issues in real estate - service tax
TRANSCRIPT
Real Estate – Impact of Service Tax
CACA. Madhukar N Hiregange
CA Sudhir VS
Coverage TodayDef “ Service” + Issues
Declared Services + Issues
Exemption + Issues
Valuation + Issues
Credits + Issues
Reverse charge + Issues
Other issues
Interactive Session.
Definition: Service - Section 65B(44)
Any activity carried out by a person for another for
consideration, and includes a declared service
Essential requirements:
Any activity
For consideration
Carried out by a person
For another
Specific exclusions from the definition of service
Shall not include
Any activity which constitutes merely
Transfer of title in goods or immovable
property
• Whether landlord is liable to service tax on land provided for
developer under a JDA?
• Whether service tax is leviable on the construction done for
landlords by developer under JD agreement?
• Whether landlord is leviable to service tax on his share of
building which he sells to end buyer?
• Whether consideration for sale of TDR’s is liable to service
tax?
• Whether the amounts forfeited for non-payment of
installments is liable for service tax?
• Whether plotted development is liable to service tax?
• Whether compensation received for transfer/
relinquishment/ nomination of buying right is liable for
service tax?
• Whether the compensation paid to customer for delay in
delivering flat to customer is deductible from taxable
value?
Declared Service…
a) renting of immovable property
b) construction of a complex, building, civil structure or a
part thereof, including a complex or building intended for
sale to a buyer, wholly or partly, except where the entire
consideration is received after issuance of completion-
certificate by the competent authority
h) service portion in the execution of a works contract;
Construction of Complex [Para(b) of Section 66E]
Mentioned as
“Construction of a complex, building, civil structure or a part
thereof, including a complex or building intended for sale to a
buyer, wholly or partly, except where the entire consideration is
received after issuance of certificate of completion by a
competent authority”.
The expression "construction" includes additions, alterations,
replacements or remodeling of any existing civil structure
Except where entire consideration is received after issuance of
certificate of completion by a competent authority.
Construction of Complex [Para(b) of Section 66E]
The following would be irrelevant for determining the
coverage under this declared service.
whether put to use for commerce or industry,
whether the same is used for residential purpose,
whether for charitable purpose,
whether for the public purpose or by Government
Construction of residential complex by builder for
prospective customer is also a works contract. M/s.
Larsen & Toubro Ltd Vs State Of Karnataka 2014 (34)
S.T.R. 481 (S.C.)
Whether Composite contract of sale of land and building
where any part of consideration received before
completion certificate is liable to service tax?
Services under the Negative List- Section 66D
No specific entry pertaining to construction activity. However some services could be as under:
Those services provided by Government or local authority which may include renting and construction
Storage sheds, green house etc built as incidental to use of vacant land for agriculture
Renting of residential dwelling units for use as residence.
Works Contract [Para(h) of Section 66E]:
Works contract - defined in section 65B as:
contract wherein transfer of property in goods involved in
execution of such contract is leviable to tax as sale of goods
&
such contract is for purpose of carrying out construction,
erection, commissioning, installation, completion, fitting out,
maintenance, repair, renovation, alteration of any movable or
immovable property or for carrying out any other similar
activity or a part thereof in relation to any movable or
immovable property.
Scope of Works Contract
Basic requirement - activity should be subject to sales tax.
Pipeline or conduit are structures on land. Contracts for
construction of such structure would be covered under
works contract.
Contracts for painting a building, repair of a building,
renovation of a building, wall tiling, flooring shall be covered
under ‘works contract’ .
Pure labour contracts are not works contracts.
• Whether the service tax is leviable on student hostel run by
private parties?
• Whether the rental pertaining to the parking slot in residential
complex is liable to service tax?
• A building taken for commercial place but used for residence.
Whether the rental income is covered under negative list
entry?
• A building in residential dwelling but put to use for other than
residence? Whether the rental income is covered under this
entry?
Mega Exemption – Notification No. 25/2012 dated 20.06.2012
12. Services provided to the Government, a local authority or a
governmental authority by way of construction, erection,
commissioning, installation, completion, fitting out, repair,
maintenance, renovation, or alteration of-
a) historical monument, archaeological site or remains of national
importance,
b) a structure meant predominantly for use as (i) an educational, (ii) a
clinical, or (iii) an art or cultural establishment;
c) canal, dam or other irrigation works;\
d) pipeline, conduit or plant for (i) water supply (ii) water treatment, or
(iii) sewerage treatment or disposal; or
Mega Exemption – Notification No. 25/2012 dated 20.06.2012
13. Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-
(a) a road, bridge, tunnel, or terminal for road transportation for use by general public;
(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;
(c) a building owned by an entity registered under section 12 AA of the Income tax Act, 1961 (43 of 1961) and meant predominantly for religious use by general public;
(d) a pollution control or effluent treatment plant, except located as a part of a factory; or
(e) a structure meant for funeral, burial or cremation of deceased;
Mega Exemption – Notification No. 25/2012 dated 20.06.2012
14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,-
(a) a single residential unit otherwise than as a part of a residential complex;
(c) low-cost houses up to a carpet area of 60 square metres per house
(d) post-harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or
(e) mechanized food grain handling system, machinery or equipment
29. Services by the following persons in respective capacities –
(a) … or
(h) sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt;
Exemptions with drawn from 01.04.2015
Government non commercial constructions/erection/repair
& maintenance
Residential complex/ houses/ quarters for government
employees for their use
Construction/installations within port
Construction/installations within airport
• Whether the construction of villa is exempted from service
tax?
