Service tax on Works Contract is leviable from 1-06-2007. All assesses providing services of works contract has to choose any one among the following options:

Option A: -       Avail Exemption upto Rs. 8 Lakhs

Option B: -       Opt composition scheme and pay service tax @2.06%

Option C: -       Opt for Regular Service Tax Payment instead of composition scheme

(Note: - "Option B" and "Option C" can also be opted after exhausting the maximum limit under "Option A" if opted)

Before choosing any option, an assessee must analyze the issue of Cenvat Credit involved carefully.

Sometimes "Option C" is more beneficial that "Option B" for the following reasons: -

In Option C -   An assessee who is availing Composition Scheme is not allowed to avail Cenvat Credit on Inputs used in or in relation to such works contract. - (See Rule 3 of the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007)

However he can avail Cenvat Credit on Input Services and Capital Goods.

In Option B -    There is no such condition. An assessee can avail Cenvat Credit on inputs / Input Services and Capital goods.

It seems unrealistic but it is true that while claiming deduction for the value of goods transferred from the Gorss Value (under rule 2A of the Service Tax (Determination of Value) Rules, 2006), Cenvat Credit is allowed to be availed simultaneously. There is no bar.

Cenvat Credit treatment shapes works contract tax choice: composition restricts input credit but permits input service and capital goods credit. Assessors of works contract services must choose between an exemption threshold, a composition scheme, or regular service tax payment; this choice determines Cenvat Credit entitlement. The composition scheme disallows Cenvat Credit on inputs used in the works contract while permitting credit on input services and capital goods, whereas the regular payment route allows Cenvat Credit on inputs, input services and capital goods. Simultaneous claim of Cenvat Credit is allowed when deducting the value of goods transferred under the value determination rules.