29 October 2013
My Client is a partnership firm providing Electrical Contract service. In a particular contract with a PSU company, it has agreed to supply various electrical goods like cables, panels, pole, switches, jumpers, MS Angles & Channels, etc. along with excavation of earth, dismantling of defective parts, fixing and maintenance of the same as per requirement at agreed rate contract. As per contract, service tax shall be charged extra on 20% of value and VAT on 80% value. So, this is a 'Works Contract Service' U/s 65B(54). Can it Avail Cenvat Credit on goods purchased for executing this works contract towards supply portion which is exempted from levy of tax?
29 October 2013
Kindly Note Explanation (2) to Rule 2A of Service Tax (Determination of Value) Rules, 2006 which prohibits taking of Cenvat Credit on Inputs in Works Contract. I have reservations over the validity of the restriction imposed by the said explanation.
19 July 2024
In the scenario described, your client, a partnership firm providing Electrical Contract Service, has entered into a works contract with a PSU company. Here’s how you can analyze the eligibility for Cenvat credit on goods purchased for executing this works contract:
### Understanding Works Contract Service
- **Nature of Service**: The contract involves both supply of goods (electrical goods like cables, panels, etc.) and provision of services (excavation, dismantling, fixing, maintenance).
- **Tax Treatment**: As per Section 65B(54) of the Finance Act, 1994, this falls under the category of "Works Contract Service." Under this classification: - Service tax is applicable on the service portion of the contract. - VAT (or GST, depending on the current regime) is applicable on the value of goods supplied in the contract.
### Cenvat Credit Eligibility
Now, considering the supply portion of the works contract (which attracts VAT/GST and not service tax):
1. **Cenvat Credit on Goods**: Generally, Cenvat credit can be availed on goods purchased for providing taxable services. However, in the case of works contracts: - Cenvat credit is typically available only for goods used directly in providing taxable services where service tax is applicable.
2. **Exemption of Service Tax on Supply Portion**: Since service tax is not applicable on the supply portion of the works contract (only VAT/GST is applicable), Cenvat credit may not be available on goods used specifically for the supply portion of the contract. This is because Cenvat credit rules require that credit be linked to taxable output services.
3. **Apportionment of Credit**: If there are common inputs used for both taxable (service tax applicable) and exempt (supply portion) activities under the works contract, a proportionate credit can be claimed based on the applicable percentage for taxable services. However, specific goods used solely for the supply portion (exempt from service tax) may not qualify for Cenvat credit.
### Conclusion
- **Service Taxable Portion**: Cenvat credit can be availed on goods used directly for providing the taxable service portion of the works contract, where service tax is applicable.
- **VAT/GST Supply Portion**: Goods used exclusively for the supply portion (subject to VAT/GST only) of the works contract may not qualify for Cenvat credit, as service tax is not levied on this component.
Given the complexity and specific nature of works contracts, it’s advisable for your client to consult with a qualified tax advisor or chartered accountant who can review the contract terms, analyze the input tax credit eligibility, and ensure compliance with relevant laws and regulations. They can also provide guidance on maintaining proper documentation to support Cenvat credit claims effectively.
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