CA Nikhil Jhanwar

After new regime in service tax has been introduced, there hves been various issues regarding availability of Cenvat Credit for Real Estate Industry. Through this write-up all major issues have been clarified specifically.

Issue 1: ‘Works Contract’ or ‘Construction of Complex’ as Input service. 

As per definition Of ‘Input Service’ under Rule 2(l) of Cenvat Credit Rules, 2004, credit of service tax paid in respect of following services (termed as ‘specified service’) can be availed and utilized only for paying service tax on such ‘specified services’:

(i)        Service portion in execution of works contract and Construction Services (includes Commercial or industrial construction service, maintenance or repair service)

(ii)       Construction of Complex Service including deemed construction service (as listed under Section 66E- Declared Service)

In simple terms,   the nature of input service and output service should be similar.

For example,

1.         A Builder is engaged in providing service of construction of building/flats. Further, the Builder sub-contracts the work of construction to another contractor. In this case Builder is providing output service of works contract/construction of complex service and at the same time availing input service of works contract from contractor. Therefore, the Builder can take the Cenvat Credit on input service and utilize the same in paying its tax liability only for works contract service, maintenance or repair or construction of complex service.

Issue 2: Other Input Services (other than works contract)

In case of other input services viz. Manpower supply, legal consultancy, telephone bills, GTA service(upto place of removal), banking or financial services etc. Credit can be taken on such ‘services’ if they are used in providing output service (in the present case: works contract/construction of complex service).

Issue 3: ‘Renting of Immovable Property’ (RoIP) as Output Service.

Without prejudice to above submission, Cenvat Credit of service tax paid on services of Works Contract, Construction of Complex Service, maintenance or repair service cannot be taken and used in paying service tax on ‘renting of immovable property service’ because these services are actually used in construction of immovable property and not directly used in provision of ‘RoIP’. Because, ‘Immovable property’ is neither a ‘good’ nor ‘service’ and cannot be taxed. Even Cenvat Credit Rules, 2004 does not allow to take credit in such situation read with Circular No. 98/1/2008 dated 04.01.2008.

Whereas, credit on other input services can validly be taken and utilized accordingly.

Issue 4: Availability of Cenvat Credit if abatement of 75% is taken.

In view of new law based on negative list and Notification No. 26/2012 dated 20.06.2012, where abatement of 75% is taken in case of ‘construction of complex service’, Credit of input services and capital goods used in providing out service (subject to conditions as per Issue 1 & Issue 2) can be taken and utilized for paying service tax on output service. But credit on inputs cannot be taken.

Issue 5: Availability of Cenvat Credit in case of reverse charge

In case where service tax has to be paid on reverse charge basis by service receiver, such service is treated as ‘input service’ for service receiver and irrespective of whether the whole amount of service tax is required to be paid by service receiver on reverse charge basis or not, the whole service tax paid by service receiver, whether paid to service provider or government directly, the whole Cenvat Credit of service tax paid shall be allowed. This is subject to general conditions prescribed under Issue 1 & Issue 2.

Issue 6: Claim of Cenvat Credit, whether on due basis or payment basis.       

As per Rule 4(7) of Cenvat Credit Rules, 2004, the Cenvat Credit in respect of input service shall be allowed on or after the day on which invoice or bill is received. (Earlier, it was allowed on payment basis).  This is subject to the condition that payment of value of input service and service tax shall be made within three months of the date of invoice or bill. If payment is not made within the prescribed period, then Cenvat Credit taken earlier on accrual basis shall be reversed and it can be taken back once payment is made.

Conclusion

Credit on Input Service Whether Credit can be taken against Output Service
Works Contract(Including Maintenance or Repair) Construction of Complex Renting of Immovable Property
Works Contract

Yes

Yes

No

Man Power Supply

Yes

Yes

Yes

Commission/Brokerage

Yes

Yes

Professionals/Legal Consultancy

Yes

Yes

Yes

Telephone Bills

Yes

Yes

Yes

Other Services

Yes

Yes

Yes

(Author-CA Nikhil M. Jhanwar, Delhi-NCR, nmjhanwar@gmail.com, +8860876960)

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