Service tax on Works Contract (Post Negative List)
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This article briefly explains the basics of service tax on works contract after the negative list regime. Also covering some of the old disputed issues in the service tax regime. It also touches upon the basic aspects of Cenvat Credit moreso in an environment, where both taxable and exempt services are being rendered.
Transcript of Service tax on Works Contract (Post Negative List)
Indirect Taxation of Works Contracts –
Service Tax Aspects
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SECTIONS: OLD vis-à-vis NEW w.e.f. 01/07/2012
Sr. No. Content of Section OLD Section NEW Section
1 Section of Definition Section 65 Section 65B
2 Classification of Services Section 65A Section 66F
3 Charging Section Section 66 Section 66B
4 Place of Provision Section 66A Section 66C
5 Negative List (17 Services) - Section 66D
6 Declared Service (Positive List – 9 Services)
- Section 66E
‘SERVICE’- DEFINED• Section 65B (44) defines ‘Services’ as:
– any activity carried out by a person for another for consideration – and includes a declared service.
• not to include:– Transfer in title of:
• Goods – (Kone Elevators Issue)
• Immovable Property (Sale of Plots)By way of sale/gift or in any manner
– Transaction in Money or Actionable Claim– Employment service provided by an employee to employer– Fees payable to court/tribunal
Negative List of Service
1.Services by Government or a local authority2.Trading of goods 3.Any process amounting to manufacture or
production of goods4.Transmission of electricity by an electricity
transmission utility. 5.Service by way of access to a road or a bridge on
payment of toll charges; 8.Betting, gambling or lottery
Definition
Prior to Negative list Regime i.e. 01-07-2012, service tax on construction industry was applicable on the basis of definition of services as under:1) Commercial or Industrial Construction2) Construction of Residential Complex 3) Works Contract Service4) Preferential Location Charges5) Maintenance or Repair Service
‘Service’ and ‘Declared Service’
• In Negative list Regime, definitions of various services are done away with.
• Instead, the term ‘SERVICE’ and ‘DECLARED SERVICE’ has been defined.
• Construction activity is covered in the definition of ‘Declared Service’.
Definition of Declared ServiceWhy Services are Declared?
.The following activities have been specified in section 66E as declared service:
1. Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority;
2. Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software;
3. Service portion in execution of a works contract;
4. Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity.
EXEMPTED SERVICES VIDE NOTIFICATION NO 25/2012-ST(w.e.f. 01-07-2012)
Entry No. 12 - Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of -
• (a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;
• (b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);
• (c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;
• (d) canal, dam or other irrigation works;• (e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii)
sewerage treatment or disposal; or• (f) a residential complex predominantly meant for self-use or the use of their
employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act;
Poser 9 (i)
Critical Issues
• Exemption only if services are provided to Govt / LA / GA
• Civil Structure for commercial use not covered
• Use of Term “Pre-dominantly” vs Exclusively or Solely
• Absence of Term “Pre-dominantly”• Canal, dam and Other Irrigation Works
Contd…Entry 13. Services provided by way of construction, erection, commissioning, installation, completion, fitting
out, repair, maintenance, renovation, or alteration of,-• (a) a road, bridge, tunnel, or terminal for road transportation for use by general public; (Poser 10)
• (b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
• (c) a building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;
• (d) a pollution control or effluent treatment plant, except located as a part of a factory; or• a structure meant for funeral, burial or cremation of deceased;• Entry 14. Services by way of construction, erection, commissioning, or installation of original works
pertaining to,-• (a) an airport, port or railways, including monorail or metro;• (b) a single residential unit otherwise than as a part of a residential complex;• (c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by
competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;
• (d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or
• (e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;
Contd…• Entry 14. Services by way of construction, erection, commissioning, or
installation of original works pertaining to,-• (a) an airport, port or railways, including monorail or metro;• (b) a single residential unit otherwise than as a part of a residential
complex;• (c) low- cost houses up to a carpet area of 60 square metres per house in a
housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;
• (d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or
• (e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;
Poser 9 (ii)
Critical Issues
• General Public defined in Explanation• Status of Service Recipient is immaterial• What are the activities that would fall under
road construction ? E.g. Soil Stabilisation• Charitable Trust – Religious Use• Pollution Control / Effluent Treatment –
Part of Factory
Critical Issues
• Only Original Works – Completion, Fitting, Alteration, Renovation, Repair & Maintenance Not covered.
