The Hindu Business Line : Cenvat credit on input services

Service tax is now in its 12th year. What started off as a meagre tax on a few services has turned out to be a goldmine for the Government. These 12 years have seen what is normal for any new law — constitutional validities being challenged, plethora of notifications and circulars, few landmark cases of the Supreme Court, annual amendments to the law tinkering with the provisions but making no radical changes and, more recently, fixing a target year for the much-touted Goods and Service Tax (GST).

To tone down the effect of the law, input tax credit was provided for the first time in 1997.

It commenced with providing for input tax credit only on output tax services and was later merged with the Cenvat Credit rules providing an across-the-board set-off facility.

However, the laws also provided for abatements of varying percentages to compute the liability to service tax for mandap keepers, hotels, tour operators, renting of cabs, convention centres, commercial or industrial construction service and construction of complexes.

The abatement was probably with an intent to remove the material portion of such composite contracts and tax only the service portion.

Abatement condition

One condition to get this abatement was that Cenvat Credit cannot be availed on these services. While these were spread over various Notifications, the service tax department thought it fit to merge all these Notifications into one called 1/2006.

However, the conditional Notification read "the Cenvat credit of duty on inputs or the Cenvat credit of the service tax on input services has been taken under the provisions of the Cenvat Credit Rules 2004". Consequently, an abatement chooser cannot get service tax credit on input services now.

Sub-contract

Let us assume that a pandal contractor also undertakes catering services. He, however, sub-contracts the catering portion to another contractor.

In a hypothetical situation, in case he does contracts worth Rs 50 lakh a year and sub-contracts work to the extent of Rs 20 lakh, he would pay a service tax of Rs 1,83,600 if he opts for the abatement.

However, to the extent of Rs 73,440 which is what the sub-contractor would be charging him in case he also opts for abatement, the main contractor would not be in a position to claim service tax credit to the extent of Rs 73,440 which would be paid to the credit of the Central Government in any case.

In case the value of the sub-contract is very high, this could permit enterprising taxpayers to indulge in some tax planning. In the above instance, in case both the contractor and the sub-contractor decide not to opt for abatement, and the value of the sub-contract is Rs 40 lakh, service tax payable after set-off would only be Rs 1,22,400.

Also, one could probably count on the fingers of one's hand the number of service tax assessees who pay/claim Cenvat credit. The Finance Ministry would do well to restore Cenvat credit on input services to pure-play service tax assessees.

(The author is a Hyderabad-based chartered accountant.)

Mohan R. Lavi

More Stories on : Taxation | Reassessment

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Bite the bullet on petrol

Responsibilities of corporate citizens

FTA: A clarification

Good work by poll panel

Relook at replacements

Limits of delegation

Cenvat credit on input services

As many red herrings as grow in the wood

Economics has a way of catching up with populist politics