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MALL owner or landlord letting out property for commercial use will not be able to set off service tax liability against the duty paid on inputs used for constructing the property. In other words, a mall owner will not be able to claim credit against the service tax paid on construction service or excise duty paid on inputs such as cement or steel used in the building. The finance ministry has said that credit cannot be claimed for the inputs used in building process even if the building is meant for commercial renting.

The Central Board of Excise & Customs (CBEC) clarified that since commercial building is an immovable property, service tax on input could not be claimed. "Commercial or industrial construction service or works contract service is an input service for the output, namely immovable property. Immovable property is neither subjected to central excise duty nor to service tax. Input credit of service tax can be taken only if the output is a 'service' liable to service tax or a 'goods' liable to excise duty. Since immovable property is neither service nor goods as referred to above, input credit cannot be taken," a CBEC circular said.

Commercial rent was recognised as a service and brought under tax net in Budget 2007. Property owners who rent, let out, lease or license immovable property for commercial use have to pay the 12.36% service tax on the rentals. Similarly, a works contract service provider will not be eligible to claim credit of excise duty paid on goods involved in the execution of the contract. Services provided in relation to execution of a works contract is leviable to service tax in the last Budget.

Noting that value-added tax or sales tax is payable on the transfer of goods involved in the execution of a works contract, the CBEC has said, "The value for the purpose of levy of service tax under works contract service does not include the value pertaining to transfer of property in goods involved in the execution of a works contract leviable to VAT or sales tax... A works contract service provider is, therefore, not eligible to take credit of excise duty paid on such goods involved in the execution of works contract," it said.

The CBEC also said a service provider who paid service tax prior to June 1, 2007, for the taxable services - namely erection, commissioning or installation service, commercial or industrial construction service or construction of complex service - cannot change the classification of the single composite service for the purpose of payment of service tax on or after June 1, 2007. They would, hence, not be entitled to avail the benefit of the composition scheme. Under the composition scheme for works contract, tax payers have the option to pay service tax at 2% of the gross amount charged for the works contract.

This would mean that with the clarification, tax payers who entered into contracts prior to June 1, 2007, for providing construction service or have paid service tax cannot change the classification to works contract and draw the benefit of a composite scheme. However, experts feel this may complicate the issue further instead of simplifying it.

"The ministry has clarified the much-awaited issue. However, clarification issued by the ministry may increase the litigations because there is scope of judicial interpretation about the classification of taxable service and the reasons and justification given by the government is not in consonance with law. Moreover, it may lead to other disputes as well whether prior June 1, 2007, works contract service is at all taxable under any other category of taxable services," says Assocham expert committee on indirect taxes co-chairman J K Mittal.

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