• Status of Service Recipient not material• Specified Infra Projects covered –
Port/Airport/Rail• Single Residential Unit• Carpet Area• Non-Mechanised Food Grain Handling System
Contd…Entry 25. Services provided to Government, a local authority or a
governmental authority by way of -• (a) carrying out any activity in relation to any function ordinarily
entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation; or
• (b) repair or maintenance of a vessel or an aircraft;
Entry 39. Services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243 W of the Constitution.
What is Governmental Authority ♦ set up by an act of the Parliament or a State Legislature; ♦ established with 90% or more participation by way of equity or control by Government; and ♦ carries out any of the functions entrusted to a municipality under article 243W of the Constitution.
1. Urban planning including town planning.2. Regulation of land-use and construction of buildings.3. Planning for economic and social development.4. Roads and bridges.5. Water supply for domestic, industrial and commercial purposes.6. Public health, sanitation conservancy and solid waste management.7. Fire services.8. Urban forestry, protection of the environment and promotion of ecological aspects.9. Safeguarding the interests of weaker sections of society, including the handicapped and mentally
retarded.10. Slum improvement and upgradation.11. Urban poverty alleviation.12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.13. Promotion of cultural, educational and aesthetic aspects.14. Burials and burial grounds; cremations, cremation grounds; and electric crematoriums.15. Cattle pounds; prevention of cruelty to animals.16. Vital statistics including registration of births and deaths.17. Public amenities including street lighting, parking lots, bus stops and public conveniences.18. Regulation of slaughter houses and tanneries.
Contd…• Clause 29 h – Services by sub-contractor
providing services by way of Works Contract to another contractor providing works contract service which are exempt
Taxability of Sub-contractors
• VAT – Specific Provisions• Excise – Specific Provisions• Service Tax – No specific provisions as such
• Whether Sub-Contractors are liable to service tax?
No service tax on sub-contracted services prior to 23.8.2007
[Sunil Hi-Tech Engineers Ltd v CCE 2010(17) STR 121 (Tri-Mum); See also CCE vs. Shivhare Roadlines (2009) 16 STR 335 (Tri-Delhi); Urvi Construction vs. CST (2010) 17 STR 302 (Tri-Ahmd.)]
Subsequent view of department
• In supercession of the earlier circulars, CBE&C, vide circular dated 23-8-2007 has clarified that a sub-contractor is also a taxable service provider.
• Builder engages a contractor for construction , the contractor in his capacity as a taxable service provider (to the builder / promoter / developer / any such person) shall be liable to pay service tax.
Circular in response to an application made by Jaiprakash Associates issued in May, 2011 + Circular 147/16/2011
Issues :-a) Applicability of ST on sub-contracts of various nature , when main contract is exempted /excluded from preview of services.b) Can a principal contractor take responsibility of tax payment and ask sub
contractors not to charge ST ?
Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services.
The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided.
Services to be independently classified
Poser• M/s ABC has got a road contract of Rs. 100 Lacs from Govt of Goa. The
work is subletted to M/s CBA. M/s CBA does not charge service tax on the presumption that work done by sub-contractor still continues to be ‘road or bridge construction service’ and hence should be outside the service tax net.
• Service Tax department has levied service tax demand stating that the relationship between the contractor and that of sub-contractor is commercial in nature.
• Will Service tax be levied on the same?
• Can the principles of L&T SC Judgement in case of goods be applied to services
• Sec 66F – Reference to a service shall not include reference to service used in providing the main service
• Para 9.1 of Guidance Note – E.g. – Toll – Collection Agency / Transport – Booking Agent
• Services provided in SEZ by sub-contractor to main contractor
• Issue relating to construction service provided sub-contractor in SEZ is more complicated.
