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CENVAT Credit of service tax paid on rent-a-cab service

by on May 4, 2013

Karnataka High Court in case of Commissioner of Central Excise, Bangalore-III v. Tata Auto Comp Systems Ltd. CEA No. 132 of 2009 April 11, 2011 has announced a really good decision by allowing credit of service tax paid on Rent-a-Cab service for transport of employees to and from factory as input service. The wordings of the judgement was as follows:

“The identical question of law came up for consideration before this Court in the case of CCE v. Stanzen Toyotetsu India (P.) Ltd. [2011] 32 STT 244 (Kar.). This Court took the view that the transportation/Rent-a-Cab service is provided by the assessee to their employees in order to reach their factory premises in time which has a direct bearing on manufacturing activity. In fact, the employee is also entitled to conveyance allowance which would form part of his condition of service. Therefore, by no stretch of imagination it can be construed as a welfare measure by denying the availment of Cenvat credit to the assessee for providing transportation facilities as a basic necessity which has a direct bearing on the manufacturing activity. While so holding the Court held that if the credit is availed by manufacturer then the question is what are the ingredients that are to be satisfied for availing such a credit. That the said service should have been utilized by the manufacturer directly or indirectly in or in relation to the manufacturer directly or indirectly in or in relation to the manufacturer of final products or used in relation to activities relating to business. If any of the test is satisfied then the service falls under input service and the manufacturer is eligible to avail Cenvat credit and the Service tax paid on such credit.”

Gone are those days!

To start with, from 01-07-2012, specified services are taxable to company on reverse charge basis and one of them is rent-a-cab service. Generally, once paid, the amount of service tax paid on reverse charge basis is available as CENVAT Credit on the basis of GAR-7 challan paid. However, CENVAT credit of service tax paid on rent-a-cab service is specifically excluded in “input service” definition {Rule 2(I)} and thereby made it ineligible for credit.
Legal text:
In this regard, Notification No 3/2011 CE(NT) dated 1.3.2011 (made applicable from 01-04-2011), makes rent-a-cab input services ineligible for credit. The wordings of the text of Rule 2(I) of CCR 2004 is as follows:

“but excludes services,-
(A) ……………………………………………………………………… or
(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods;”

Now this text survived till 31st of March 2012 because the text was changed through Notification No. 18/2012 dated 17th of March 2012 (made applicable from 01-04-2012) as follows:
“but excludes services,-
(A) ……………………………………………………………………… or

(B) specified in sub-clauses (o) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle which is not a capital goods;”

Understanding:

- Generally speaking, the credit of service tax paid on rent-a-cab service is not available since 01-04-2011.
- From 01-07-2012, company, as  a service receiver require to pay service tax on reverse charge basis for the rent-a-cab services received from specified service providers. In this case also, the credit of service tax paid on reverse charge basis (100 or 40% i.e. to whatever extent) is not eligible to company on the basis of GAR-7 challan because input service definition excludes rent-a-cab service.

- However, credit is still available to those tax payers who can relate rent-a-cab service to a motor vehicle which is a capital goods for them. Who are such tax payers? They can be businessmen running business of renting of motor vehicle or transportation of passengers. Hence, credit is still available to these assesses for relating the input service for renting of motor vehicle or transportation of passengers business.

 The motor vehicle should be registered in the name of service provider.

Can service providers providing rent-a-cab service but taking abatement while paying service tax on output services receive credit of rent-a-cab input service?

Rent-a-cab service providers can take abatement of 40% while  paying service tax on output services. Now these tax payers may have vehicles which can be eligible as capital goods and so as to make input service of rent-a-cab service eligible for CENVAT Credit but it is also note that the same credit becomes ineligible again because the once the abatement is received no credit can be availed by service provider as per Notification No. 26/2012 dated 20/06/2012.

What are the action points required to be taken if credit of rent-a-cab service is already taken in accounts?
- If credit is received in accounts as CENVAT Credit Receivable (under Current Assets) related to service tax paid on reverse charge on rent-a-cab service, the same shall be reversed.
- It shall be booked as an expense.

Is there any interest payable on reversal basis?
No. Please refer to our article in this subject matter - http://aviratshiksha.wordpress.com/2013/04/01/interest-and-penalty-on-wrong-availment-taking-of-cenvat-credit/

CA GAUTAM JOSHI
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From → Excise, Service Tax

3 Comments
  1. raj permalink

    It is important to look into getting transportation to and from the airport to make traveling comfortable. I have gone through your blog. The information you have given are really informative.

  2. Anantharaman T permalink

    “…Can service providers providing rent-a-cab service but taking abatement while paying service tax on output services receive credit of rent-a-cab input service?

    Rent-a-cab service providers can take abatement of 40% while paying service tax on output services. Now these tax payers may have vehicles which can be eligible as capital goods and so as to make input service of rent-a-cab service eligible for CENVAT Credit but it is also note that the same credit becomes ineligible again because the once the abatement is received no credit can be availed by service provider as per Notification No. 26/2012 dated 20/06/2012….”

    How a rent-a-cab service provider can get service tax credit of rent-a-cab, if he owns the cars? So the reading could be that the service tax credit of a rent-a-cab is available to the first service receiver from the cab owner. It is not availablke to the person who is taking service from a person who provides the service rent-a-cab), but do not own the cabs. That is he rent cabs to rent them out. It is similar to Excise credit can be passed on by ‘Excise Registered Dealers’ upto 2 stages only.
    Is this suits the definition?

    • Hi Anant,

      First of all, yes, if you are availing the abatement and paying 4.944% ST on output rent-a-cab service then no credit is eligible.

      However, if the person opts to pay 12.36% then only rent-a-cab service received by him can be eligible as credit while providing output rent-a-cab service.

      The reality is 8/10 vehile hiring businesses are either proprietors or firms who are covered under reverse charge so most of them would be taking abatement and get free from hassles of paying ST because their corporate service receivers are liable to discharge ST.

      I would have advised to take abatement in all given cases because receiving CENVAT is subject to rules and any small breach of CENVAT credit rule can later become an outflow or loss of funds at a later stage.

      Best Wishes.

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