Credit of Taxes (Vat and Excise Duty) paid on Capital Goods used in execution of works contracts

– The primary capital goods as a works contractor could be machines like Batching Plant, Excavators, Transit Mixers, Cranes etc. While these goods are purchased, a significant amount is paid towards VAT and Excise on the same. If some of the machines require erection and commissioning a minor element of service tax also creeps into the whole system.
 
– Taking a logical view, one may always hold that since these equipments are key to the execution of works contract, a clear credit towards the Input Taxes should be available against the Output Taxes. But surprisingly that may not be the case.
 
– Please look at the below provisions under the Gujarat VAT :-
 
Section 11(5)(mm)  Notwithstanding anything contained in this Act, tax credit shall not be allowed for purchases —
(mm) of capital goods used in transfer of property in goods (whether as goods or in some other form) involved in execution of works contract;
 
– Now one can-not really understand the logic of having such a provision within the act. Although I have so far not seen such direct disallowance under any other State VAT, but one needs to be careful before taking the credit of VAT on capital goods. It would thus be proper to go through the relevant State VAT provisions applicable on Input Credit on Capital goods before utilising any such credit against the VAT Liability.
 
– The second tax is Excise Duty. Since 2004, cross credit of excise duty has been allowed against service tax and vice versa. Thus service providers are technically entitled to credit of excise duty paid on capital goods against their service tax liabilities. However it may be noted that there are certain equipments which are to be registered with the regional transport offices as they run on wheels. Does that mean that they would get covered within the exclusion clause of the definition of Capital goods under the Cenvat Credit Rules.
 
– The term ‘motor vehicle’ is not defined in Cenvat Credit Rules. As per Central Excise Tariff Act, ‘motor vehicles’ are covered under chapter 87 of Central Excise Tariff.
– As per section 65(73) of Finance Act, 1994; ‘motor vehicle’ has same meaning as assigned to it under section 2(28) of Motor Vehicles Act. As per that Act, ‘motor vehicle’ means any mechanically propelled vehicle adapted for use upon roads, whether the power or propulsion is transmitted thereto from internal or internal source and includes a chassis to which a body has not been attached and a trailer; but does not include a vehicle run on fixed rails or a vehicle of special type adapted for use only in a factory or in any other enclosed premises or a vehicle having less than four wheels fitted with engine capacity of not exceeding thirty five cubic centimeters.
– Credit of excise paid on such vehicles, is only available to the specified service providers and not to those executing construction projects. However certain typical equipments like crane, Excavator, Batching Plant, which may be on wheels and may require registration with RTO, but since the same do not fall within the definition of vehicles as mentioned in the exclusion category, credit of such goods would be very well available to the service provider.
– Further it is interesting to note that The capital goods which are used by the manufacturer or the service provider and which do not fall within the ambit of definition of input in rule 2(k) are to be treated as inputs and are entitled for the Cenvat credit. The CBEC through its Letter dated 23-10-2008 vide F No. 137/120/2008 CX-IV has already clarified the position and it states that the capital goods are entitled for Cenvat credit if it is used in the process.