• Exemption Notification No. 17/2011-ST dated 1-3-2011 (relating to SEZ) reads as follows –
In exercise of the powers – the Central Government, - - , hereby exempts the taxable services specified in clause (105) of section 65 of the Finance Act, chargeable to tax under section 66 or section 66A of the Finance Act, received by a Unit located in a Special Economic Zone (hereinafter referred to as SEZ) or Developer of SEZ for the authorised operations, from the whole of the service tax, education cess and secondary and higher education cess leviable thereon.
• As per second proviso to rule 10 of SEZ Rules amended w.e.f. 3-2-2009, the exemptions allowed to developer or co-developer will also be available to contractor or sub-contractor appointed by such developer or co-developer.
• Thus, services provided to contractors for ultimate use of developer should also be exempt.
• However, this proviso applies only in respect of SEZ Developer and co-developer and not in respect of SEZ units manufacturing or providing services.
Meaning of ‘received by SEZ Unit or SEZ Developer’• The notification does not use the words ‘directly
received by SEZ Unit or SEZ Developer’. Thus, even if the service is provided by sub-contractor, ultimately it is ‘received by SEZ Unit or SEZ Developer’.
Only one deemed sale and one taxable event even when work is done by sub-contractor
• In Larsen & Toubro Ltd. v. State of Andhra Pradesh (2006) 148 STC 616 (AP HC DB)
Lets not take a chance
• Rule 6(6A) of Cenvat Credit Rules, 2004• No input disallowance for input credit used
in giving services to SEZ• Retrospective effect from 2005
Exemptions under the current regime sought to be withdrawn - Negative Impact on existing exemptions
Sr. No. Pre – Negative List Post – Negative List
1 Site formation and clearance services were exempt under Notification 17/2005 on service provided in the
course of construction of roads, airports, railways, transport terminals, bridges, tunnels, dams, ports and
other ports.
All these services henceforth, except when provided to or by Government or local authority shall become taxable under service
tax regulations.
2 Services in relation to Construction of Roads not liable to tax.
Construction of private road for factory, residential complex and other private premises is taxable now.
3 Under Airport services exemption was available to all works contract services performed within airport
premises.
All services provided in the airport which are not for or in relation to the original erection or construction of such airport will
henceforth be taxable.
4 Construction of Residential Complex services provided for "personal use" is presently exempt from Service Tax
as exempted in the definition of ‘residential complex’.
Under the new regulations, construction of residential complex services for personal use shall be taxable other than for
government or local authority for its personal use and for MPs, MLAs, constitutional authorities etc.
5 Services in relation to construction of less than 12 Residential units are specifically exempt from Tax as
per the definition of ‘residential complex’.
It appears that even construction of less than 12 residential units will also get covered under the service tax ambit. Regarding exemption for single residential unit otherwise as a part of a
residential complex, no clarity is presently available, as construction of residential unit for self use also seems to
becoming taxable.
6 Under works contract provisions construction in respect of Dam is generally exempt. Construction of Canal is exempt except for the ones primarily used in the
commerce or industry.
Henceforth, construction for or by any non- government entity / person of any Dam or canal
irrespective of its end use would be a taxable event. This may likely to impact industrial townships and large plants where canals are required to transport
fresh water, liquids or sewage to and from the factory / township premises.
7 Notification No. 11/2011 & 10/2011 provides for exemption of works contract specific services provided within the port & all
services in airport.
All works which are non-original in nature performed within the airport or port shall henceforth
become taxable.
8 Presently Works contract ser vices receiver was not required to pay service tax under
the reverse charge mechanism
The new regulations would have a major implication on business entities which engage contract
services from individuals, firms, HUF etc as now such business entities would also be liable for
service tax compliance.
