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Service tax on construction

Anand (Partner) (38 Points)

10 July 2012

I am constructing a commercial building. We have given it to a sub-contractor for taking care of building a portion of the building. There are other sub-contractors for taking care of other areas of the construction. We are planning to buy steel directly from the steel manufacturers. Since we pay VAT for steel, do we also need to pay service tax for this material? Our contractor says that we will need to pay Service Tax since they are charging ST of 4.94 which is inclusive of material. Since we have not included in their scope, do we need to pay this 4.94%?

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9 Replies

Ajit kumar Dubey (Taxation Manager) (637 Points)
Replied 11 July 2012

Service tax is not to be paid for sale of steel. Whenever there is change in ownership of any good, service tax is not applicable on the same. So need to pay service tax buying steel.

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Parihar Gopal (Corporate Taxation ) (392 Points)
Replied 11 July 2012

Dear Sir,

Information for all Contractor/Builder/developer & Information for all Consumer and prospective Buyers

I am informing this to all contractor/ developer /Builder so that they can avail this benefit so pay correct reduced amount of service tax to Govt.

Service tax on activity of developers of selling the building or part of the building to be constructed on advance payment (usually construction linked payments) was made subject to service tax under the category of “Commercial or Industrial Construction Services” and “Complex Construction Services” w. e. f. 01.07.2010.

Now, w. e. f. 01.07.2012, in negative list regime, activity undertaken by developers have been included as declared service in clause (b) of section 66E of Finance Act, 1994.

Relevant abatement scheme as given in Sr. 12 of table given in Notification No. 26/2012 dated 20.06.2012 is as under:

Sl. No.

Descripttion of taxable
service

Percentage of Taxable portion

Conditions

Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority

25%

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004.

(ii)The value of land is included in the amount charged from the service receiver.

Huge Benefit in the form of CENVAT Credit: Prior to 01.07.2012 also, rate of abatement was same i.e. 75% and taxable portion was 25% of gross amount (including land cost). However, earlier there was absolute bar on availment of CENVAT Credit.

However, now, CENVAT Credit in respect of capital goods and input services (as defined under rule 2 of CENVAT Credit Rules, 2004) has been allowed w. e. f. 01.07.2012. (CENVAT credit in respect of inputs shall not be allowed).

Usually, developers get the construction done from a construction contractor who charges service tax from developers in respect of construction services provided to developers.

Now, CENVAT Credit in respect of capital goods and input services (including construction service received which is a substantial expenditure) shall be allowed.

Now, developer shall continue to charge service tax from their customers, however, they will now avail CENVAT Credit and deposit lesser amount of service tax in cash after availment of CENVAT Credit. In other words, amount equivalent to CENAVT credit availed by developers will be net saving for developers.

Thus, developers discharging service tax must place a system for availing the CENVAT Credit as per the provisions of CENVAT Credit Rules, 2004.

Example: A Flat is sold for 10,00,000 including land value.After abatement of 75 % ,service tax on 25 % value @ 12.36 % Rs 30900/-charged by builder. As per notification 26/2012 given above,while depositing the collected service tax amount from the consumer ,Developer can claim cenvat credit on capital goods used and cenvat credit on services .

Suppose Input Capital goods used and input services received to construct this flat is worth Rs 2 lakh. Cenvat credit available on 2 lakh @ 12.36% is Rs 24720. So Developer /Builder is required to pay balance only Rs 6180(30900-24720).

After this amendment 26/2012 , there is a direct benefit to builder/developer. In the given example benefit is of 80 % of the service tax collected from consumer . This benefit will increase / decrease with increased used of capital inputs and Input services in construction activities.In few case nothing is payable by developers.

So technically developer/builder should pass on this benefit to consumers.

Rohan (Consultant) (91 Points)
Replied 11 July 2012

Sir,

You have given a contract to Builder or Developer to Construction of Commercial or Industrial Complex. Under the agreement it seems you shall be supplying steel and cement to the Contractor which you've bought from Market after paying Excise and Vat on the same.

W.e.f 1st July 2012, Contractor requesting service tax @ 4.944% seems correct. This shall be charged on entire consideration for carrying out the said services ie. Monetory as well as the non-monetary consideration. Therefore, Taxable value shall include the "cost" of material supplied @ free of cost and used for providing services.

The said activity gets covered under the definition of "Original Works". Value of free supplies needs to be ascertain as per Generally accepted accounting Principle. Refer AS-2. Now whether to include the value of excise duty and vat? Yes, as per AS-2.

Also the Service Tax shall be paid by Both the Service Receiver and Provider @ 50% each of 4.944%. Provided that the Service provider is Individual, Partnership registered or not, LLP or Association of Person, HUF and the Service reciever is Body Corporate. (As per Notification 30/2012 dated 20-06-2012)