indirect tax implication on lstk contracts

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….


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);


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


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.


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.


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.



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


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]


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.


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


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.

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indirect tax implication on lstk contracts

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