• Whether the construction of buildings for educational
institutions providing school education[till HSC] is exempted
from service tax?
• Whether the construction of Government hospitals is leviable
to service tax? Whether installation of rice milling machines in
the rice mill is leviable to service tax ?
• The contract of construction of water pipeline is given to A Ltd
by Municipality. It has sub-contracted to Mr B. whether he is
exempted from service tax?
Valuation Mechanism:
Construction
Contract not
coupled with
transfer of
property [ Labour
Only]
Construction
Contract coupled
with transfer of
property in goods
Construction
contract intended
for sale which
includes value of
land as well
As per section 67
of the Act.
As per Rule 2A of
the Service Tax
(Determination of
value) Rules, 2006.
Option given in
Notification
No.26/2012-ST for
abatement of 75%
(with condition)
(70% if carpet area
exceeds 2000 SFT
and price exceeds
1 Crore
Valuation in Works Contract
Broadly, there are two methods for valuation:
a) Calculate the value of service and pay the Service Tax
i. Value of service = Gross amount – value of property in
goods
ii. If not (i) value of service shall be
For execution of original works => 40% of total amount
For maintenance or repair or reconditioning or restoration or
servicing of any goods or immovable property 70% of total
amount
Valuation in Works Contract
b) Abatement scheme i.e. service tax shall be percentage of total
value of works contract including value of free material supplied
by customer. But as of now, the negative list based taxation has
not notified the effectiveness of composition scheme.
In either case, Cenvat credit cannot be availed of excise duty paid
on goods, the property of which is transferred to customer.
Valuation for Works Contract
To determine the value of goods transferred in the execution of
works contract:
Where VAT/sales tax has been paid on the actual value of
transfer of property in goods involved in the execution of the
works contract, then the same value be taken as deduction for
computing taxable value for payment of service tax. Labour
welfare Cess also can be claimed as deduction.
If it is not so, then the value may have to be determined in any
manner which can be substantiated with on sufficient
documentary evidence
Valuation alternatives under the new law i.e after 01.07.2012:
The service portion involved in the execution of works contract
service is declared to be a service under Section 66E of Finance
Act.
Option 1 - Valuation under Rule 2A of the Service Tax
(Determination of Value) Rules, 2006.
Option 2 - Valuation of service portion involved in construction
of complex, building, civil structure or a part thereof vide Entry
No: 26/2012-ST dated 20.06.2012.
Valuation of taxable services for charging Service tax – Section 67
(1) Service tax chargeable on any taxable service with reference to its value shall,—
i. where the provision of service is for a consideration in money - the gross amount charged by the service provider for such service provided or to be provided
ii. where the provision of service is for a consideration not wholly or partly consisting of money- such amount in money, with the addition of service tax charged, is equivalent to the consideration;
iii. where the provision of service is for a consideration- not ascertainable-the amount as may be determined in the prescribed manner.
Valuation of taxable services for charging Service tax – Section 67
(2) Where the gross amount charged by a service provider, is
inclusive of service tax payable, the value of such taxable
service shall be such amount as, with the addition of tax
payable, is equal to the gross amount charged.
(3) The gross amount charged for the taxable service shall
include any amount received towards the taxable service before,
during or after provision of such service.
Service Tax (Determination of value of taxable service) Rules, 2006Rule 2A: Determination of value of service portion in the execution
of a works contractWhat is works contract as per the new definition?
Defined in section 65B (54) Contracts for the specified purposes which involves transfer of
property in goods in the execution of such contract and such transfer of property in goods
Leviable to tax as sale of goods. The specified purposes are for carrying out construction, erection, commissioning, installation, completion,
fitting out, repair, maintenance, renovation, alteration of any moveable or immovable property
for carrying out any other similar activity or a part thereof in relation to any moveable or immovable property
Developer works contract? On what value and when it is to be paid?
Whether service tax to be paid on free issue material supplied by
customer to works contractor?
Whether the land value claimed by the developer is in case of joint
development, where land is registered directly by the land owner to
buyer, is eligible for exclusion from scope service definition?
Whether the profit/gross amount charged by the developer on land is
liable for service tax?
What are the Valuation options for sub-contractor & developer under
service tax law?
• The renting of building per se is declared to be a service.
• The Delhi High Court in case of Home Solutions Vs UOI 2009
(237) E.L.T. 209 (Del.) held that service tax cannot be imposed
on mere letting of immovable property.
• Constitutional validity of charging the service tax still pending
before hon’ble Supreme Court in case of Retailers Association
of India v. Union of India –2011 (23) S.T.R 561.
Renting of immovable property
Contd…….
