Why Are We Paying Service Tax on the Entire Contractor Bill Instead of Just the Service Charge?

Hello Dear,

As per service tax rules, service tax at 12.36% is calculated on the total bill of the contractor, which includes the contract workers' salaries and the contractor's service charge. The company reimburses the salary to the contract worker through the contractor's bill. The contractor's income is solely from their services. Therefore, why do we pay service tax on the total bill? Additionally, the company provides the company's share of PF to the contractor, and the government levies service tax on that as well. In my opinion, service tax should be based on the service charge of the contractor.

Please provide your valuable comments.

Thank you,
IM Gandhi

"Service Tax, being in the nature of a consumption tax, places the ultimate tax burden on the consumer of services rather than on the service provider."

Your opinion is not correct. Much has been discussed on the matter, and a number of cases have been filed before various High Courts. Finally, the Supreme Court held that the Service Tax is payable on the entire amount of the Contractor Bill, with certain exceptions based on the nature of the contract. If the contract involves manpower supply and other labor-oriented jobs, you have to consider the Service Tax on the entire bill. The treatment is different for construction contractors, transport contractors, etc., where a certain percentage of the contractual amount has to be taken into account for the purpose of Service Tax payment.

Regards,
Venkatartnam Sanagapalli