Computation of Cum-tax benefit in cases of abatement - Tribunal grants waiver of Pre-deposit

By Vijay Kumar

HOW do you compute cum-tax benefit in case of construction service with 67% abatement from the gross value? Actually, there are two different methods which give different service tax liability. Let us assume the gross value (cum-tax) be Rs. 500/- and the rate of service tax is 12.36% including education cess.

Method 1: First cum-tax method:

Under this method, the effective rate i.e., 4.08% is applied to the gross amount (On service value of Rs 100/-, after abatement of 67%, the taxable value will be Rs 33/-. Applying 12.36% on Rs 33/-, the service tax will be Rs 4.08/-. So, the effective rate of service tax is taken as 4.08%.) By applying this 4.08% to a gross cum tax value of Rs 500/-, service tax will be (500 X 100/104.08)*4.08% = Rs 19.6/-. The Service value will be Rs 480.4/- ( Rs 500/- less Service Tax of Rs 19.6/-)

The invoice will be:

Method 2: First abatement Method:

In this, first abatement is extended on Rs 500/- and then the remaining 33% is taken as cum-tax value with rate of service tax as 12.36%.

In this method,

As is evident, the tax payable under second method is less (Rs 18) compared to first method (Rs 19.6).

In a recent case, before the Tribunal, revenue adopted method 1 and assessee adopted method 2. The Tribunal prima facie found that first abatement method (second method) will result in a bill consistent with this approach and granted waiver of pre-deposit.

But, unfortunately, the second method will not result in proper bill as explained below:

Gross value is Rs 500/- and in this method, the service tax is Rs 18/-. So, the Service Value will be Rs 500 less Rs 18/- = Rs 482/-. Now, if we prepare a bill for this, it will be as under:

So, the first abatement method will not result in proper Bill, but only first cum-tax method will give correct invoice.

Please see: 2013-TIOL-1177-CESTAT-MAD