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The Plight of Construction Service and CENVAT Credit By the time you read this article, one more Union Budget may already been presented by the Finance Minister and may be some more changes taken place in Service Tax and Cenvat Credit simultaneously. Still, the earlier provisions never become PAST, at least in taxing statutes. Therefore, I would like to highlight this article on provisions related to Cenvat credit applicable for Taxable Service of Construction Service. Earlier ‘Construction Sector’ was divided into two different taxable services viz. ‘Commercial or Industrial Construction’ and ‘Construction of complex’ but now both services are covered under one roof i.e. Declared Service’ under Section 66E of Finance Act, 1994. There are many common features in the Construction Service. Hence all Contractors whether Civil Contractors or Fabricators must know implications of all these aspects to prevent legal disputes by making best use of the provisions contained in CENVAT Credit Rules, 2004 effective from 10/9/2004. Cost influencing element – Excise Duty Variety of excisable goods is required by this sector. The cost of these goods is the major element contributing to the cost of construction. The list given below is picked up at random. Moreover the duty rates are changing. There are exemptions on certain commodities under certain conditions. All these factors must be considered before estimating the construction cost. Rates of Excise duties as picked up from R.K. Jain’s, Central Excise Tariff (63rd Edition)

S.No. T.S.H. No. Description of commodity CENVAT Duty Rate 1 4410 Particle Board and Similar Board 12% adv 2 6810 Articles of Cement, of Concrete or of

Artificial stone, whether or not reinforced (This Covers, tiles, hollow concrete blocks, Mosaic tiles of Cement etc.)

12% adv

3 6807 Articles of Asphalt or of similar material like tartlet roofing

12% adv

4 6905 Roofing tiles, chimney-pots, cowls and other ceramic constructional goods.

12% adv.

5 6906 Ceramic pipes, conduits, guttering and pipe fittings

12% adv.

6 9406 Pre fabricated buildings 12% adv. 7 2515 Marble slabs and others 12% adv. 8 680223 Granite blocks, granite tiles and other stones 12 % adv 9 25232910,

25232920, 25232930, 25232940,

Ordinary Portland Cement dry or Coloured or pozzolana Cement, Portland slag Cement and other Cements

Rs. 900/- per tonne

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25232990 10 25232100 Portland Cement (white or coloured) 12% adv. 11 69010010 Clay bricks 6% adv. 12 6902 Refractory bricks, blocks, tiles etc. of ceramic 12% adv. 13 6910 Ceramic sinks, wash basins, wash basin

pedestals etc. 12%

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Iron & steel , Articles of Iron and steel Tariff to be referred because there is a large variety

Comments: The duty rates mentioned above are as shown in the First Schedule to CETA, 1985. There are frequent changes in the duty rates and there are conditional or unconditional exemptions from duty. The Builders and Customers should check on this point at the time of purchase. Cost influencing element – Input Services From 01/07/2012 the list of taxable services as per erstwhile Section 65 (105) of Finance Act, 1994 is no more in existence and instead of that ‘Negative List of Services’ under Section 66D is introduced. Therefore, it is more difficult to decide the status of particular service as an ‘Input Services’ availed by an assessee. Now the status has to be decided from the ‘Description of service’ instead of ‘Name of the Taxable Services’. The Central Government always play a ‘double game’, means at one stroke they have declared that now ‘No more list of Taxable Services’ and suddenly once again restored the earlier list of taxable services with its accounting codes in the month of November 2012. Therefore, instead of going into details to find out Why? How? Is it required to do? Accepted and digested too. Like goods mentioned (supra), plenty of services have to be procured from others and consumed in the construction contracts. These are input services. In all these input services, Service Tax and Education Cesses are payable. Advertising Agency Architect Banking & Financial Institution Business Auxiliary Services Business exhibition services Business Support Service Chartered Accountant Clearing and Forwarding Agent Commissioning & Installation Construction services (if outsourced) Consulting Engineers Courier Interior Decorator Maintenance or Repair Outdoor catering services

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Pandal or shamiana services Photography Real Estate Agent Rent - A - Cab Scheme Operator Sale of space or time for advertisement. Security Agency Technical Inspection & Certification Technical Testing & Analysis Telephone Service Transport of goods by air Transport of goods by Road – This is the major cost element in many cases. Without availing any exemption related to payment of Service Tax, the availment and utilisetion of Cenvat Credit of Service Tax paid as a consignee on inward freight is possible for the payment of service tax. When ‘commercial Concern’ replaced by ‘Any Person’ and change in the erstwhile Rule 2 (p) of Cenvat Credit Rules, 2004 – Explanation given below the definition of ‘Output service’ is omitted w.e.f. 19/4/2006 vide Notification No. 8/2006 C.E.(N.T.). This was most unpleasant amendment for all merchant community and providers of Construction services who do not pay duties of excise, or any taxable output service but have to pay very heavy freight charges on transportation of goods by Road.(GTA Service) both on account of inward freight and outward freight. Many of them may require to face this burden twice”. The contractors must study as to which of the services will be taken from others, get proper Service Tax invoices from them if he wants benefit of CENVAT Credit scheme to reduce his service tax liability.

