Service Providers - Input Credit Avaiability?

[Madhukar N Hiregange]

Service Providers - Is Input Credit Available in these Special cases?

This note examines the practical situations when Input credit is available or not available while providing a service.

Inputs means all goods used for providing any output service but excludes LDO, HSD or petrol, any goods used for construction or execution of works contract of a building or a civil structure or a part thereof or laying of foundation or making of support structures of capital goods except for the provision of service of service portion in the execution of a works contract or construction service [ 66E]

Credit Available on Exempted Service

The credit of inputs is available where they are used in providing either an exempted or taxable service. However the services set out in the negative list [ 66D] are not eligible for the credit as they are not considered as output service. Therefore if an exempted service provider chooses to pay the service tax on exempted service, there is no bar.

This is to be distinguished from the legal position under Central Excise where there is specific bar under Rule 5A to grant of refund on credit of final products which are exempted or nil rated. Also Rule 6(1) restricts input credit for manufacture of exempt goods.

Credit Available on Works Contract – Other than Construction

The credit is restricted / denied only on the construction, works contract for original works of buildings or support structures. In other cases it should be available wherever one is modernising, repairing or renovation other than original works.  Most manufacturers/ service providers blindly avoid availing credit.

Further the ST Valuation rules when followed for determination of value restrict the usage of input used in the works contract.

Whether the service provider has an option not to follow the valuation rules and chooses to pay service tax on the gross amount as provided vide Sec.67 (i) or (ii) is an important question especially where the customer of the works contractor is in a position to avail the credit.

A few examples of such eligibility when payment could be made on gross basis [ rather than claiming the deduction for material] are as under:

1. Exported exempted services
2. Exempted services on which tax paid
3. Works contract such as painting of machinery, powder coating, electroplating, erection & installation, repair & maintenance...
4. Inputs consumed while providing the service such as photography [ films/ paper], explosives in quarrying, printing inks/ paper in mailing list type of services.

Input Credit Used to Manufacture Goods Used in Service

The service sector has been surging to reach around 59 percent of the GDP of India. Many inputs are used in providing a service. Some of them could be exempted products. However the service is taxable at full rate. It appears that the credit on the duty paid inputs used to manufacture the exempted products could be available as credit. This is on the premise that when duty is being paid on gross basis and there is no bar on the credit availment, it should be in line with the scheme.

  This may require some judicial confirmation as today there is a perception that this may not be available.   

For doubts host on pdicai.org.