Transitional provisions related to civil works contractors - Notification No. 26/2012-ST vs Rule 2A

Sivakumar sir,

You are always role model for all of us and we always wait for your article. This is due to the fact that your in-depth analysis always brings new angle on the topic. Your recent article is also gave a new direction as we were not thinking that credit will not be available to builders who are taking benefit of Rule 2A under works contract.

But we have some doubts about this analysis. Please clarify the same.

Section 140(3) allows credit only when the registered person is eligible to take credit on such inputs under this Act. (condition (ii)). Now, whether the builders will be eligible to take credit on inputs as the Section 17 (5)(c ) of CGST Act provides that the credit under this provision is allowed to work contract services when it is input service for further supply of works contract service.

But Schedule II of CGST Act, 2017 gives separate entry 6(a) for works contract to be termed as service and 5(b) for construction of complex service. Thus, it underlines that works contract service is separate for CGST Act and construction of complex will not fall under the same. If this is the position then credit under Section 17 will not be available to builders. This view is also taken in another article on TIOL titled “Works contract under GST-Pandora Box yet to be opened” by Mr. Shubam Khaitan published on May 6, 2017.

If the credit is not allowed to builders under this CGST Act then benefit of Transitional provision will also be not available.

Please clarify the same.

CA PRADEEP JAIN

Pradeep Jain Jain 15/05/2017

 

Respected Shri Pradeep Jain

Many thanks for your kind words.
In my view, the provisions contained in Section 140(3) which deals with transitional credit and in Section 17(5)(c) which deals with ITC are independent of each other. While we have the confusion regarding the availability of transitional credit u/s 140(3) in respect of builders who are currently paying service tax under Rule 2A, the ITC in respect of tax paid on inward supply of works contract services is available only to a supplier who is also a supplier of outward works contract services. This, as you know, is also there in the current service tax and this restriction is contained in the definition of input service under Rule 2(l) of the Cenvat Credit Rules.

Hence, in my view, credit of tax paid under GST on inward supply of works contract services is very much available to a Developer or Builder who is engaged in providing outward construction or works contract services under GST.

I do believe that the confusion caused vis-a-vis Section 140(3) regarding builders who are currently paying service tax under Rule 2A is unintentional and the Government would come out with a clarificatory notification or circular. If the Govt does not do this, Section 140(3) might get challenged in the High Court under Article 14 of the Constitution.

Best wishes
Sivakumar

15/05/2017