9 Construction of Non commercial Buildings Hospitals and Educational Institutes for any
one whether government or private was exempt from service tax
If the construction of such structures if for persons other than for the government or local authority,
then service tax shall be levied irrespective of the end use of the structure
Existing Abatements Scheme as per Notification no 01/2006-ST
TAXABLE SERVICES Abatement Taxable
Erection, Commissioning and Installation 67% 33%
Commercial or Industrial Services 67% 33%
Commercial or Industrial Services (incl. Land Cost) 75% 25%
Outdoor Catering Services 50% 50%
Construction of Residential Complex Service 67% 33%
Construction of Residential Complex Service (incl. Land Cost) 75% 25%
Construction of Complex Service (incl. Land Cost) – Carpet Area 2000 sq ft and 1 cr 70% 30%
Poser - 8
New Reverse Charge MechanismDescription of a Service Service
providerService
Receiver
Service provided by an insurance agent to any person carrying on insurance business
NIL 100%
Service provided by a goods transport agency in respect of transportation of goods by road
NIL 100%
Service provided by way of sponsorship NIL 100%
Service provided by an arbitral tribunal NIL 100%
Service provided by an individual advocate NIL 100%
Service provided by way of support service NIL 100%
Service provided by way of renting or hiring any motor vehicle designed to carry passenger on abated value
NIL 100%
Service provided by way of renting or hiring any motor vehicle designed to carry passenger on non abated value
60% 40%
Service provided by way of supply of manpower for any purpose 25% 75%
Service provided by way of works contract 50% 50%
Service provided by any person who is located in a non-taxable territory any received by any person who is located in a taxable territory
NIL 100%
Reverse Charge Mechanism Expanded Nature of Service Liability of
Service Provider
Liability of Service Receiver
Renting or hiring any motor vehicle for passengers 60% 40%
(for Non-abated value)Supply of manpower for any service 25% 75%
Works contract service by an individual/HUF/ proprietary firm/partnership firm/association of persons (whether registered or not) to company or
body corporate located in the taxable territory.
50% 50%
Issues :- If the service provider does not charge any service tax in his invoice as he is unregistered although he is required to under the turnover criteria.
Even if he is registered what if Service Tax is not reimbursible as per the contract. The question is in a single works contract if the contractee and contractor choose different schemes for payment of service tax then how
the ratio of 50% will be determined?
What about 10 Lacs exemption limit?
Photocopying and Printing Contracts?
Pure Labour services not covered
Transitional Issues? – Advisable to book before 30-06-2012
Work Contract Composition Scheme
A new valuation rule is being introduced :-
• As at present, first determination will be the value of service being the total amount charged for the contract reduced by the value of property transferred in goods for State VAT purpose;
• If value of goods is not intimated to State VAT, the assessees can still calculate the actual value of goods and the same will be relevant to deduce the value of the service involved in the works contract;
• If the value is not so deduced as per above, the value shall be specified percentage of the total value as follows:
• Poser 2
Debatable
• Actually rule 2A(ii) uses the words 'where the value has not been determined' and not where value cannot be determined
Issue
• If the declaration give by the dealer is not accepted by the VAT department in the course of assessment proceedings and department asks the dealer to pay VAT on a higher value, will he be allowed to claim refund of excess service tax paid on the contract?
• If my value of Works Contract is Rs.1000 (Material 400 + Labour 600). Can we pay service tax on total Rs.1000 and claim excise credit of input goods or is it compulsory to follow valuation rules - 2a
Valuation of WCS – w.e.f. 01-07-2012Where works contract is for Value of the service portion shall be
A) Execution of Original Works 40% of the total amount charged for the works contract.
B) Maintenance or repair or reconditioning or restoration or servicing of any goods
70% of the total amountcharged including such gross amount.
C) In case of other works contract not covered by (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property
60% the total amount charged for the works contract.
Valuation of WCS – w.e.f. 01-07-2012
• "Original works" means i. all new constructionsii. all types of additions and alternations to abandoned
or damaged structures on land that are required to make them workable
iii. erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise.
40
Valuation of WCS – w.e.f. 01-07-2012
• Where the value of goods or services supplied free of cost is not ascertainable, the same shall be determined on the basis of fair market value of the goods or services that have closely available resemblance. – Format of Invoice
• No CENVAT Credit in respect of duties or cess paid on inputs used in or in relation to the works contract shall be availed.
