Dear Professional Friend,
Our observation on your query is as follows: -
The service tax is applicable under erection, commissioning and
installation services. The definition of erection, commissioning and
installation kept on changing in the act. We are enclosing herewith
the definition exciting in the Act from time to time
(i) From 10.09.2004 to 15.06.2005
"erection, commissioning or installation" means any service provided
by a commissioning and installation agency in relation to erection,
commissioning or installation of plant, machinery or equipment;
(ii) From 16.06.2005
"erection, commissioning or installation" means any service
provided by a
commissioning and installation agency in relation to
(i) Erection, commissioning, or installation of plant, machinery
or equipment; or
(ii) Installation of-
(a) electrical and electronic devices, including wirings or
fittings therefore; or
(b) plumbing, drain laying or other installation for transport of
fluid; or
(c) heating, ventilation or air –conditioning including related
pipe work, duct work and sheet metal work; or
(d) thermal insulation, sound insulation, fire proofing or water
proofing; or
(e) lift and escalator, fire escape staircases or travelators;
(f) such other similar services;
(iii) From 01.05.2006
(i) Erection, commissioning, or installation of plant, machinery
or equipment; or
structures, whether pre-fabricated or otherwise; or
(ii) Installation of-
(a) electrical and electronic devices, including wirings or fittings
therefore; or
(b) plumbing, drain laying or other installation for transport of
fluid; or
(c) heating, ventilation or air –conditioning including related pipe
work, duct
work and sheet metal work; or
(d) thermal insulation, sound insulation, fire proofing or water
proofing; or
(e) lift and escalator, fire escape staircases or travelators;
(g) such other similar services;
Because you have not mentioned that that kind of service is given by
to your client. Hence we are not able to reply clearly. You can study
from these definition where your client is liable to service tax.
The law provides that one has to pay sservice tax even if he has not
collected the service tax from his buyer. As such, your client has to
pay service tax.
But your client has right to charge service tax from Hydle department
because it is indirect tax and to be recoverd from buyer. But he has
not right to recover the interest and penalty.
CA. Pradeep Jain
Website: - www.capradeepjain.
--- In ICAI_CIRC_MEERUT_
<amitcambd@.
>
> Thanks for the latest updates
>
> Please help me out from the following problem on service tax matter
>
> One of the contractor engaged in the erection and commissioning
work at Hydle under section 65(29)
> now he has been served a notice to deposit service tax w.e.f.
10.9.2004 on the amount he received from
> the Hydle department. The problem is he has never charged service
tax nor Hydle Departt. gave him,
> because it is not mentioned in the Bid price. In the Bid price the
contractor's profit is 8 to 10%.
> Now in this situation how he could deposit the same, moreover the
contract is completed in year 2006 itself.
>
> Please advise so that a meaningful reply could be given to the
service tax departt.
> Thanks
>
> ca amit agarwal
>
>
> ----- Original Message ----
> From: Deepak Gadgil <gadgildeepak2000@
> To: solapurcas@yahoogro
casofgoa@yahoogroup
icaihyd@yahoogroups
ca@yahoogroups.
CAs <aurangabad_ca@
> Sent: Tuesday, 8 January, 2008 1:32:12 PM
> Subject: {Brainstormers -CA} Fwd: Clarifications on Immovable
Property & Works Contract
>
>
>
> "CA. V.M.V.SUBBA RAO" <vmvsrao@gmail. com> wrote:
> Date: Tue, 8 Jan 2008 10:03:49 +0530
> From: "CA. V.M.V.SUBBA RAO" <vmvsrao@gmail. com>
> To: aashabhasker@ yahoo.com
> Subject: Clarifications on Immovable Property & Works Contract
>
>
>
> Recent Clarification รข€" Service Tax
>
> CA. Rajendra Kumar. P, Chennai
>
> The Ministry of Finance, Department of Revenue, Tax Research Unit
has issued a Circular on January 4, 2008. This circular is an
amendment to the master circular no.96/7/2007- ST issued on August
23, 2007. The circular clarifies the departments stand on cenvat
credit that can be availed by service providers who either provide or
utilize services that come under the category of works contract,
construction and rental of immovable property.
>
> The following issues have been addressed :
>
> To construct an immovable property goods like cement, steel etc are
used. These are inputs for the construction of immovable property.
Architect Fee, works contract service tax, consulting engineer
services are also utilized which will fall under the head 'input
service'. When the immovable property comes into existence it is let
out for commercial use and the same will merit classification under
the head 'rental of immovable property'. The department has clarified
that the excise duty paid on cement, steel etc and service paid on
input services cannot be setoff against the service tax payable on
rental immovable property. The department has based its logic on the
premise that when the immovable property is constructed it is an
output and since immovable property per se does not suffer any duty
or tax no credit will be available. It is only the goods and services
which go in to the construction of immovable property suffer tax or
duty and the tax or duty
> on such goods or services get added to the total cost of
construction of the immovable property.
