presented by ca. virendra parwal [email protected]
TRANSCRIPT
Category under which services can be classified
Commercial or Industrial construction (w.e.f. 10-9-2004)
Construction of Residential complex (w.e.f. 16-6-2005)
Works contract service (w.e.f. 1-6-2007)Service provided by Builder (w.e.f. 1-7-10)
Commercial or Industrial construction service
a) construction of new building or a civil structure or part thereof;
b) construction of pipeline or conduit;c) completion and finishing services such as glazing,
plastering, painting, floor & wall tiling, wood and metal joinery work, fencing & railing…
d) repair, alteration, renovation in relation to building or civil structure
Which is- Used, occupied or engaged primarily for commerce or
industry.But does not include-Services provided in respect of road, airports, railways, transport
terminals, bridges, tunnels and [email protected]
Construction of complex servicesa) Construction of new ‘residential complex’b) Completion and finishing services in relation to
residential complexc) Repair, alteration, renovation or restoration or similar
services in relation to residential complex‘Residential complex’ is defined in section 65(91a):-i. A building or buildings, having more than 12 residential
units;ii. A common area; andiii. Any one or more facilities or services such as park, lift,
common water supply, parking space, community hall, or effluent treatment system located within a premises and layout of such premises is approved by an authority.
Essential Requisites:-Minimum 13 residential units (house or apartment)Common areaCommon facilities/servicesLocation within a premisesLayout of such premises is approval by authorityExclusion Complex which is constructed by a person directly engaging any
other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person (includes permission for use of such complex by another person either on rent or without consideration)
EXCLUSIONS
WORK CONTRACT SERVICE u/s 65(105)(zzzza)
WHAT IS THE SERVICE?
Service provided in relation to the execution of a works contract
Works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams
What is a Works Contract?A contract that has 2 ASPECTS
Transfer of property in goods involved in execution of such contract which is leviable to tax as sale of goods.
such contract is for the purpose of carrying out
a. Erection/ commissioning/ installation of plant, machinery, equipment or structures; or
b. Construction of new building or civil structure or a part thereof for the purpose of commerce or industry ; or
c. Construction of new residential complex ; or
d.Completion and finishing services, repair, alteration, renovation or restoration of, or similar services in
relation to (b) and (c) ; or
e. Turnkey projects including EPC projects.
Valuation of Taxable Service
New Rule 2A inserted in ST (Determination of Value) Rules, 2007
Value of Service Gross Amount Charged (GAC) Less Value of Property in goods
NotesNotes: : GAC shall exclude VAT / Sales Tax.GAC shall exclude VAT / Sales Tax.
Value of works contract to include charges for labour/ Value of works contract to include charges for labour/ services/ planning/ designing & architect’s fees, P&M hire services/ planning/ designing & architect’s fees, P&M hire charges, consumables, cost of establishment of contractor charges, consumables, cost of establishment of contractor and profit earned in service relatable to supply of labour & and profit earned in service relatable to supply of labour & services.services.
Vatable/ Sales taxable value shall be taken as value for Vatable/ Sales taxable value shall be taken as value for transfer of property in goods.transfer of property in goods.
Composition scheme for Payment of ST on WORKS CONTRACT SERVICE
Works Contract (Composition Scheme for payment of service Tax) Rules, 2007
(Notification No. 32/2007 dated 22-5-2007)
Option to pay 4% of the GAC for the Option to pay 4% of the GAC for the works contract. (GAC shall not include works contract. (GAC shall not include VAT or Sales Tax) VAT or Sales Tax)
No Cenvat Credit on any inputs No Cenvat Credit on any inputs used.used.
Option exercisable before payment Option exercisable before payment of service tax on the contract and no of service tax on the contract and no withdrawal till completion of contract.withdrawal till completion of contract.
GAC shall include value of all goods GAC shall include value of all goods used in whether supplied for a used in whether supplied for a consideration or otherwise.consideration or otherwise.
Preferential location and development of complex’ service
Prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer. (Direction- sea facing, corner flat, vastu friendly, lucy number etc.)
Internal or external development charges which are collected for developing/maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc;
Fire-fighting installation charges; and Power back up charges etc.
Preferential location contd…Preferential location means any location
having extra advantage which attracts extra payment over and above the basic sale price.
Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, such charges are being brought under the new service namely “services provided by builder”.
