2012-Cus, such machinery/equipment should be exported back on
completion of Work.
Alternatively, in terms of N/N 28/2013-Cus read with Circular No.
21/2013-Cus, such equipment can be transferred to another Licensee
(Operator) for petroleum operation in eligible PEL/ML area or NELP
Block. However, in this case, contractor must provide copy of Bill of
Entry duly allowed by Custom for such transfer along with discharged
copy of undertaking given by ONGC at the time of Import.
Tax on Material Component of LSTK Contract
Import of Constructional Machinery/Equipment on
payment of Custom Duty (CD):
N/N-27/2008-Cus allows import of goods taken on lease by
importer for use after importation at rates specified below,
however Importer to submit Bond & Bank Guarantee (BG) for
balance CD:
However, no duty drawback shall be available on such exports.
Period of Use Custom
Duty
BG
For use of 6 Months 15% of CD 85% of Custom Duty
For use of 12 Months 30% of CD 70% of Custom Duty
Domestic sourcing of specified goods for LSTK
Domestic sourcing of goods (as specified in List 13 and theimport of which is Exempted under Customs) for execution ofLSTK contract awarded under ICB is covered at para 8.2(f)of Foreign Trade Policy (FTP) as deemed export and benefitof deemed export as indicated at para 8.3 of FTP would beavailable. Benefits:
- Import of raw material without payment of Customs Dutyagainst Advance Authorization issued based on ProjectAuthority Certificate (PAC) issued by ONGC;
- Exemption from terminal Excise Duty based on EssentialityCertificated Issued by DGH.
Tax on Material Component of LSTK Contract
Tax on Material Component of LSTK Contract
Other provisions on domestic sourcing of specified
Goods for LSTK
- Sl. No. 336 of Central Excise N/N 12/2012-CE allows
upfront exemption from payment of basic excise duty on
the basis of EC issued from DGH, if supply is under ICB.
- Even if Contractor is not a manufacturer and purchasing
goods from other manufacturer (Sub-contractor), such
manufacturer is also eligible for the benefit of deemed
export/upfront exemption of terminal excise.
In such case, the name of such manufacturer (Sub-
Contractor) should be indicated in the contract and on
EC/PAC.
Tax on Material Component of LSTK
Contract
EPCG Benefits for Import:
Benefit of customs duty exemption under Sl. No.
356/358/359 is not available for LSTK contract in Non-
eligible PEL/ML area. However, ONGC may avail the
benefit of EPCG Scheme which allows:
- import of capital goods at NIL rate of customs duty on
strength of EPCG. Here, ONGC would be importer and
Contractor would be responsible for Customs clearance
under procedure of high sea sale and would be custodian
of goods till completion of contract.
Tax on Material Component of LSTK
Contract
EPCG Benefits for Domestic sourcing:
- In case of domestic sourcing of capital goods by
contractor, ONGC would provide EPCG License duly
invalidated in favour of manufacturer/contractor for:
- Duty free import of raw material for manufacturing of
such capital goods or duty drawback
- Claiming refund of terminal excise duty from DGFT
Tax on Material Component of LSTK Contract
VAT/CST on Material Components:
In case of LSTK contract, the sale takes place on
commissioning i.e. Sale of works between Contractor and
ONGC.
VAT/CST in case of Imported Material: No VAT/WCT is
leviable on material imported without payment of Custom
Duty on the strength of EC as it would be treated as
purchase in the course of import. [SC decision in CIVIL
APPEAL NO.1123 OF 2003]
Tax on Material Component of LSTK Contract
On commissioning of works, the sale transaction is
between contractor and ONGC:
- ONSHORE PROJECT: On execution of onshore works
contract, VAT/WCT would be applicable as sale between
Contractor and ONGC. Contractor is eligible for Input Credit of
VAT paid on local purchase of material while discharging
VAT/WCT liability. However, such input credit is normally not
available, if VAT/WCT liability is discharged under composition
scheme.
- OFFSHORE PROJECT: No VAT/WCT is payable on
transfer of ownership on commissioning of project/works i.e. sale
of works in offshore by contractor to ONGC.
Tax on Service Component of LSTK Contract
ServiceTax:
• Service tax is payable on value of service portion in the
execution of works contract.
• If the contract provides for value of goods and value of
service separately, the service tax shall be payable only on the
value of service.
Tax on Service Component of LSTK Contract
Where value of goods and service are not available
separately in the contract, Rule 2A (ii) of Valuation
Rules, 2006 provides:
Sl. Particulars Value for Service Tax
(A) Original works 40% of total amount
charged
(B) Other than Original Works 70% of total amount
charged
Tax on Service Component of LSTK Contract
CENVAT Credit to LSTK Contractor:
• ServiceTax paid under Actual Method:
- CENVAT Credit of service tax paid on Input Service shall beallowed.
- CENVAT Credit of Excise Duty/CVD paid on Inputs forming partof taxable value shall be allowed.
• ServiceTax paid under Composition Method:
- CENVAT Credit of service tax paid on Input Service shall beallowed.
- No CENVAT Credit of Excise Duty/CVD paid on Inputs shall beallowed.
Note: CENVAT Credit of Duty/CVD paid on Capital goods isallowed under both the scenarios.