>
> Since the 'value' for the purpose of charging service tax
under 'works contract' does not include the cost of goods involved in
the execution of works contract the excise duty paid on goods will be
available as setoff against service tax on works contract.
>
> Works contract was notified as a new taxable service with effect
from June 1, 2007. Under the head 'works contract' construction,
erection, commissioning, installation and turnkey project are
included which were already taxed under their respective head prior
to June 1, 2007. The service provider under the works contract
service can pay service tax at the rate of 2% on the total value. As
the rate of tax is attractive, it is possible that classification
disputes may arise for contracts commenced prior to June 1, 2007. The
department has clarified that for contracts commenced prior to June
1, 2007 and for which payments are already received by the service
provider and tax liability is being discharged under the respective
service heads; the special works contract rate cannot be used after
June 1, 2007. In short, the department has made it clear that two
rate of tax cannot be used for a composite contract commenced prior
to June 1, 2007. For Eg: A
> construction project is commenced in June 2006. The service
provider is registered under the head 'construction of complex' and
is discharging the service tax liability on 33% of the value. The
construction project will be completed only by December 2007. In this
situation the service provider cannot pay tax on 2% of the gross
value from June 1, 2007 for the said project. Any project commenced
after June 1, 2007 will only be eligible for the beneficial rate of
2%.
>
>
>
> Amendment to Circular No. 96/7/2007-ST, dated 23-8-2007 -
Clarification in respect of renting of immovable property service and
works contract service
> CIRCULAR NO. 98/1/2008-ST, DATED 4-1-2008
>
> In the Circular No. 96/7/2007-ST dated the 23rd August, 2007,-
>
> (i) after Reference Code 086.05 / 23.08.07, the following Reference
Code and corresponding issue and clarification shall be inserted,
namely:-
>
> Reference CodeIssueClarificat
> (1)(2)(3)
> 096.01 / 04.01.08Commercial or industrial construction service
[section 65(105)(zzq) ] or works contract service [section 65(105)
(zzzza) ] is used for construction of an immovable property. Renting
of an immovable property is leviable to service tax [section 65(105)
(zzzz) ].
>
> Whether or not, commercial or industrial construction service or
works contract service used for construction of an immovable
property, could be treated as input service for the output service
namely renting of immovable property service under the CENVAT Credit
Rules, 2004? Right to use immovable property is leviable to service
tax under renting of immovable property service.
>
> Commercial or industrial construction service or works contract
service is an input service for the output namely immovable property.
Immovable property is neither subjected to central excise duty nor to
service tax.
>
> Input credit of service tax can be taken only if the output is
a 'service' liable to service tax or a 'goods' liable to excise duty.
Since immovable property is neither 'service' or 'goods' as referred
to above, input credit cannot be taken.
>
>
> (ii) after Reference Code 097.01 / 23.08.07, the following
Reference Codes and corresponding issues and clarifications shall be
inserted, namely:-
>
> 097.02 / 04.01.08Services provided in relation to execution of a
works contract is leviable to service tax [section 65(105)(zzzza) ].
> VAT / sales tax is payable on the transfer of property in goods
involved in the execution of a works contract.
>
> Service tax is leviable on the value equivalent to the gross amount
charged for the works contract less value of the transfer of property
in goods involved in the execution of the works contract which is
leviable to VAT / sales tax [Rule 2A of the Service Tax
(Determination of Value) Rules, 2006].
>
> Whether or not, excise duty paid on goods, subjected to levy of
VAT / sales tax under works contract service, can be taken as credit
under the CENVAT Credit Rules, 2004?
> Value for the purposes of levy of service tax under works contract
service does not include the value pertaining to transfer of property
in goods involved in the execution of a works contract leviable to
VAT / sales tax. Works contract service provider is, therefore, not
eligible to take credit of excise duty paid on such goods involved in
the execution of works contract.
> 097.03 / 04.01.08Services provided in relation to execution of
works contract is leviable to service tax w.e.f. 01.06.07 [section 65
(105)(zzzza) ].
>
> Works Contract (Composition Scheme for Payment of Service Tax)
Rules, 2007 provides option to pay service tax @ 2% of the gross
amount charged for the works contract. However, the service provider
opting for composition scheme for payment of service tax should
exercise the option prior to payment of service tax.
>
> The issue pertains to,-
> (i) contracts entered into prior to 01.06.07 for providing
erection, commissioning or installation and commercial or residential
construction service, and
> (ii) service tax has already been paid for part of the payment
received under the respective taxable service.
