CAG auditors inadvertently open doors for avoiding service tax on works contract while trying to safeguard revenue
IT is reliably learnt that the officers of CAG undertaking audit of construction service providers in Bangalore have come out with an innovative interpretation in respect of works contract.
As per Rule 3(1) of the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007
Notwithstanding anything contained in section 67 of the Act and rule 2A of the Service (Determination of Value) Rules, 2006, the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to two per cent (now four per cent) of the gross amount charged for the works contract.
The Audit feels that this 2% is only an “amount” to be paid by the service providers and it is not “Service Tax”. Hence the service providers are not allowed to collect this 2% “amount” from their clients. Since the service providers audited by the CAG have already collected this 2% amount, the same has to be treated as additional consideration and another 2% has to be paid on this 2% amount collected.
But, what if this second 2% amount is also collected from the clients? Another 2% on 2%? Endless computation of 2% which is a mathematical impossibility?
The Audit further feels no CENVAT Credit can be availed for payment of this 2% “amount” since rule 3 (4) of the CENVAT Credit rules 2004 stipulates that an output service provider can utilise the Credit only for payment of service tax on output service.
While making the above observation, the auditors perhaps have forgotten that Section 73 of the Finance Act, 1994 which contains machinery provisions for recovery of service tax does not refer to any “amount” and hence no notice can be issued for recovery of this 2% amount from the Works Contract Service Providers going by the interpretation of the auditors. Hence here is good news for all those service providers of “works contract” who were issued notices under Section 73 of the Finance Act, 1994 for recovery of service tax. They can argue that the amount payable under the Works Contract Composition Scheme, be it 2% or 4% is not service tax and the same cannot be recovered under Section 73 of the Finance Act, 1994.
And this will be a huge amount compared to the 2% of 2% wanted by the auditors. Thank you CAG. You saved the day for many service providers by providing an escape route from payment of service tax on works contract. Keep the good work going!