Excluded charges for providing parking space and Development charges, to the extent paid.
New ‘Explanation’ inserted w.e.f 1-07-2010
For the purpose of this sub-clause, the construction of the complex which is intended for sale, wholly or partly, by a builder or any person authorised by the 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 the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer.
Effect of such Expl.Effective from 1-7-2010.Imposition of service tax on builder or developer
if such complex or part thereof is sold prior to obtaining ‘completion certificate’(CC).
In other words, Installment purchases or lump sum payment of immovable property will become chargeable to the service tax.
Key factor for determining taxability is obtaining of C.C.
Still the exclusion for ‘personal use’ [email protected]
Requirement of Completion Certificate:• Service tax (Removal of Difficulty) Order, 2010 dated 22-6-
10 provides that ‘authority competent’ includes -a)Any Govt. Authority incl. Local Authority (LA)b)An Architect registered with the Council of Architecturec) Chartered Engineerd)Licensed surveyor of the respective LA
who is authorised under any law for time being in force to issue such C.C., as a precondition for its occupation.
Constructions started prior to 1.7.2010Service tax will apply in respect of services
provided or to be provided on or after 1-7-2010. Receipt of payment or advance is not relevant.Such bifurcation is possible only if the
builder/developer keeps proper accounts and records.
Running bills can be issued in respect of services provided up to 1-7-2010, backed by a Certificate from Architect/Chartered Engineer regarding stage of completion of construction covered by such bills raised.
Options
Notification No. 1/2006 Notification No. 12/2003
Service tax to be paid on 25% of the gross amt.
OR33% of the gross amt. (where value of land is excluded)
Exemption of value of goods and material sold by the service provider from value of taxable services. However documentary proof specifically indicating the value of said goods/material is must.
Note: “Gross Amt” should include value of material supplied or
Conditions for abatement under Notification 1/2006
a) No CENVAT Credit of duty paid on inputs and capital goods, or no CENVAT credit for input services.
b) No benefit of notification no. 12/2003 dated 20-06-2003
Issue Abatement Notification No. 1/2006
Notification No. 12/2003
Land Value included in the valuation of service.
Abatement @ 75 %.
Gross value – Value of goods or material sold (including Land)Land Value not included in
the valuation of service. Abatement @
67 %.
Effective rate of service tax 2.575% 10.30 % on the Net Value
Cenvat credit of service tax paid on input service
No
Yes
Cenvat credit of duty paid on capital goods or input goods
No
No
Example
“ABC” Builder constructs a complex. Costs incurred by him for constructing the complex & other relevant details are as under:-
Cost of Land : Rs. 60,000Value of Material used : Rs. 18,000Cost of Labour Service : Rs. 10,000Total Gross Amt. Charged : Rs. 1,00,000CENVAT Credit on Input Services : Rs. 500
PARTICULARSN. No.
12/2003ABATEMENT AVAILED
Option A -75% Option B- 67%
GROSS AMT. CHARGED 1,00,000 1,00,000 1,00,000Less: Abatement @ 75% Nil (75,000) NilLess: Cost of Land (60,000) Nil (60,000)Less: Value of Material (18,000) Nil NilLess: Abatement @ 67% Nil Nil (26,800)VALUE OF TAXABLE SERVICES 22,000 25,000 13,200SERVICE TAX LIABILITY 2,266 2,575 1,360Less: CENVAT Credit on Input Services
500 Nil Nil
SERVICE TAX PAYABLE 1,766 2,575 1,360
Important aspects for choice…Developers can find Notification No. 12/2003 more
beneficial looking at significant benefit arising out of availment of CENVAT credit of Input services.
The 25% scheme is simple but the liability of service tax will be high, particularly at places where land costs are very high. Further CENVAT credit of service tax paid to contractor/sub-contractor is not available.
Different options for different contracts can be adopted depending upon the amount of tax liability under each option.
Each contract can be treated as separate contract and valued differently.
Type of Business Model Tripartite Business Model Redevelopment including slum
rehabilitation projects Investment model Conversion Model Build- Operate- Transfer (BOT) Projects Joint Development Agreement Model
Liability to pay service tax (i)on flats/houses agreed to be given by builder/developer to the land owner towards the land /development rights (ii)flats given to other buyers.
Tripartite Business Model
(i)Prior to 1-7-2010 : Construction service provided by the builder/developer will not be taxable.(Circular No.108/02/2009-ST)
(ii)After 1-7-2010: taxable in case any part of the payment/ development rights of the land was received by the builder/ developer before the issuance of completion certificate.
