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Recent Clarification - Service Tax [Submitted by CA. Rajendra Kumar. P, January 9, 2007 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 of 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 into 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 not 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%.
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