As you all are aware, Government has proposed to introduce Negative list taxation of services in Finance Budget 2012, it has been notified that this new scheme will come into effect from 1st July onwards. By this time you might have been reasonably aware of or at least started to know some of implications that would have major impact on construction industry, Here we have made an attempt to bring all those changes in terms of applicability of service tax so as to enable to understand the fundamental changes in terms of taxability of all the construction related services.
What is Negative List based Taxation:
Till now, the liability to service tax used to arise only in case where the activity carried is covered under any of the taxable category of services as provided like Site formation services, Construction of Residential Complex Service. This has been dispensed with. Instead of providing for the list of taxable services, the term “Service” is defined. What are all the services that Government does not want to tax are listed out as Negative List of services. Further some 39 services are exempted vide Notification 25/2012.This is popularly called “Mega Exemption Notification”.
Definition of the term “Service”
The term “Service” has been defined to mean any activity carried on by one person for another for consideration and includes declared services. But shall not include the following;
a. Transfer of title in goods & immovable property by sale, gift or in any other manner.
b. Transaction in money or actionable claims
c. Services of employee to employer in the course of employment
d. Fee collected by tribunals and courts
Therefore the term service is defined to include every other activity for consideration apart from the above and further it includes certain activities though not commonly understood as services but are specially stated to be services. These are declared services.
Declared Services with regard to Construction Industry:
There are two activities relating to construction industry that are declared to be services. These are as follows.
1) All the construction activities carried out by builders relating to construction of complex, building, civil structure that are carried out in terms of contract with another person. Apart from this it also includes construction of complex or building on their own with a view to sell to a buyer except where the entire consideration from the buyer is received after obtaining the completion certificate.
2) Apart from the above, service portion in the execution of a works contract is also stated with a view to specifically cover all the composite contracts where there is transfer of both material and services.
The first entry covers cases where the company undertakes development of complexes with his own funds with intent to sell the same to the prospective buyers. The second entry covers all other contracts that are executed by company under a contract with service receiver. Therefore all the construction activities carried out by the construction companies are holistically covered under declared services.
None of the services relating to construction industry are covered under the Negative list. Therefore all the services are taxable. However certain services are exempted by Mega exemption Notification.
Exemptions Relating to Construction Industry Under Mega Exemption Notification:
The following are the exemptions available:
1. Services provided to Government or a local authority or a government authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of:
a. Civil structure or any original work predominantly meant for use other than for commerce, industry, or any other business or profession.
b. Construction activities relating to historical monuments, archeological site or remains of the nature.
c. Structures meant for educational, clinical, art or cultural establishment
d. Canal, dam or other irrigational works.
e. Pipeline, conduit or plant for water supply, water treatment, sewerage treatment or disposal.
f. A residential complex predominantly meant for self-use or use of their employees or elected representatives of Parliament, State assembly, Members of Panchayat, Municipalities and Local Authorities.
a. The above activities are exempt only if provided to Government. The term Government has not been defined in the Finance Act. The TRU circular by making reference to General Clauses Act, 1897 stated that ‘Government’ to include both State Government and Central Government and Union Territory. Accordingly it would cover various departments and offices of the Central or State Government which carry out their functions in the name and by order of the President of India or the Governor of the State. Further clarified that Government does not include Government companies registered under the Companies Act, corporations, autonomous institutions formed under the Central Acts or State Acts. Therefore the above works carried out these establishments are not covered under the exemption and service tax is required to be paid.
b. The specific exclusion for personal use of residential complex is available to every service receiver under the existing “Residential Complex Service”. But under the new scheme this benefit is extended only to Government for their own use or as Quarters to the employees and other public servants.
c. Any services provided by sub-contractors to the main contractor providing these services to Government are not exempted from the plain reading of the exemption notification. A clarification in this regard is required.
2. The Services provided by way of erection, construction, maintenance, repair or alteration, renovation or restoration of:
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 scheme under JNNUR or RAY
c. Building owned by an Charitable institution if it is meant predominantly for religious use by general public.
d. Pollution Control equipment or effluent treatment plant excepted or located as a part of factory.
a. Only those roads, bridges, tunnel or terminals for use by general public are exempted. Construction of approach roads in the precincts of a building or gated community.
b. These services are exempted even if provided to any person other than Government.
c. Sub-contractors can also claim exemption as long as the service provided by them to main contractor is of construction nature.
3. Services by way of construction of original works pertaining to:
a. Airport, port or railways including monorail or metro
b. Single residential unit otherwise as a part of residential complex.
c. Low cost houses about carpet area of 60 sq.meteres per house inhousing project approved by Ministry of Housing and Urban Poverty Alleviation.
d. Post harvest storage infrastructure for agricultural produce including cold storages
e. Mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages.
a. Only new constructions are exempted. In case of repairs and other maintenance activities, minor modifications to the existing structures specified above, service tax is payable.
b. Construction of only single residential unit is exempted. Earlier exemption to a complex having 12 units or less is done away with. Further single residential unit is defined as an independent unit with specific facilities for living, cooking and sanitary requirements. Therefore construction of a residential building that allows the dwelling of more than one family by having separate/demarcated facilities as to above is not exempted.
Therefore it is time to check out the position of the contracts undertaken in terms of the above principles. Since a week time is left for all of us it is indispensable to shift the gears.
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