Landowner Builder or Developer
Contractor who undertakes construction
Issues
Clarification
The value of these flats would be equal to the value of similar flats charged by the builder/developer from the other buyers. In case the prices of flats/houses undergo a change over the period of sale (from the first sale of flat/house in the residential complex to the last sale of the flat/house), the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value.
When the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (eg. allotment letter).
This is contrary to the provisions of the Point of Taxation Rules, 2011. According to which the S.T. has to be paid as per Rules applicable for continuous supply of services. Once the developmental right is given to the builder, the liability to pay S.T. will arise.
Tripartite Business Model contd….
Valuation
Point of Taxation
Circular No. 108/02/2009-St Dt. 29-1-2009
The initial agreement between the promoters/ builders/developers and the ultimate owner is in the nature of ‘agreement to sell’. Such a case, as per the provisions of the T.P. Act, does not create any interest in or charge on such property. The property remains under the ownership of the seller. Therefore any service provided by such seller in connection with the construction of residential complex till execution of sale deed would be in the nature of self-service and consequently would not attract service tax.
Redevelopment Including Slum Rehabilitation Projects
In this model, land is owned by a society, comprising members of the society with each member entitled to his share by way of an apartment. Society or its flat owners may engage a builder/developer for undertaking re-construction. They give ‘No Objection Certificate' (NOC) or permission to the builder/developer, for re-construction. The builder/developer makes new flats with same or different carpet area for original owners of flats and additionally may also be involved in one or more of the following:
(i) construct some additional flats for sale to others;
(ii) arrange for rental accommodation or rent payments for society members/original owners for stay during the period of re-construction;
(iii) pay an additional amount to the original owners of flats in the society.
(i) Re-construction of building by society by directly engaging builder/developer is not taxable as it is meant for “personal use” of society/its members.
(ii) Service provided by builder to others (sale of additional flats to others) is taxable after 1-7-2010.
Issue Clarification
In this model, before the commencement of the project, the same is offer to investors. Either a specified area of construction is earmarked or a flat of a specified area is allotted to the investors. Additionally the investor may also be promised a fixed rate of interest. After a certain specified period an investor has the option either to exit from the project on receipt of the amount invested along with interest or he can re-sell the said allotment to another buyer or retain the flat for his own use.
Investment amount shall be treated as consideration paid in advance for the construction service to be provided by the builder/developer to investor would be subject to service tax.
In case investor exit from the project at a later date, the builder/developer would be entitled to take credit under rule 6(3) of the Service Tax Rules, 1994( to the extent he has refunded the original amount).
If Builder/ Developer resells the flat before the issuance of completion certificate, again tax liability would arise
Issue Clarification
Investment model
Conversion of any hitherto untaxed construction /complex or part thereof into a building or civil structure to be used for commerce or industry, after lapse of a period of time.
Mere change in use of the building does not involve any taxable service, unless conversion falls within the meaning of commercial or industrial construction service.
Issue Clarification
Conversion Model
In certain states, completion certificates have been waived or are considered as not required for certain specified types of buildings. Doubts have been raised, regarding levy of service tax on the construction service provided, in such situations.
Non requirement of completion certificate
Issue Clarification
Where completion certificate is waived or is not prescribed for a specified type of building, the equivalent of completion certificate by whatever name called should be used as the dividing line between service and sale. Even an architect or chartered engineer or licensed surveyor is competent to issue C.C.
Transaction b/w Govt. and Concessionaire At the first level, Government or its agency transfers the right to use and/or develop the land, to the concessionaire. Here the Government or its agency is providing ‘renting of immovable property service’ (renting of vacant land to be used for furtherance of business or commerce) and in such cases the concessionaire becomes the service receiver.
In this model, though the concessionaire is undertaking construction of a building to be used wholly or partly for furtherance of business or commerce, on the land provided by the government or its agency for temporary use, he will not be treated as a service provider since such construction has been undertaken by him on his own account and he remains the owner of the building during the concession period.
Build- Operate - Transfer (BOT) Projects
Transaction b/w Concessionaire and ContractorWhere an independent contractor is engaged by a concessionaire for undertaking construction for him, then service tax is payable on the construction service provided by the contractor to the concessionaire.