• In other words, Cenvat Credit of Duty paid on Capital goods and Service tax paid on Input services is eligible.
41
Sr. No
Content of Section Taxable % Up to 30-06-2012
Effective rate
w.e.f 01-07-2012
Effective rate
1 Only Labour NIL 12.36% 12.36%
2 Works Contract 40% 4.944% 4.944%
3 Maintenance Service without material
NIL 12.36% 12.36%
4 Maintenance Service with material 70% 12.36% 8.65%
5 Completion and finishing services 60% 12.36% 7.42%
6 Preferential Location Charges, Legal charges and other charges
NIL 12.36% 3.09% (if bundled)
Rate Difference w.e.f. 01-07-2012
Structuring of Contracts
• Supply & Installation• Supply, Erection & Commissioning
What is the best way to go ?
Notification 12/2003-ST is proposed for deletion
• Under the negative list scheme, transactions that involve transfer of title in goods are excluded. If goods are being sold by a service provider under a separate contract then sale of such goods is excluded from the definition of service.
• If it is a ‘composite contract’ and dominant nature of the contract is that of provision of service then value of goods cannot be excluded and if the dominant nature is sale of goods then the contract is not taxable as service.
Transfer of Right to use
• Transfer of good without transfer of right to use– Whether Mutual exclusivity would be possible
• AP High Court – GS Lamba
Retrospective Amendments
• Rule 6(6A) of the Cenvat Credit rules, introduced last year is being given effect from February 10, 2006. This will neutralize the investigations or demands for reversal of credits in respect of services provided to SEZs for the past.
• Repair of roads had been exempted from service tax by Notification
24/2009-ST dated 27th July, 2009. By section 97, exemption relating to roads is extended for the earlier period commencing from June 16, 2005;
• Service tax exemption has also been granted with retrospective effect on management, maintenance or repair service in relation to non-commercial Government buildings from 16th June, 2005.
Chronology of Happenings before the leviability
• Karnataka High Court - K Raheja - 2006• Allahabad HC - Assotech Reality – 2008 (Set Aside by SC)• Advance Ruling – Hare Krishna - 2008• Guwahati HC – Magus Construction Pvt Ltd – 2008• CBEC Circular Dated 29.1.2009
Construction of Complex…
• There is no bifurcation between residential or commercial complex.
• Non-taxability for 12 or less than 12 residential units is done away with.
• Non-taxability for residential units for personal use is done away with. – Police Hsg Case
Hence, construction of each and every unit whether residential or commercial is taxable.
Recent Circular No. 151/2/2012 – Dt 10-2-2012
Two broad business models in the construction of residential complex :-
• The undivided share of land (UDS) or the UDS along with a semi finished structure would first be sold to the flat buyer, which is a transaction of sale of immovable property. Further, a construction agreement would be entered to construct the flat of specified description between the builder and purchaser.
• An agreement to sell the flat will be entered into and the consideration would be received in instalments. After completion of construction, the flat would be sold and registered in the name of the purchaser.
Discharge of Land Cost through Allotment of Flats to Landowners:
Transaction Issue Analysis
In some agreements, the consideration towards land is discharged by way of allotment of flats to the land owners.
Is service tax applicable on such allotment? If yes, then how to quantify the consideration?
Yes, Applicable. Valuation Rules would apply and cost of construction + Profit would be the consideration.
Point of Taxation clarification beneficial for builders ?
Redevelopment Projects
Transaction Issue Analysis
The builder/developer makes new flats with same or different carpet area for original owners of flats and additionally may also be involved in one or more of the following: (i) construct some additional flats for sale to others;(ii) arrange for rental accommodation or rent payments for society members/original owners for stay during the period of re-construction;
Under this model, the builder/developer receives consideration First from society, who transfer development rights over the land The second category consist of buyers of flats other than the society/members. Generally, they pay by cash.
For the period after 01/07/2012, construction service provided by the builder/developer to both first second category of service receivers is taxable in case any payment is made to the builder/ developer before the issuance of completion certificate.
