service tax issues on construction of residential complex

Service Tax issues on Construction of Residential Complex

Types of Services in Real Estate Transactions

Construction Service

Works Contract Service

Architect Service

Auction of Property

Engineering Service

Erection, Commissioning & Installation Service

Interior Decorator

Real Estate Agent & Consultants

Management Repair and Maintenance

Site Preparation Service

Renting of Immovable Property

• Commercial

• Residential

Types of Service Providers in Real Estate Transactions

Builders Own land, own

Construction

Sale

Develope

r

Develop for Land

Owner

Joint

Agreement

Contract

or

Construction for

Builders

Works

Contract

Following Type of activities by above Service Providers

Construction of Flats/ Offices/ Shops

Developing Residential Townships.

Construction of independent Villas.

Sale of Plots (Developed/ Undeveloped)

Abatement from Service

Tax in

Real Estate Sector

Abatement of Service Tax in Real Estate Sector

AbatementDescription Abatement Taxable

ValueCENVAT CREDIT AVAILABILITY

INPUTS INPUT SERVICES

CAPITAL GOODS

Construction of a complex related services falling u/s 66E(b)-

(a) Residential Unit :- (i) with Carpet Area less than 2000 sq ft. & (ii) Amount Charged less than Rs.1 Crore for each unit.[Both conditions must be satisfied]

75% 25% NO YES YES

(b) Any other case :- (i) Commercial units, OR (ii) Residential units having Carpet Area of 2000 sq ft. or more, OR (ii) Residential units priced above Rs.1 Crore or more.[Any of the above cases (i) to (iii) ]

70% 30% NO YES YES

Valuation of

Services

Related to

Real Estate

Transactions

Valuation of Services related to Real Estate Transactions

Valuation of Construction ServiceGross Amount charged (including value of Land) + FMV of goods / services received from service recipient (excluding taxes) - amount charged by service recipient (excluding taxes).

Valuation of Works Contract ServiceAs Per Rule 2A of Service Tax (Determination of Value) Rules, 2006

Other - Gross Amount Charged

Works

Contract: Valuation & Taxation

Works Contract: Valuation & Taxation

What is Works Contract For execution of a contract

Transfer of property in goods on which sale tax is leviable and; such contract is for the purpose of carrying out

Construction Installation

Repair

Maintenance Completion

Erection

In Relation of : any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

Valuation

Service Tax Determination of Value Rules, 2006

Rule 2A:Determination of Value of Service Portion in the Execution of a Works Contract

Option - IGross amount ChargedLess: (i) Value of property in

goods transferred,(ii) VAT

Option – IITotal Amount

Charged X

Specified Taxable Percentage


Gross Amount charged (GAC) for Works Contract xxxxxLess:(i) Value of property transferred in goods xxx

Taxable Value xxxxNote:(ii) VAT or Sales Tax shall be excluded from GAC.(iii)Value of transfer of property in goods shall be the value taken for VAT

purposes.Value of Works Contract Shall include:(i) Labour charges(ii) Payment to sub-contractor for labour and services;(iii) Planning, designing and architect’s fees;(iv) Hire charges for machinery and tools(v) Cost of Consumables such as water, electricity, fuel(vi) Cost of establishment of the contractor relatable to supply of labour and

services;(vii) Other similar expenses; and(viii) Profit earned by the service provider relatable to supply of labour and

services.

Works Contract: Valuation & TaxationRule 2A : Option – I

Works Contract: Valuation & TaxationRule 2A : Option – II

Where Value Cannot be ascertained as per Option-I then value shall be worked out as under:

S. No. Nature of contract Taxable

Value

1. Execution of Original Works 40%

2. Execution of contract for maintenance, repair, reconditioning or servicing of any goods

70%

3. Other works contracts not covered by 1 & 2 above (including completion and finishing services such as glazing, plastering, installation of electrical fittings of an immovable property).

60%

1. Original works means (i) All new constructions;(ii) All types of additions and alterations to abandoned or damaged structures to make them workable; (iii) Erection, commissioning or installation of plant, machinery or equipment whether pre-fabricated or otherwise.2. Total amount means the gross amount charged plus the value of any material supplied under the same contract or any other contract. Where supply is free of cost, value shall be determined on FMV.3. No input tax credit of excise duty paid on goods, property transferred in execution of works contract. However taxes paid on capital goods and input services will be available.