Transaction b/w Concessionaire and User of building constructed by him The concessionaire may provide to the users, taxable services such as ‘renting of immovable property service’, ‘business support service’, ‘management, maintenance or repair service’, ‘sale of space for advertisement’, etc. Where the concessionaire has outsource the management or commercial exploitation of the building developed/constructed by him, to another person and receive a pre-determined amount as commission - Taxable under business auxiliary service.
Under this model, land owner and builder/developer join hands and may either create a new entity or otherwise operate as an unincorporated association, on partnership /joint / collaboration basis, with mutuality of interest and to share common risk/profit together. The new entity undertakes construction on behalf of landowner and builder/developer.
Joint Development Agreement ModelIssue Clarification
Circular No. 148/17/2011-ST dt.13/12/2011 (Clarification on levy of service tax on distributors/ sub- distributors of films & exhibitors of movie), particularly paragraphs 7, 8, 9 apply mutatis mutandis in this regard.
7. Unincorporated joint venture, not operating on principal-to-principal basis, will exist only if the arrangement entered into between the two independent persons is also recognized as a person. It may be noted that the word “person” has not been defined in the Finance Act, 1994. As per Sec 3(42) of General Clauses Act, 1897 “person shall include any company or association or body of individuals, whether incorporated or not”.
8. Such a joint venture is also recognized as a legal & juristic entity in the nature of a partnership of the constituent companies by the hon’ble Supreme Court of India in the case of New Horizons [1995 SCC (1) 478; 1994 -TMI – 83686] wherein it was held that “the expression ‘joint venture’ connotes a legal entity in the nature of a partnership engaged in the joint undertaking of a particular transaction for mutual profit or an association of persons or companies jointly undertaking some commercial enterprise wherein all contribute assets and share risks. The independence of joint venture as a separate legal entity, away from its constituent members, has further been fortified in the case of M/s Gammon India Ltd. Vs Commissioner of Customs, Mumbai, 2011-TMI - 204309 wherein the hon’ble Supreme Court categorically denied the benefit of exemption to the JV as the impugned goods were directly imported by constituent member.
9. Thus, where the distributor or sub-distributor or area distributor enters into an arrangement with the exhibitor or theatre owner, with the understanding to share revenue/profits and not provide the service on principal-to-principal basis, a new entity emerges, distinct from its constituents. As the new entity acquires the character of a “person”, the transactions between it and the other independent entities namely the distributor / sub-distributor / area distributor and the exhibitor etc will be a taxable service. Whereas, in cases the character of a “person” is not acquired in the business transaction and the transaction is as on principal-to-principal basis, the tax is leviable on either of the constituent members based on the nature of the transaction and as per rules of classification of service as embodied under Sec 65A of Finance Act, 1994.
Joint Development Agreement Model contd…..
Type of Arrangement
Service Tax Implication
Principal-to-Principal Basis
Service tax is leviable on either of the constituent members based on the nature of transaction and as per rules of classification.
Arrangement under unincorporated partnership/ joint/ collaboration basis
where the land owner and builder enters into an arrangement for joint development of the property with the understanding to share revenue/ profit and not provide service on principal to principal basis, a new entity emerges which acquires the character of a person (As per decision of Hon’ble Supreme Court of India in case of New Horizons). The transaction between new entity and other independent person namely land owner and developer will be a taxable service.
ISSUES In Joint development agreement the landowner brings land
and the developer brings in his expertise to build and market the property, for sharing profit or loss. It assumes character of Joint Venture.
The dominant intention is of partnership and not one of provision of service. There is no relationship of service provider and service recipient.
Transaction b/w developer and landowner is in the nature of ‘self-service’. (Circular No. 108/2009)
The adoption of value of similar flats sold nearer to date on which land was made available to builder is highly impracticable.
ISSUES contd…Where the landowner asks the builder to sell his portion of
constructed area also. In such circumstances, it is not clear whether the builder is providing service to the landowner (in which case, the service tax liability would arise) or to the purchaser (in which case, there would be no liability on the ground of personal use) or to both?
Pure Developer/builder who do not undertake the construction activity are also liable to be taxed under construction service. (whereas as per decision of SC in case of L&T Ltd. (2008) 17 VST 001 a pure developer is not a works contractor). Can he still be covered under construction service which is a generic category.
Classification of service – whether under Construction service or Work Contract service. Present circular is in respect of Construction service only.
