Whether 'composition amount' paid under Works Contract Composition Scheme eligible as CENVAT Credit and whether ECess and SHE Cess are also payable on such 'composition amount'?
EVER since Service Tax was introduced in 1994 on three services and expanded over the last decade and a half to an entire gamut of services, it was afflicted with one controversy or the other.
However, none of the controversies ever come close to matching the controversies surrounding taxation of construction sector, which the Government did in right earnest in 2004 by taxing the construction activity which are of commercial nature and gradually extending it to residential sector as well in the year 2005. Thereafter the Works Contract Service and its attendant composition scheme closely replicating the existing taxation pattern in the VAT domain appeared on the horizon in June 2007, but it was meant to tax only the service component of the Works Contracts by vivisecting such composite contracts.
Now there appears to be another controversy brewing and which is likely to engulf the construction sector in all its fury. When Works Contract service was introduced w.e.f June 1, 2007, the Government also introduced the ‘composition scheme' wherein a 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 at the rate of four percent of the gross amount charged for the works contract (for brevity let's call it ‘composition amount').
For this purpose the gross amount charged shall include the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise and the value of all the services that are required to be provided for the execution of the works contract. But it excludes the VAT or Sales tax paid on transfer of property in goods involved in execution of such works contract and the cost of machinery and tools used in the execution of such works contract except for the charges for obtaining such tools and machinery on hire.
Also the service provider shall not be eligible to avail CENVAT credit of duties or cess paid on any inputs used in or in relation to the said works contract. Further the service provider who opts to pay service tax under these rules shall exercise such option prior to payment of service tax in r/o such works contract and the option so exercised shall be applicable for the entire works contract and shall not be withdrawn until the completion of such works contract.
Now to the crux of the issue – whether the ‘composition amount' paid by the service providers who opt this composition scheme, is eligible as CENVAT Credit to the service recipients and whether any ECess and SHE Cess is leviable on such ‘composition amount'?
While one school of thought is of the view that the amount paid by service providers availing the benefit of this composition scheme cannot be regarded as ‘service tax' because the relevant Rules only provide for payment of four percent of the gross amount charged for the works contract and such ‘composition amount' paid at four percent of the gross amount charged for the works contract by itself cannot be regarded as ‘service tax' but only an amount in lieu of their service tax liability on the Works Contract service.
According to this school of thought, it therefore naturally follows that ECess and SHE Cess are not payable on such ‘composition amount' because such cesses are leviable only on service tax in terms of section 95 of the Finance Act, 2004 and section 140 of Finance Act, 2007 and further this ‘composition amount' is not eligible as CENVAT Credit since Rule 3 of CENVAT Credit Rules, 2004 only allows ‘service tax' and ECess/SHE Cess paid on such ‘service tax' as CENVAT Credit for the recipients of such Works Contract service subject to other conditions prevailing therein.
On the contrary, there is another school of thought which is of the view that the ‘composition amount' paid under the composition scheme is indeed ‘service tax' payable under section 66 of the Finance Act, 1994 on Works Contract service and this composition scheme only provides a benefit to service providers to ‘discharge their service tax liability' at a reduced rate of four percent without any CENVAT credit benefit on ‘inputs' used in or in relation to provision of such service.
In view of this, it also follows that ECess and SHE Cess are payable on such ‘composition amount' which is nothing but ‘levy of service tax at a concessional rate' by those who opt to pay ‘service tax by availing the benefit of composition scheme' and the same would be available as CENVAT credit to the service recipients. In fact this aspect is also evident from a plain reading of the clarification issued by TRU vide paragraphs 9.5 to 9.8 of TRU Circular F. No. B1/16/2007-TRU Dated: May 22, 2007 clarifying the scope of composition scheme at the time of its introduction.
Before this issue snowballs into a major controversy resulting in huge litigation for the construction sector, Board should step in and nip this controversy in the bud by issuing a detailed clarification in this regard.