IndividualHUFFirm AOP

Service Provider

Business Entity

Registered as Body

Corporate

Service Recipient

Works Contract Service

ServiceLiability to

Deposit Service Tax

50% 50%

Service Tax Liability under Partial Reverse Charge


CENVAT Credit in

Real Estate Transactions

Basic rule of CENVAT Credit for service provider

Provider of Output

Service can avail CENVAT Credit

Capital Goods

Inputs

Input Services

Used for Providing

Output Service


Requirement for availing CENVAT CreditInput Services & Capital Goods are used for provision of taxable service

Possession of Proper duty paying documents

Documents must contain all particulars as per Rule 4A of ST Rules, 1994

CENVAT Credit on capital Goods – upto 50% in C/Y, balance 50% in next year.


Joint Charge Quantum of

CENVAT Credit available

On the basis of Invoice issued by Service Provider

On the basis of Challan

Service Tax Issues

in

Real Estate

Transactions

Service of Vehicle Parking

General Public

Private

Rental Sale of Space

Taxable under

rentingCovered vehicle parking / open vehicle parking

Cover under Mega

Exemption

Service Tax Issues in Real Estate Transactions

Construction service

(3.09% / 3.708%)

Taxable

Issue of Preferential Location Charges


Any location having extra advantage which attracts extra payment over and above the basic sale price.Examples:

Direction

Sea Facing, Park Facing, Corner Flat

Floor First Floor, Top Floor

Vastu Having the Bed Room in a Particular Direction

Number Lucky NumbersStatus of Taxability

Separate Consideration

No Separate consideration

Covered by construction service

12.36% on Gross AmountNo abatement

Issue of Surrender/ Cancellation/Transfer/Buy-Back of Flat by Buyer to another person before its completion


Status of Taxability

Builder/Developer would be eligible for adjustment of excess payment under rule 6(3) of the Service Tax Rules, 1994 to the extent he has refunded the original amount.

If the builder/developer resells the flat before the issuance of completion certificate, again tax liability would arise.

Cancellation Charges : Cancellation Charges would fall under declared service Section 66E (e) of Finance Act, 1994 i.e. Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act, these charges will attract Service Tax at the full rate w.e.f. 1-7-2012.Transfer of flat before its completion – Mere transfer of right by the previous owner to subsequent owner. No service is provided.Buy-back of flat – No service. Builder can make adjustment of service tax u/r 6(3).

Issue of Assured Return


Assured Returns are given by the builders to the investor who invest in their under construction project & they are mostly for commercial projects.

Mode of Payment :Give monthly returns to the investors on the amount paid by the investor as down payment by means of post dated cheques till such time the building is ready.

Service Tax implications of Assured Return-

In case of Builder:- It is an expenses for builder- No service tax.

In case of customer :- Assured return represents a consideration for providing services by way of extending deposits/ loans / advances. Covered by Negative List of Services (66D(n)(i)). Hence not taxable.

Issue of Administrative Charges/ Transfer Charges / Restoration Charges



Department’s view that it is taxable

under “Real Estate agent’s service”.Matter sub-judice.

Any activity carried out by a person for

another for consideration falls within the ambit of

term “Service” – Full Rate 12.36%

Prior to 1-7-2012 On or after 1-7-2012

CENVAT Credit availed on Brokerage invoice – Later on Flat cancelled by the buyer.



CENVAT Credit availed need not be reversed.

Reverse CENVAT Credit availed.

Brokerage amount not recoverable from broker.

Brokerage amount

recoverable from broker.


There is no exemption limit in the case of

Reverse Charge. Even Re.1/- liability is to be

discharged

Even if the SP is not registered with

department than RC liability is to be

discharged by SR.

POT is the date of payment to input Service

provider, provided the payment is made within

6 months from the date of invoice.

Reverse Charge Issues


Interest Free Maintenance Security (IFMS) –

Taxable @ 12.36% if non refundable otherwise

NIL rate.

Club Membership Fees taxable @ 12.36%.

Power Backup taxable @ 3.09% / 3.708% as

applicable.

EEC / FFC taxable @ 3.09% / 3.708% as

applicable.

Lease Rent not taxable if recovered from buyer

on actual payment basis otherwise fully

taxable.

Other Issues


Interest income on delayed payment from

Customers: No service Tax.

Transfer Charges: Full rate of Service Tax.

Other Charges collected @ 425/- per sq ft like

(Lease Rent / Car Parking Charges / Club

Membership / Power back up / EEC / FFC / etc)

taxable @ full rate 12.36%.

Other Issues

Knowledge Speaks , But Wisdom

Listens

service tax issues on construction of residential complex

Documents

service recipient

value of works contract

service portion

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abatement of service

service tax issues

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