>
> Whether in such cases, the service provider can revise the
classification to works contract service from the respective
classification and pay service tax for the amount received on or
after 01.06.07 under the Composition Scheme?Prior to 01.06.07,
service provider classified the taxable service under erection,
commissioning or installation service [section 65(105)(zzd) ],
commercial or industrial construction service [section 65(105)(zzq) ]
or construction of complex service [section 65(105)(zzzh) ], as the
case may be, and paid service tax accordingly. The contract for the
service was a single composite contract. Part of service tax
liability corresponding to payment received was discharged and the
balance amount of service tax is required to be paid on or after
01.06.07 depending upon receipt of payment.
>
> Classification of a taxable service is determined based on the
nature of service provided whereas liability to pay service tax is
related to receipt of consideration. Vivisecting a single composite
service and classifying the same under two different taxable services
depending upon the time of receipt of the consideration is not
legally sustainable.
>
> In view of the above, a service provider who paid service tax prior
to 01.06.07 for the taxable service, namely, erection, commissioning
or installation service, commercial or industrial construction
service or construction of complex service, as the case may be, is
not entitled to change the classification of the single composite
service for the purpose of payment of service tax on or after
01.06.07 and hence, is not entitled to avail the Composition Scheme.
>
> Service tax burden on renting of immovable property unjust
> January, 07th 2008
> Even before the wound caused due to levy of service tax in the
recent Budget on renting of immovable property was yet to be healed,
here is some salt being sprinkled on the wound by issue of a circular
last week. The industry was up in arms in various writ courts against
the levy of service tax on renting of immovable property challenging
its constitutional validity on the basis of the power of the central
government to levy service tax on the subject matter which seemingly
fell under state government's purview.
>
> While the dispute on propriety of the levy of service tax by the
central government was yet to be decided by the appropriate courts,
the government now issued a clarification stating that service tax
paid on input services in the nature of construction service or work
contract service that are used in construction of an immovable
property, which is meant to be rented or leased, will not be eligible
for CENVAT credit for those who provide renting of immovable property
service.
>
> The clarification is going to be a double whammy for the industry
inasmuch as it will result in payment of output service tax without
being allowed input tax credit thereby causing cascading of tax which
is against any good VAT system.
>
> It appears from the bare reading of the circular that as if it was
predetermined to deny the credit and then an attempt was made to give
reasons for such denial by way of a circular. The clarification
starts with an incorrect proposition that right to use immovable
property is leviable to service tax. Service tax is applicable on
renting, letting, leasing, licensing of an immovable property.
Therefore, the subject matter of service is the tangible immovable
property being let out or rented or licensed and not the right to use
such property, which is intangible in nature.
>
> The circular seeks to clarify that immovable property is neither
goods nor service and, hence, any inputs used in creation of such
immovable property should not qualify for CENVAT credit. What is
ignored while taking this view is the very definition of input
service under the CENVAT rules which is the foundation of the CENVAT
scheme. The input service for CENVAT credit purposes inter alia
includes services used in relation to setting up, modernisation,
renovation or repairs of premises of output service provider or an
office relating to such premises. It needs no emphasis to state that
the rules issued by the government will always have overriding effect
over any administrative clarifications issued like the instant.
Therefore, when the rules governing CENVAT scheme allow CENVAT credit
on input services used for setting up of premises, the question is
can a circular deny the benefit sought to be granted by the rules
which has overriding effect over
> circular.
>
> The other provision in CENVAT rules which has been ignored while
issuance of the circular is the provision which makes an active
exception to allow unrestricted utilisation of CENVAT credit for
specified services even when used in provision of taxable and exempt
services. Commercial construction service is one such specified
service where government permits unrestricted utilisation of CENVAT
credit even when such service is used partly in provision of taxable
services and partly in non-taxable services.
>
> It is obvious that commercial construction service will always be
used to construct an immovable property and if this be so, in light
of the fact that government has specifically allowed credit on
commercial construction service and that too under a category making
an exception to the general rule of credit, what remains to be
guessed is the sanctity of the instant circular. The circular will
result in a scenario where any other service provider using
commercial construction service where the connection of this input
service would be rather remote with his output service would be
allowed the credit that too under a special category whereas the
person engaged in renting of immovable property will be denied the
credit of the input service used in constructing the very same
property which plays direct role in his service rendition.
>
> There is an urgent need to review the present circular and issue
suitable amendment before it results in pile of litigation.
>
> Prasad Paranjape & Vishal Lahoti
> (The authors are with PricewaterhouseCoop ers)
>
>
> --
> CA. V.M.V.SUBBA RAO
> Chartered Accountant
> Door No.24-2-1885,
> I Floor, Flat No.5,
> Siddivinayaka Residency, I Cross,
> Central Avenue, MSR Nagar,
> Magunta Layout,
> Nellore-524 003
> Andhra Pradesh
> India
> Mobile:+91 - 0 9390221100
> +91 - 0 9440278412
> e-Mail: vmvsr@rediffmail. com
> vmvsr@yahoo. co.uk
>
>
>
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