“renting” means
allowing,
permitting or
granting access, entry, occupation,
use or any such facility, wholly or partly, in an immovable
property,
With or without the transfer of possession or control of the
said immovable property and includes letting, leasing,
licensing or other similar arrangements in respect of
immovable property;
Contd….
Letting of vacant land used for commercial purposes are also
liable for service tax.
Even permitting the use of space other than for residence is
liable for service tax.
Renting of place meant for parking purposes are also taxable.
Renting of residential dwelling units for use as residence
specified under in negative list hence no service tax will
apply.
Contd…
Renting of land for agricultural purposes is also specified in
negative list hence not taxable.
Letting of commercial building for residential purpose are
taxable.
Renting of building to a company intern Company using the
same guest house-liable for service tax.
Returnable deposit received from tenant not liable for service
tax
Exemptions in respect of renting of immovable property
Property tax paid in respect of property leased can be claimed
as deduction from the taxable value Notification No. 29/2012-
S.T dated 20.06.2012
renting of precincts of a religious place meant for general
public; or
Site formation/site leveling/site excavation works
Site formation/levelling works prior to June 2012 fully exempted if it is provided within Port area, for construction of roads and for water supply projects. (Notification No. 17/2005-S.T) From 01.07.2012 Site formation/levelling works are liable for service tax.
Other than above site leveling works liable from year 2005, continued to be liable for service tax.
Receipt of goods transport agency services during course of site leveling services is also taxable.
Site formation/levelling works taxable at full rate if only labour. If land filling is there then the cost of mud etc used for filling could be deducted.
No abatement is allowed from the taxable value.
Architect Services
The architect services includes following
Preparations of drawings, plans and layouts of buildings
Technical examination of site
The legislative competence of the Parliament to levy the
service tax on architect tested in case of Chartered
Accountant Association Vs Union of India 2005 (179)
E.L.T. 129 (Guj.)
Contd…
At present architect services per se not eligible for any
exemption.
Not covered under reverse charge provisions
Service tax @ 14% has to be charged. No abatement is
available for the architect service.
Other services
Services in relation to purchase or sale of immovable property
(real estate) taxable.
The Preferential location services provided by builder are also
taxable.
Property or project management services are also taxable at
full rate
Technical testing or inspection services towards the material
used for construction also taxable.
Survey and exploration services are also taxable
S.NO. Description of Service %ST
SP SR
1. Insurance Agent to a person carrying Insurance business
NIL 100%
2. Goods Transportation Agency NIL 100%
3. Sponsorship Services NIL 100%
4. Advocate or firm of advocates 2 NIL 100%
5. Support Services by Govt. except Renting , Posts, transportation of goods or passengers 2
NIL 100%
6. Manpower/Security services NIL 100%
7. Service portion in Works Contract1 50% 50%
8. Hiring of Vehicles (Abated value)1 NIL 100%
9. Hiring of Vehicles (Non-Abated)1 50% 50%
10. Import of services NIL 100%
11. Directors Remuneration( incl. Sitting Fees) NIL 100%
12. Recovery Agency to Bank & NBFC Nil 100%
Reverse Charge-Joint Charge
Eligibility of Cenvat credit
No bar on availment of credit of service tax paid on any inputs
services in relation services involved in such works contract.
However as far as duty paid on goods are concerned, it is
specifically restricted for ‘inputs’ used in or in relation to the said
works contract.
Benefit of Cenvat credit of capital goods would be available.
Major items where credit can be availed
Excise duty paid on schwing stetter
Transit mixture
Mobile cranes, hydraulics
Dumpers and tippers
Wet mix plant
RMC machine
Pavers
Cranes
Backhov loader
Contd….
Service tax paid by sub contractor
Shuttering and scaffolding material
Frontend loader
Excavator
Accessories to above vehicles and machines
Service tax paid on repair and maintenance to vehicles
Service tax paid on Insurance taken in respect of buildings,
stores, vehicles and machines
BG Commission
Issues???
Whether Cenvat credits can be availed on the pipes and tubes
used to make scaffolding by the construction contractor? What
other capital goods credit could be available?
Whether the developer can avail cenvat credits of service tax
charged in the contractor bills?
Whether Cenvat Credits related to immoveable property sale
can be availed by developer?
Place of provision of service
With the introduction of new scheme of tax, the determination
of tax liability is dependent upon whether the services are
provided within the taxable territory or not.
If it is provided within the taxable territory, it would be taxable
and if not in taxable territory not taxable.
Rule 4-Based on the performance of service
Rule 5-Based on location of immovable prop
Place of location of property
services of experts and estate agents,
provision of hotel accommodation by a hotel, inn, guest house,
club or campsite, by whatever, name called,
grant of rights to use immovable property,
services for carrying out or co-ordination of construction work,
including architects or interior decorators
Works contract services
Site formation services
POP-Immovable property
If the property or site on which the work is carrying out is
located in India, then the Place of Provision for such service is
in India, accordingly liable for service tax. Suppose if the
property or site on which the work is carrying out located in
foreign country, then the place of provision for such service is
foreign country accordingly not liable for service tax.
Services of architect relating to immovable property or site
situated in foreign country, not liable for service tax even
though the architect is located in India.
