PPT ON CONSTRUCTION SERVICE PPT ON CONSTRUCTION SERVICE

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Construction connected Services

Commercial or Industrial Construction Service Construction of complex service Works Contract Service

Erection, commissioning or installation services

Architects’ services

Management, maintenance or repair services

Interior decorators’ services

Consulting engineering services

Legal Service

Real Estate Agency Service

Site Formation and Clearance, excavation & Earthmoving &

Demolition Service

Preferential Location or Development2

Interlinked Construction Services

The relevant taxable service categories for the real estate

industry are as follows

Categories

Construction ofComplex Services

ErectionCommissioning

Works ContractCommercial orIndustrial Construction

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Works Contract Services

EPC - EPC - Turnkey projects including engineering, procurement and construction or commissioning

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Alternatives Available

Alternatives

1) Single Consolidated Contract

2) Consortium Contract

3) Split Contracts

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Structure

PROJECT OWNER

EPC Contractor

One Composite contract comprising of the following activities

Offshore supply

Onshore supply

Offshore service

Onshore service

Civil works

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Development in Law by pronouncement of Judicial decisions, Interpretation, Clarification, Explanation in Construction Activity

Erection commissioning installation service came into service tax net on 01/07/2003

Construction services was brought under service tax net W.E.F 10/9/2004 by insertion of clauses (25b) in section 65(105) of the Finance Act 1994

Renamed as commercial and industrial construction from 16/6/2005 in order to distinguish it from its brother Construction of Complexes introduced on 16/6/2005

Fine tuned by many addition and expansion Construction Services are not pure services It is a composite contract divisible or may not be divisible It involves transfer of property which attract Vat or Sales tax

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Other Judicial Pronouncements

Reheja development corporation case -3STR337 (SC) has clarified the activity under taken by builder for construction /building for or on behalf of the customer for consideration in cash or deferred payment is covered under work contract and not under sale since Karnataka Sales tax act has got separate head for works contract sale

But later the SC for the same facts in the L&T case, 2008(12)S.T.R 257(S.C) referred the matter to the larger bench

The above decisions prompted subsequent Amendment in service tax and vat laws

CBE&C vide number 80/10/2004 S.T dated 17/9/2004 has clarified that estate builder (who get such construction done ) are not covered under the ambits of construction services

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… Cont V/DGST/22/ Audit / Misc./1/2004/ Mumbai the 16th February

2006 - since the builder constructed for prospective customer he provide service and he is liable for service tax

Reheja ‘s case distinguished Assotech Reality private limited vs. State of UP 2007 (7) STR 129 (All SC)

In 2007 CBE&C circular, builder are not liable for payment of service tax

Circular number 96/7/2007 dated 23/08/2007 clarified that pre existing contracts as on 01/06/2000 shall continue to be classified under the same category of taxable service in which they were classifiable at the time of initiation of the contract

Hare Krishna Developers 2008 (10) STR 341 (AAR) pronounced in its advance ruling that builders are liable for payment of Service tax

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… Cont

In 2008 more number of judicial decision gave contradictory pronouncements but by and large holding that sale of flats are not liable for payments service tax

In 2009 circular number 108/02/2009-S.T date 29/1/2009 clarified that builder are not liable for payment of service tax

In 2010 explanation inserted in Sec 65(105)(zzzzh) and in sec 65(105)(zzq) with effect from 01/07/2010

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Judicial Decisions Service tax is payable only on the Service portion BSNL case 2 STR161(supreme court ) recoginised the principle that

service tax and vat tax are mutually exclusive and one cannot overlaps others territory . SVT can be levied on service portion and vat can be levied on material portion in the composite contract

Image Creative Pvt ltd 9 STR 337 (supreme court )recognize or authorize the artificial division to levy vat and service tax on the respective portion of the composite contract .

In AP H.C A.P. Aksh Broad Band Ltd V. Commercial Tax Officer, Jubilee Hills Circle, Hyderabad and Others (41 VST 129) (AP) Once the goods are incorporated in the execution of works contract,

transfer of property in goods takes place When goods are supplied or used in execution of works contract by

a dealer there shall be deemed to be transfer of property in such goods and it would be a sale. 11

… Cont

The law permits deduction of material portion either by way of abetment of 67% vide notification number 1/2006 or by way of material sold or supplied in performing the contract by notification number 12/2003 for the above 3 categories

But abatement of 67% benefit is not available where the taxable services provided are the only completion and finishing services referred in Sec 65 (25b) (c )

For availing the abatement of 67%, the gross amount charged shall include the value of goods and materials supplied or provided (Including free Supplies)

Both the above notification are intended to provide relief for goods and material supplied while providing services one by way of actual and other by way of adhoc deduction

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Works contract service was introduced on 1/6/07 Work contract include all the above three service and has created

controversy in classification and taxability method of service tax CBEC vide its letter No B1/16/2007 TRU, dated 22/05/2007

• Various trade industry associations have raised apprehension in respect of classification of a contract either under the newly introduced works contract service or erection, commissioning or installation and commercial or residential construction services.

• Contracts which are treated as Works Contract for the purpose of levy of VAT / Sales tax shall also be treated as Works Contract for the purpose of levy of Service tax. This is clear from the definition under 65 (105) (zzzza)

… Cont

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Works Contract was not actually an insertion of new service but merely a valuation mechanism provided for specific taxable services which per force included the value of goods also

Rule 2A was inserted in the Service tax (Determination of Value) Rules 2006 allowing exclusion of value of goods and VAT as per VAT or Sales Tax Returns

As an alternative to the above, Works Contract (Composition scheme for payment of SVT) Rules 2007 was introduced.

