The Minister of Finance had recently released an updated service tax policy, addressing industry concerns on matters including the broad application of service tax on total construction contract value (inclusive of service and materials), service tax on installation works whereby sales tax is already applied on the supply of goods and EPCC related contracts.
Is service tax applicable on both construction service and materials?
For many construction service providers, the supply of construction materials / goods are part of the contract. Based on the latest Service Tax Policy No. 7 (STP 7), service tax can be imposed only on the value of the construction work services, provided that the following can be complied with:
(1) Separate invoice for construction work services and the supply of construction materials / goods; or
(2) Single invoice with itemised billing, clearly identifying the value of construction work services and the supply of construction materials / goods.
If the value of construction work services and construction materials / goods cannot be separated, then the total value of the invoice will be subject to service tax.
Therefore, it is important to review construction contracts to ensure both portions can be clearly segregated for invoicing purposes.
What is the tax treatment on installation works for manufacturers?
Installation works fall under the broad definition of construction services, that may be subjected to service tax. On the other hand, the supply of goods by manufacturers may also be subjected to sales tax. To address this, STP7 provides clarity on the service tax treatment based on the following scenarios:
(a) For contracts that can separate the value of goods supplied and installation work (service)
Service tax is only imposed on the portion of installation work. The supply of goods is not subject to service tax.
(b) For contracts that do not separate the value of goods supplied and installation work (service)
Sales tax is imposed on the entire contract value if the service provider is a registered sales tax manufacturer. In this, the installation work is treated as part of the value of the goods supplied.
On the other hand, service tax will be imposed on the entire contract value if the service provider is not a registered sales tax manufacturer. In this, the value of goods supplied is treated as part of the installation work.
As such, the application of sales tax / service tax depends on whether the service provider is a registered sales tax manufacturer or not.
It is important to review whether the value of goods supplied and installation work can be segregated, in order to comply the sales and service tax requirements in a correct manner.
What is the tax treatment on EPCC contracts for the construction of ships or platforms?
The industry has the option to determine the meaning of shipbuilding, whether as manufacturing or construction. The application of sales tax / service tax will depend on how the company treats its shipbuilding process.
(a) Shipbuilding treated as construction service
If shipbuilding is treated as construction service (EPCC / design and build), service tax will be applicable. It may also qualify for business-to-business (B2B) exemption for professional services.
(b) Shipbuilding treated as manufacturing service
If shipbuilding is treated as manufacturing activity, it will be categorised as a sale of goods and will be subjected to sales tax. There will be no service tax and there will be no B2B exemption for professional services.
For further information on exemptions applicable to the construction industry, please visit this link.
