statistic: Re: {Brainstormers -CA} Fwd: Clarifications on Immovable Property & Works Contract

My Dear Amit,

You have to check how you can be out of the network of a particular tax. The reasons that you did not include in your offer would not be a plea to avoid your tax liability.

CA J P AGARWAL

----- Original Message -----

From: amit agarwal

To: ICAI_CIRC_MEERUT_CA@yahoogroups.com

Sent: Wednesday, January 09, 2008 6:57 PM

Subject: Re: {Brainstormers -CA} Fwd: Clarifications on Immovable Property & Works Contract

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@yahoo.com>
To: solapurcas@yahoogroups.com; casofpune@yahoogroups.com; casofgoa@yahoogroups.com; caclubindia@yahoogroups.com; icaihyd@yahoogroups.com; icai_circ_meerut_ca@yahoogroups.com; bhilai-ca@yahoogroups.com; THANECAS <thanecas@yahoogroups.com>; Aurangabad CAs <aurangabad_ca@yahoogroups.com>
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 – 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 Code

Issue

Clarification

(1)

(2)

(3)

096.01 / 04.01.08

Commercial 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 / 04.01.08

Services 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 / 04.01.08

Services 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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Reference Code	Issue	Clarification
096.01 / 04.01.08	Commercial 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.

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statistic

Kamis, 10 Januari 2008

Re: {Brainstormers -CA} Fwd: Clarifications on Immovable Property & Works Contract

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097.02 / 04.01.08	Services 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 / 04.01.08	Services 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)