Works Contract

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Works Contract Composition Scheme - Restriction on input credit for certain input services MARCH 01, 2011By Santosh HatwarWORKS Contract (Composition Scheme for Payment of Service Tax Rules, 2007 provides that a service provider engaged in provision of ‘works contract service' has an option to pay an amount of 4% of the gross amount charged for the works contract.For this purpose the ‘gross amount charged for the works contract' means an amount which includes 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 also the value of all the services that are required to be provided for the execution of the said works contract.However, the VAT or Sales tax paid on the transfer of property in goods involved in the execution of such works contract and the cost of machinery and tools used in the execution of the said works contract (except for the charges for obtaining them on hire) are excluded from the purview of service tax levy.Further, sub-rule (2) of Rule 3 of the said Rules provide that the service provider shall not take CENVAT credit of duties or cess paid on any inputs, used in or in relation to the said works contract , under the provisions of CENVAT Credit Rules, 2004. In other words there was no restriction on availment and utilization of CENVAT credit of service tax paid on input services.Now, the Government has brought in an amendment to this Rule 3 to restrict certain amount of service tax paid on certain input services. In this regard, a new sub-rule (2A) is introduced in Rule 3 of the said Rules which reads as follows:“(2A) The CENVAT credit of tax paid on taxable services as referred to under sub-clauses (zzd), (zzq) and (zzzh) of clause (105) of section 65 of the Finance Act, 1994, shall be available only to the extent of 40% of the service tax paid when such tax has been paid on the full value of the service after availing CENVAT credit on inputs.”In terms of paragraph 10.1 of the TRU DO Letter dated 28.02.2011, it is clarified that this new sub-rule (2A) is being added in rule 3 so as to restrict the CENVAT credit to 40% of service tax paid on services relating to erection, commissioning & installation, commercial or industrial construction and construction of residential complex, in case tax has been paid on full value of the service after availing CENVAT credit on inputs i.e. without availing exemption notification 1/2006-ST dated 01.03.2006. It is explained further that this has been done to ensure that the credit on inputs is not availed of indirectly while availing of the said composition scheme by the service providers.How will the recipients know if their service providers (providing input services like erection, commissioning & installation, commercial or industrial construction etc) have availed the benefit of exemption notification No. 1/2006-ST or not while discharging their service tax liability? Hereafter they have to insist that this aspect is mentioned in the tax invoice.Again, what about service providers (who provide services to the recipients engaged in providing ‘works contract services' and these recipients intend to avail composition scheme) engaged in these very activities but are themselves registered as ‘works contract services'? What if some of these service providers also avail composition scheme but do not come under the purview of this new sub-rule 2A?Let's wait for more clarification on this. Till then happy litigation!| |

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Works contract services were brought into service tax net by the Finance Act, 2007, w.e.f 01-06-2007 vide notificationNo. 23/2007-ST, dated 22-05-2007.Works contract in general terms can be understood as a contract which involvestransfer of property and also element of service or work rendered. Definition of works contract service:Service tax under works contractservices has been...
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