Investment Model
Transaction Issue Analysis
Before commencement of the project, the same is on offer to investors. Either a specified area of construction is earmarked or a flat of a specified area is allotted to the investors. After a specified period the investor has an option to exit with specified interest income or he can resell the said allottment to another buyer or retain flat for own use.
What is the nature of receipt?
Investment shall be treated as an advance on which service tax is payable . If investor exits than the builer would be entitled to take credit under rule 6(3) of service tax rules. If builder sells the flat before issuance of completion certificate, again tax liability would arise.
Service Tax on Registration & Stamp Duty Charges:
Transaction Issue Analysis
Registration and Stamp Duty (RSD) is paid to the revenue authorities, the builder only passes through the same to the revenue authorities.
Whether service tax is chargeable on RSD so passed through to the revenue authorities?
As per provisions of Rule 5(2) of the Valuation Rules, RSD would not be included in the value of consideration as it is only a pass through cost.
Service Tax on GEB, Legal & Other charges:
Transaction Issue Analysis
GEB, legal and other charges are collected from customers. These are mentioned in the sale deed. Legal work is done by in house team of lawyers. Further, GEB and Legal charges are recognized as revenue in the books.
Whether service tax is applicable on these items?
Liable to tax if not collected on actual basis
Point of Taxation for builders
Deemed service of Sale of Flat
– agreement to sale – payment defined based upon construction activity
Would qualify as CSS. Date of advance received or date of invoice (demand letter) from date of event specified – e.g. completion of first slab..
Issuance of Invoice mandatory
Deemed service of sale of flat – payment defined based upon fixed dates
Would qualify as CSS. Date of advance or date of payment milestone in agreement in absence of invoice raised in 30 days.
Construction Contract Would qualify as CSS. Date of RA bill if issued within 30 days from date of completion of services.
Poser – 7a
04/07/2023 SKJ 61
Allowability of Cenvat Credit
• As per new abatement scheme, unlike the erstwhile notification no. 01/2006-ST, Cenvat Credit of input services is allowed in most of the output services covered in the abatement notification.
• Accordingly, if abatement of 75% is fixed for construction of complex, previously no cenvat credit was allowed; however, now input is being allowed against the abated value of construction of complex.
Illustration
• Mr. C is purchaser of a Residential unit worth Rs. 1.25 Crore.
• Mr. B is Builder/Developer providing Construction services to Mr. C and charges service tax @ 3.09% on Rs. 1.25 Cr.
• Mr. A is Contractor providing original works contract service to Mr. B worth Rs. 75 Lacs and charge service tax @ 4.944% on Rs. 75 Lacs.
Contd…Sr. No.
Situation Before 01-07-2012 W.E.F 01-07-2012
1 Mr. A charging service tax @ 4.944% on Rs. 75 Lacs from Mr. B i.e. Rs. 3,70,800
Mr. A will collect Rs. 3,70,800 of service tax, utilize cenvat credit of tax and duties paid on input services and capital goods
Mr. A will collect Rs. 3,70,800 of service tax, utilize cenvat credit of tax and duties paid on input services and capital goods
2 Mr. B will charge service tax @ 3.09% on Rs. 1.25 Cr from Mr. C i.e. Rs. 3,86,250
Mr. B will pay Rs. 3,86,250/- S. Tax (-) --- Credit Rs. 3,86,250/- pay in cash
Mr. B will pay Rs. 3,86,250/- S. Tax (-) Rs. 3,70,800/- Credit Rs. 15,450/- pay in cash
Cancellation of Unit – adjustment of taxes
• Rule 6(3) – Excess tax is paid in respect of services not provided either partially or wholly.
• Service tax on Liquidated Damages deducted in such cases??