The Composition tax is to be paid on the entire contract value by the Service Provider (Previously2%, now 4%, + Ed.Cess)

… Cont

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Explanation inserted in commercial or industrial service and complex service but the same was not inserted in work contact service.

Explanation inserted –for the purpose of this sub clause , construction of a complex which is intended for sale, wholly or partly ,by a builder or any person authorized by the a builder before during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorized by the builder before the grant of completion certificate under any law for the time being in force ) shall be deemed to be service provider by the builder to the buyer

After this introduction all developers /builders are brought under the service tax net and sale of flat made by them before the complete construction shall attract service tax

… Cont

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Common definition of Services

Particulars COC C I C ECI WC

a) Construction of Residential complex…..

b) Completion and finishing……

c) Repair, alteration…..

d) Construction of new building…..

e) Erection, commissioning and Installation….

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… Cont

Option available to builder for Assessment under the following categories viz CIC, CCC, WC through either by Notification 12/2003 S.T (sale or supply of material with

documentary proof) (or) Abetment of 67%wide notification number 1/2006(non

availment of cenvat on input goods ) (or) Abetment of notification 29/2010 dated 22/06/2010 (non

availment of cenvat on input goods and land is include in gross value )

Works contract regular method or Works Contract composition method

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… Cont Composition scheme under Works Contract can be availed only excise of option. Opting of option available for each contract Once if it is opted, the same shall not be revoked. SVT is to be paid on Gross amount Gross Amount Includes

Labour charges for execution of the works Amount paid to a sub contractor for labour and services Charges for planning, designing and architect fees Charges for obtaining on hire or otherwise, machinery and tools used for

execution of the Works contract Cost of consumables such as water, electricity, fuel, used in the execution of

works contract Cost of establishment of the contractor relatable to supply of labour and

services Other similar expenses relatable to supply of labour and services and Profit earned by service provider relatable to supply of labour and services

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… Cont

Notification no 23/2009 ST dated 7/7/09

• Include all value of Goods and Services in relation to executing the WC whether supplied under any other contract for consideration or otherwise

• Less : VAT tax

• Less: Cost of Machinery and equipment used

• Declared value of WC is not less than the Gross amount chargeable to WC

Free supply / provision of material also included Prior to 7/7/2009, gross amount does not include value of

material supplied by contract

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Service Tax Calculation (Options)Services COC, CIC, ECI WC

Particulars Abatement (1/2006 dt 1.3.06)

Supply of Mat. 12/2003 dt 20.6.03

VAT assessment 29/2007, rule 2A dt (22.05.07)

Composition scheme (32/2007 dt 22.5.07)

Gross Value Bill Value of Sp to Sr

(-)SVT

Bill Value

of Sp to Sr

(-) SVT

Bill Value of Sp to Sr

(-) SVT

Bill Value of Sp to Sr

(-) SVT

Deductions:

1.Material

Adhoc ded. Of 67%

Inv. Value Value of Material assed under VAT

Nil

2.VAT Tax

3.Cenvat on CG

4.Cenvat on Ipg

5.Cenvat on IS

Ass.Value XXX XXX XXX XXX

Tax rate 10.3% 10.3% 10.3% 4.12%20

Notes Vide notification No 1/2011, dated 01/03/2011 a new sub rule (2a)

has been inserted in rule 3 of the Works Contract Composition Rules o Restricted use of 40% of SVT paid on following Input Services

ECICICCOC

Above restriction not applicable Where the Service Provider has availed abatement vide

notification number 1/2006 Where the Service provider charge service tax on full value by

not claiming CENVAT Credit on Inputs, Adhoc abatement deduction of 75% is available if land is included

along with the bill value vide notification n0 29/201021

Interplay between VAT and SVT

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VAT and Service Tax Construction activities attract both VAT and service tax:

o VAT on material appropriated in the course of constructiono Service tax on construction services

In theory, there is no overlap between the two levies:o VAT not applicable on value of labour/ serviceso Service tax exempt on value of goods supplied

However, there may be an overlap where contractor required to pay VAT and/ or service tax on notional value, (Composition Scheme) VAT on 80% of contract value (assuming ad-hoc deduction of 20%

towards labour/ services)o Service tax on 33% of contract value (available under exemption

notification) VAT and service tax are separate and independent levies. Therefore,

possibility of overlap between the two levies in certain cases cannot be ruled out.

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Comparison of Composition Scheme both in VAT & SVT

Basic of comparison Composition scheme under Service tax

Composition scheme under VAT

Applicability Available on contract to contract basis

Available on year to year basis.

Time for exercise of option

Prior to payment of service tax

By 30th April of the relevant financial year.

Value on which tax to be charged

Service tax to be charged on the gross amount for provision of taxable services.

VAT to be charged on the total turnover including the turnover of exempted goods.

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…. Cont

Cenvat credit/ Input tax credit

Cenvat credit in respect of input services and capital goods can be availed. However, credit of duty paid on inputs cannot be availed.

Input tax credit (i.e. VAT paid on purchases of goods including capital goods) cannot be availed.

Availment of Cenvat credit

Service recipient can avail Cenvat credit of service tax paid to the service provider

Contractee cannot avail input tax credit.

Disclosure in invoice

Service tax (@ 2% or 4% as the case may be) has to be shown separately in the invoice.

VAT charged under composition scheme (at concessional rate of tax) cannot be shown separately on the invoice.

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Taxes on Real Property

Particulars Sale tax / VAT apply? SVT Apply?

Sale of Real Property

Construction Activity

( On material appropriated to WC)

( On construction services)

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CA. P. Sankaran M.Com, FCA, DISA (ICAI)Ganesh & Sankaran

Chartered Accountants26, Govindu Street,

T.Nagar, Chennai – 600017.E- Mail : ganeshsankaran@vsnl.net

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