Advantage of Cenvat Credit Scheme If the Builders not taking benefit of exemption Notification No. 1/2006-S.T. dated 1/3/2006, then only - Cenvat Credit Rules, 2004 are in effect from 10/9/2004. If the contractor is liable to pay Service Tax and actually paying Service Tax then he can avail the credit of excise duties plus education Cess paid on excisable goods, if purchased from either manufacturers or from Registered Depot of manufacturers are from Registered first stage / second stage dealers against proper Cenvatable invoices as per Rule 11 of CER, 2002. They can use this credit for payment of Service Tax. Similarly if they are availing taxable services from others and consuming it into output service then they can take credit of Service Tax paid on input services, provided proper Service Tax invoice is obtained and payment to the provider of input service is made. It is absolutely necessary to read and understand word by word each rule of the Cenvat Credit Rules, 2004 because wrongful availment and utilisetion of credit shall again mean a colossal financial loss.

If the Builder is availing benefit of exemption Notification No. 1/2006-S.T. dated 1/3/2006, then he is not allowed to take Credit of duty paid on inputs or even Capital goods or input services as defined in the Notification No. 1/2006-S.T. dated 1/3/2006. The proviso of this notification is very important which reads - Provided that this notification shall not apply in cases where, - (i) the CENVAT credit of duty on inputs or capital goods or the CENVAT credit of service tax on

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input services, used for providing such taxable service, has been taken under the provisions of the CENVAT Credit Rules, 2004; or ………

Whether Benefit of any Exemption should be taken or not Many Exemption Notifications normally deny benefit of CENVAT Credit Schemes, question is whether to avail benefit of such exemptions or not by Builders and Contractors. There is very simple thumb rule to give better self advice without referring to any consultant or chartered accountant. This is simple because his own true statistics and Profit margins (at least of the last few financial years) are known to him only. (Duties + ST payable) – (Credit of Duties + ST possible) Gross ST Liability = ---------------------------------------------------------------------------- X 100 (GSTL) Gross billed amount

ST means Service Tax

Gross billed amount means the total amount(s) collected from customers in one lot or in differed lots. Builder can judge whether % of GSTL can be easily absorbed in Gross profit before taxation. If answer is positive, better not to take benefit of such conditional exemption. The advantages of this decision may- (a) Income Tax Saving possible to partly offset the tax or duty loss. (b) Freight charges is main costing element but that effect can be nullified by Credit of ST paid

on Freight charges paid by anybody. (c) Duty element on goods is very high. But it will be nullified due to credit facility. (d) Credit of so many other input services will drastically reduce the service tax liability. (e) Possible savings in sorting legal disputes initiated by either Excise or Income Tax

departments. (f) Middle class customers will be satisfied and attracted if the builders can absorb the Service

Tax Burden and do not recover it from customers. (g) Transparency & clarity in transactions The change in definition of ‘Input Service’ from 01/03/2011, the manufacturers and service providers availing services of ‘Construction Service’ suffered a lot. The ‘exclusions’ of ‘Construction Service’ from the definition of ‘Input Service’ itself leads the message by Central Government that ‘No availment of Cenvat Credit’ on ‘Construction Service’. In that case, the persons providing ‘Construction Service’ left no alternative than to opt the exemption by not charging the Service Tax’ or if liable to pay then at least avail ‘benefit of Notification to charge minimum Service Tax by way of abatement’.

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Rest, I leave it to the people, because I personally believe ‘there is no personal gain by evading Indirect Tax such as Service Tax or Excise Duty’ and also strongly believe that ‘at the end common man has to bear the burden of all taxes and duties’. Cenvat Credit is the scheme with lots of ‘Buts’ and ‘Ifs’. The penal provisions for wrongful availment and utilisation of CENVAT Credit can wash out the business of any entrepreneur. Therefore, first understanding the concept thoroughly before availing the benefit of CENVAT Credit and then application of it is always graceful. ……………………………………………………………………………………………………….