04/07/2023 SKJ 65
IX – Challenging the constitutional Validity • Bombay HC in the case of Maharashtra Chamber of
Housing Industry and Punjab & Haryana HC in GS Promoters v. UOI have upheld the validity of the “Explanation”
Why no service tax to be imposed on sale of complex
• In BSNL v. UOI [2006] 3 STT 245- SC noted that the seller and buyer have to be ad idem as to subject matter of sale and purchase
• Court need to see what was the intention of the parties• If the contract is for sale of immovable property then how
activity to build the same can take a different colour from that of the end product
• In majority of the cases the buyer has no role in deciding the design / structure / other parameters related to house
• Lets wait and watch the judicial scrutiny by the apex court.
Cenvat Credit Related Issues
• Definition of Input Service• “Input service” means any service, -
– Used for providing an output service / manufacture of final product
– and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service and ……….
• but excludes services, -– used for- (a) construction of a building or a civil structure or a part thereof; or (b)
laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or
– services are used primarily for personal use or consumption of any employee.
– Poser 5
3.1 Services specifically excluded under clause (A)
• If used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods
• * Architect Services [Section 65(105)(p)]• * Port Services [Section 65(105)(zn)]• * Other Port Services [Section 65(105)(zzl)]• * Airport Services [Section 65(105)(zzm)]• * Commercial or Industrial Construction [Section 65(105)(zzq)]• * Construction of Residential Complex [Section 65(105)(zzzh)]• * Works Contract Service [Section 65(105)(zzzza)]
These ‘specified services’ will be eligible for Cenvat credit only if used for any of these ‘Specified Services’. e.g. Architect Service will be eligible as input service if used for Port Service or Construction Service or Works Contract Service.
Poser 4
In such cases, the manufacturer/service provider has following four options w.e.f. 1-4-2011 –
• (a) Maintain separate inventory and accounts of receipt and use of inputs and input services – Rule 6(2) of Cenvat Credit Rules .
• (b) Pay amount equal to 6% of value of exempted goods/services – Rule 6(3)(i).
• (c) Pay an ‘amount’ equal to proportionate Cenvat credit attributable to exempted goods / services as per Rule 6(3A) – Rule 6(3)(ii)
• (d) Maintain separate accounts for inputs and pay ‘amount’ as determined under rule 6(3A) in respect of input services - – Rule 6(3)(iii) -
Giving both taxable and exempt services –
• Option has to be exercised in respect of all exempted goods manufactured and all exempted output services provided. The option once exercised shall not be changed in remaining part of financial year – Explanation I to Rule 6(3) - reiterated in para 2 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.
Meaning of ‘exempted services’ • As per rule 2(e) of Cenvat Credit Rules, “exempted services” means
– taxable services which are exempt from the whole of the service tax leviable thereon, and
– includes services on which no service tax is leviable under section 66 of Finance Act and
– taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken.
Explanation – For removal of doubts, it is hereby clarified that ‘exempted services’ includes trading [Words in italics inserted w.e.f. 1-4-2011]
• Services on which no tax is payable are also ‘exempt services’ unlike goods.
• It has been clarified that export of service will not be treated as exempted service - para 6 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.
• Calculation of 'value' for purposes of rule 6(3) and 6(3A)
(a) in the case of a taxable service, when the option available under the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 has been availed, shall be the value ……………
(b) in case of trading, shall be the difference between the sale price and the purchase price of the goods traded or 10% of CGOS which is higher.
Total amount of Cenvat credit attributable to exempted goods and exempted services for the financial year
• Cenvat on Inputs used for exempted final products
• Cenvat Credit on Inputs used for exempted services (On proportionate basis, based on actual ratio of financial year)
• Cenvat Credit on input services used for exempted final products and exempted services
(On proportionate basis based on actual ratio of financial year). • Cenvat credit on services specified in rule 6(5), which are exclusively used for exempted
goods or exempted services
= Total amount attributable to exempted final products and exempted services
Poser 6a
Payment of ‘amount’ or reversal of Cenvat credit is not required in case the taxable service is provided to SEZ Unit or SEZ developer for their authorised operations. These are overriding provisions irrespective of any provision in rule 6(1), 6(2), 6(3) and 6(4) [Rule 6(6A) of Cenvat Credit Rules inserted w.e.f. 1-4-2011].
