Is Service Tax Applicable When a Contractor Gets P.F. Reimbursement from a Company?

Dear sirs, my question is, "If a contractor receives reimbursement of the P.F. amount from the company, will service tax be applicable on that?"

Regards

If the contractor is paying PF or reimbursing PF for workers from the company, then no service tax is applicable. PF is a legally deposited amount, and hence no service is provided in this amount; only administrative/other charges are applicable. The same applies to ESI.

Best Regards,
Global Overseas - Delhi office

One of my friends is a labor contractor. Recently, during the service tax assessment by the inspector, he was asked to pay a sum of Rs. 5 lakhs as (service tax + penalty) on the amount of P.F. he has charged separately from the company towards the employer's share of P.F. contribution. Is it correct? If so, under which section can I seek the relevant information?

Billing Practices for Contractors

Normally, the contractor will bill the principal employer for the actual salaries paid to their employees engaged for the principal employer, in addition to the contributions they make on those wages towards ESI, EPF, Welfare Fund, etc. This also includes the monthly element of statutory bonus payable by the contractor and the service charge. The Service Tax is calculated at the applicable rate (10.3%) on the total charges, which encompass wages, statutory contributions and payments, and the contractor's service charges (their own take as a contractor).

If your practice is to bill only for wages and then collect the statutory payments separately, the Service Tax authority's demand is correct because your bill only mentions the payouts to workers. It should have been the total cost to the contractor that is recovered from the principal employer and subject to service tax. Now, it has become the contractor's liability to pay the service tax. If it had been billed on a gross basis, they could have collected it from the principal employer.

Regards,
Madhu T.K

If the contractor raises a separate invoice for PF/ESI amounts from the principal employer, then the service tax is liable to be paid by the contractor itself. In this case, the PF inspector is correct. Please make changes to the invoice/bill. By doing so, you can reduce your penalty. Let's discuss this further via email.

Thank you.

Regards

My name is Pragnesh Patel. In reference to our earlier discussion, our company's contractor has issued separate bills for PF remittance and the contract employees' salary. In this scenario, what is the company's responsibility regarding separate service tax on PF remittance?

Regards,
Pragnesh Patel
[Phone Number Removed For Privacy Reasons]

Contractor Billing and Service Tax

A contractor is billing the principal employer for the supply of manpower at X rates. The X should include the component of PF as well as the contractor's profit. Additionally, on the X amount, the contractor also charges the employer at a rate of 12.36% for service tax. Therefore, the contractor is liable to pay the service tax.

Regards,
Pon

Dear Sir,

Our company's contractor gives us two bills every month. One is the current month's manpower supply bill with a service tax of 12.36%, and he also provides us with the last month's PF remembrance bill with 12.36% service charges. For instance, in March 2014, the company contractor gave us the bill for manpower service for February 2014 and the PF remembrance bill for January 2014.

Question About Service Charges

Sir, my question is, PF is a statutory liability of the company, and the company also pays both parts of PF to the contractor—first in the bill of monthly manpower (12%) and the second one in the PF remembrance bill (13.61%). Then why does the company pay service charges twice?

Please tell me if this is right as per legal laws.

Regards,
Pragnesh Patel

Service Tax Calculation on Labor Component in Cleanliness Contracts

I am working in Railways, and we are awarding cleanliness contracts, which are mainly labor-oriented contracts. In such types of contracts, service tax is a statutory component that is to be calculated on the labor component.

Components of the Labor Component

Regarding the labor component, it includes the following three parts:
(i) Minimum wages applicable as notified by the Government.
(ii) ESI (Employees' State Insurance).
(iii) EPF (Employees' Provident Fund).

Concepts for Calculating Service Tax

There are two concepts for calculating service tax on the labor component:
(a) In some departments, service tax on the labor component is being calculated on the sum of minimum wages and ESI only, and EPF is not counted as the EPF amount is refundable.
(b) Whereas in some departments, service tax is calculated on the sum of minimum wages, ESI, and EPF.

I want to know the exact rule for the calculation of service tax, whether it will be calculated on the sum of minimum wages and ESI only or on the sum of minimum wages, ESI, and EPF. If there is any circular from the concerned ministry on the matter, the same may please be quoted.

Regards,

Devi Lal

Service Tax Rates and Responsibilities

The thread was started in 2011, and hence the service tax rates quoted are not the ones applicable now. It has increased and is 14.5% at present. The tax is to be paid by the principal employer on the total bill value, which will obviously be the total cost to the contractor plus his service charges, which will be around 8.33% of the total payout by way of wages, ESI, PF, etc.

If the contractor is a company (private limited or public limited), then the service tax will also be included in the bill and paid by the contractor. Whereas if the contractor is a proprietor or partnership kind of organization, then he will not show it in the bill. He will only show the amount due to him from the principal employer, i.e., the wages, PF/ESI, etc., and the service charges. The principal employer will have to pay 14.5% of the invoice amount as service tax. In both cases, the burden/cost is on the principal employer and is calculated on the total amount payable to the contractor.

Regards, Madhu.T.K