Changes in Service Tax-Post Budget’2006

Re: Abatements

The Govt. has rescinded various notifications allowing abatement of service tax, however simultaneously notified the conditions and the amount of abatement w.e.f. 01.03.2006.

As per Notification no.1 of 2006 dt.01.03.2006, though the abatements of service tax have been allowed as before, however a major change has been made. Now w.e.f. 01.03.2006, the assessee can't claim credit of service tax paid on input services while claiming the abatement. Earlier credit of duty paid on inputs (goods) and capital goods was denied but service tax paid on input service was available.

In view of this change, now a contractor can't claim credit of service tax paid to its sub-contractor in relation to the same services. Thus the govt. shall be receiving more tax than due in case of sub letting of the contract.

The taxability of a sub-contractor is debatable issue. As per the various clarifications issued in relation to different category of service, sub-contractor is not liable to pay service tax. Though these clarifications have not been withdrawn, however these were issued prior to the cenvat regime and are against the spirit of the cenvat scheme.   

The Govt. must come out on this issue that by denying the credit of service tax paid on input service to avail the abatement, does it wants to lend further support to the various clarifications, it has issued earlier regarding the sub-contractor. Further the abatement is allowed in many cases where supply of material alongwith the service is involved. Without prejudice to the power of Govt. to vivisect such a composit agreement for the purpose of levying service tax, the govt., under no circumstance, is authorised to charge service tax on the material portion involved in providing the services, in case the assessee choose to enjoy the credit of service tax paid on input services.