Cenvat credit on capital goods – If capital goods are partly used for exempted goods and party for dutiable final products, entire Cenvat credit of duty paid on capital goods is available. Cenvat credit of duty on capital goods is not allowable only when it is exclusively used for manufacture of final products [rule 6(4)]
• Computation of additional liability if abatement is rejected– Contract Value –
• Lets say is Rs. 10 Lacs • Out of which Value of own Material used is Rs. 5 Lacs• Value of FOC is Rs. 10 Lacs
– Can 12/2003 be resorted to in such a case if it is favourable?
• In following cases CESTAT has allowed benefit of Notification 12/2003 when abatement was denied– Intertouch Metal v. CST – Chennai CESTAT– Sobha Developers Ltd v. CCE 5 ST – Bangalore CESTAT
Reverse Effect – 12/2003
M/s VPR Mining Infrastructure Pvt Ltd Vs CCE, Hyderabad (Dated: March 29, 2011) :BANGALORE CESTAT.
• Service Tax – Value of diesel and explosives supplied free of cost to service provider is includible in taxable value for payment of service tax.
• Benefit of Notification No. 12/2003-ST also not available as there is no ingredient of sale of goods by service provider to service recipient – Pre-deposit of Rs. 10 crores
• If abatement is taken under Notifications 1/2006, whether the assessee is required to adopt the same formula in all the contracts?
• Whether in case of contract where abatement is taken, whether Cenvat credit from services availed in other contract where abatement is not taken can be utilised?
• Held Yes, in favour of assessee• In the case of Mumbai CESTAT – BHEL v.
CCE, Nagpur – 2012 35 STT 137
• To claim deduction under 12/2003 is it necessary to indicate the material portion on the face of invoice?
• To claim deduction under 12/2003, the requirement is that invoice should indicate value of material. However, even if not shown, still service tax is not payable on value of material
• In Bharat Sanchar Nigam Ltd. v. UOI (2006) it has been clearly held that price of goods cannot be included in value of services. ‘The aspect theory would not apply to enable the value of service to be included in the sale of goods or the price of goods in the value of service’.
• In Imagic Creative Pvt. Ltd v. CCT (2008) 2 SCC 614 = 12 STT 392 = 12 VST 371 (SC), it has been held that service tax and Vat (sales tax) are mutually exclusive. In case of a composite contract, Vat cannot be imposed on portion relating to value of service. As an obvious corollary, service tax cannot be imposed on value of material.
• Evolution of Earth• Philosopher• Doctor• Engineer• Tax Consultants
• What will happen to Retention Monies?
• Is there any way out to prevent payment of service tax on the same?
Non-receipt of Payment
• X Pvt Ltd completed the services to the client on 30th Sept, 2011. Final RA bill of Rs.50 Lacs has been raised. Due to some dispute, payment of only Rs. 10 Lacs was made. The chances of getting the balance amount is very less.
Bad Debts
• Letter No. 341/34/2011 dt. 31st March, 2011 categorically states that bad debts can-not be claimed as adjustments.
• “If the invoice is renegotiated due to deficient provision or as per change in terms, the tax will be payable on revised amount. However no concession is available for bad debts”
• Rule 6(3) of Service Tax Rules.
Amnesty scheme under Service Tax • Scheme applicable for persons who have pending tax dues for tax period October 2007 to
December 2012, as on 1 March 2013, in respect of which no notice has been issued even for the prior period
• Benefit would not be available to the assessee who failed to pay taxes after declaring his liability in the return
• Person opting for this scheme would be required to make a declaration of tax dues to designated authority by 31st December 2013 and pay at least 50% of tax dues by that date and balance by 30 June 2014
• In case amount is not paid by 30 June 2014, it can be paid upto 31 December 2014 with interest computed w.e.f. 1 July 2013
• Proceedings covered by the period of declaration shall not be reopened before any authority/court
• In case of failure to pay tax dues by specified date or substantially false declaration, the benefit under the scheme shall not be available and tax dues will be recoverable from the assessee as if the scheme doesn t exist ‟
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