Works contract Service Tax – all worked up
Yesterday’s DDT mentioned, "The Service provider who pays the Service Tax @ 2% will not be eligible for cenvat credit."
An alert netizen, KartikSolanki points out that the restriction is only in relation to inputs. As per the notification no. 32/2007, a works contractor, who opts to pay service tax @ composition rate of 2% can not avail CENVAT credit of any duties or cess paid on 'inputs'.
Yes Sir, you are right; the bar is only for inputs and not for input services or capital goods. Is this a conscious decision or an error? After all when abatement is given under Notification No. 1/2006, no credit at all is allowed.
Another important feature is that the stipulation in Notification Number 1/2006 that value of materials / goods supplied / used in the works contract needs to be added to the gross amount charged, is not found in the new works contract composition scheme rules. Hence, in a Rs 10 Crore commercial construction contract, if the value of own material used by the service provider is, say, to the extent of Rs 3 Crores, that fact would result in the said contract falling within the definition of ‘works contract’. Additionally, in the same contract, if client supplies materials worth Rs 5 Crores or 20 Crores, then 2% service tax needs to be paid by the service provider on Rs 10 Crores only (Gross amount charged) and not on Rs 15 Crores or Rs 30 Crores.
Was the government planning to give a bonanza to the assessees? Now all the eligible service providers can get into the works contract wagon and save a lot of Service Tax. In a Rs. 10 Crore construction activity, if the cost of materials supplied by the client is Rs. 8 Crores, under construction service, the tax liability would have been Rs.39.6 Lakhs (12% of 33% of Rs. 10 Crores). Now under Works Contract, it would be only Rs. 4 lakhs (2% of Rs. 2 Crores).
Why was the abatement of 67% given? Maybe, under the assumption that 67% constitutes goods and 33% is service. And what was wrong with the abatement scheme? Maybe a little more abatement could have been given. Importing Sales Tax concepts into Service Tax may not be all that wise a step. We have to wait for the issues to settle.