MAY 09, 2017

By S Sivakumar, LL.B, FCA, FCS, MBA, ACSI, Advocate

SECTION 140(3) of the CGST Act, as passed by both the Houses of the Parliament, reads as under:

(3) A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated the 20th June, 2012 or a first stage dealer or a second stage dealer or a registered importer or a depot of a manufacturer, shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed day subject to the following conditions, namely:--

(i) such inputs or goods are used or intended to be used for making taxable supplies under this Act;

(ii) the said registered person is eligible for input tax credit on such inputs under this Act;

(iii) the said registered person is in possession of invoice or other prescribed documents evidencing payment of duty under the existing law in respect of such inputs;

(iv) such invoices or other prescribed documents were issued not earlier than twelve months immediately preceding the appointed day; and

(v) the supplier of services is not eligible for any abatement under this Act:

Provided that where a registered person, other than a manufacturer or a supplier of services, is not in possession of an invoice or any other documents evidencing payment of duty in respect of inputs, then, such registered person shall, subject to such conditions, limitations and safeguards as may be prescribed, including that the said taxable person shall pass on the benefit of such credit by way of reduced prices to the recipient, be allowed to take credit at such rate and in such manner as may be prescribed.

Sub-Section (3) of Section 140 is very special and highly beneficial. For, it allows for the credit attributable to inputs, whether available as semi-finished goods or finished goods, to be carried forward into the GST regime, despite that cenvat credit is not currently available under the existing service law. Talking specifically of works contractors who have opted to avail of abatement under Notification No. 26/2012-ST dated 20th June, 2012, cenvat credit of the duties paid on inputs (such as steel, cement, etc) is not available under the said notification. Sub-section (3) of Section 140 grants a huge benefit to these works contractors as they now claim cenvat credit of the duties paid on inputs held in stock, whether as semi-finished goods or as finished goods, subject to the conditions specified in the said notification.

So far so good…. the question that would arise is what would happen to the players in the construction industry, who are valuing their services in terms of Rule 2A of the Service Tax (Determination of Value) Rules, 2006. Explanation (ii)(A) to the said Rule 2A has been amended by the Finance Act, 2017 to provide that, in the case of works contracts for execution of original works, service tax shall be payable on forty percent of the total amount charged for the works contract provided that, where the amount charged for works contract includes the value of goods as well as land or undivided portion of land, the service tax shall be payable on thirty percent of the total amount charged for the works contract.

In essence, works contractors who have opted to avail of the abatement could pay service tax on 30% of the total value of the works contract including the cost of the land, while works contractors who have opted to pay service tax on the basis of Rule 2A could pay service tax on 40% of the works contract value excluding the value of land.

Unfortunately, Sub-Section (3) of Section 140 while mentioning only of works contractors who have opted to avail of the abatement benefit under Notification No. 26/2012 would seem to have conspicuously left of works contractors who are paying service tax on 40% of the construction/works contract value under Rule 2A.

Though, from a legal perspective it can be argued that a works contractor who is paying service tax on 40% of the construction value could be treated as one who is rendering exempted services to the tune of 60% of the construction value, the non-mentioning of works contractors who are paying service tax under Rule 2A is bound to create a lot of confusion, especially given the fact that there is a specific reference to works contractors who have opted for the benefit of Notification No. 26/2012.

In the initial days, I thought that there had been an unintended typo error and that, instead of the words 'and was' (highlighted below), the words 'or was' should actually have come into the section.

(3) A registered person, who was not liable to be registered under the existing law, or who was engaged in the manufacture of exempted goods or provision of exempted services, or who was providing works contract service and was availing of the benefit of notification No. 26/2012-Service Tax, dated the 20th June, 2012……

It is requested of the Board to come out with a clarification to allow the benefit of transitional credit also to works contractors who are paying service tax on the basis of Rule 2A, on 40% of the construction value in the case of original works contracts, on par with works contractors who are paying service tax on the basis of Notification No. 26/2012.