The Finance Act, 2007 has introduced composition scheme for works contracts and separate rules have been notified. It is understood that Cenvat credit on inputs will not be available if the composition scheme is opted. Is it correct?
Can Cenvat credit can be taken for capital goods and input services under the composition scheme?
Service tax payable by an assessee shall be subject to the assessee’s availing of Cenvat credit as per the Cenvat Credit Rules, 2004 w.e.f. September 10, 2004.
The output service provider shall be allowed to take credit of the tax paid on the inputs and input services only after he makes payment for the value of input service, input goods or capital goods and excise duty or the service tax payable thereon as indicated in invoice or bill or challan of the input service provider.
For getting credit, proper documents and accounts as per the Rule should be maintained (including invoice/challan/bill of entry, etc).
Rule 4A of the Service Tax Rules also provides that taxable services should be provided or credit should be distributed only on invoice, bill or challan. In the case of execution of works contracts, the scheme of valuation is a bit different. Notification No. 32/2007 dated May 22, 2007 (works contract composition scheme) clearly provide in rule 3 that the service provider shall not take Cenvat credit of duties or cess or any inputs. Earlier in TRU (Tax Research Unit) letter dated February 28, 2007, it was provided that no Cenvat credit can be taken for goods, inputs and services.
Simply put, one needs to go by rule 3 of the composition scheme which states that the service provider shall not take Cenvat credit of excise duty and education cess on such duty on any inputs used in or in relation to works contract.
Therefore, Cenvat credit can be taken for capital goods and input service as per strict interpretation of present composition scheme.
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