The taxation laws in the area of real estate have been vague and confused. The fact that this sector is a very important part of the commercial transaction and involves organized and unorganized entities with varying levels of legal compliance makes taxing this sector very challenging.
The indirect taxation for this sector has been a bug bear for the state and central governments for decades now with the clarity as of now quite a distant possibility. In service tax law also each and every entry has caused heartburns for the compliant tax payer and anguish for the diligent tax administrator.
In this article we examine some of the issues and disputes in each of the works contract/ construction categories for a better understanding of the law.
ISSUES PERTAINING TO COMMERCIAL OR INDUSTRIAL CONSTRUCTION SERVICES
1. Whether construction services provided for non-commercial purpose are taxable under this head?
No, only construction services provided for commerce or industry purpose is taxable under this category of services. The work done for the PWD, Government organizations that provide public service, charitable organizations, educational institutions and hospitals that have no profit motive normally should not be liable.
Note of caution: The rigid stand in adding an explanation to the definition of commercial coaching may also be repeated in this sector in time to come. There the explanation clarified that the word commercial is only in relation to the receipt of consideration and not to the profit motive.
2. Whether the builder constructing with his own materials is covered?
If the builder uses the material of his own in an indivisible contract, then there is a combination of material and labour and hence would result in Works Contract. The works contract service has a specific entry W.E.F.1.6.2007 and hence it is not covered here.
This understanding has not been fully accepted by the revenue.
3. If in an indivisible contract for the construction services which are provided along with other non-taxable services, whether service tax is liable to be paid under this head?
As per the decision in the case of Daelim Industrial Company Ltd., [2003 (155) E.L.T. 457 (Tri. -
4. Whether the contractors/ builders who have paid the service tax after availing abatements for the period prior to 1.6.2007 are eligible for the refund from 2005?
On the proposition that the earlier entries did not covered the composite works contract, since the amount paid was not payable, whatever the amount paid can be it can be considered as to be a deposit with the Government and refund application can be made. In the opinion of the authors the question of limitation is also not applicable as it was not service tax.
However one has to prove that the incidence of tax is not passed on to the recipient of services, otherwise the refund amount even though granted will be credited to the ‘Consumer Welfare Fund’ instead of handing it over to the assessee.
5. Whether service tax is payable on land portion?
Transfer of land is in the nature of transfer of immovable property, therefore no construction service is provided in that regard and hence the same is not to be included.
6. If the developer enters into a contract with the sub-contractor for the construction, whether there is a liability on the builder?
The developers may not be involved in the complete construction, part of which would be performed by the various contractors. In such a case the contractors are providing the construction service and not the developer and hence the sub-contractors are liable. The department has also clarified this issue vide Circular F. No. 332/35/2006-TRU, dated 1-8-2006, which was reiterated in the Master Circular dated 23.08.2007.
7. Where there is factory building being built, can the builder pay the service tax on the gross amount while availing the credits under central excise for steel, cement, tiles, glass, paints, electrical items etc?
Yes. This option is available as long as the abatements are not claimed. This can also make the project cost be substantially lower for the factory as the credit on the inputs used for construction can be passed on. It can be 4-6 % cheaper where the credit can be availed by the factory.
8. Are pure labour charges of construction liable to service tax?
Yes as long as it is in relation to construction. There would be no abatements or deduction available and ST has to be paid on the gross value. In this case service tax is liable to be paid even prior to 01.06.2007 as this is covered under the category of ‘commercial or industrial construction services’ or ‘construction of residential complex services’ and not covered under the category of ‘works contract’.
19. If Commercial complex is constructed with agreement to sell, whether it would be taxable?
Circular No. 108/2/2009-S.T., dated
20. What is the impact under service tax, when the manufacturer opts to buy the factory building?
Irrespective of whether agreements of construction or agreements of sale are entered into, contractors would after Finance Act 2010, be liable for service tax, so long as, the entire amount from the manufacturers is not received after the date of the Occupation Certificate. In fact, prima facie, even agreements for sale of readymade buildings or premises, entered into prior to the occupation Certificate date would be covered under service tax.
21. Are there any provisions for claiming deduction for the value of land, when the sale agreement is executed before the receipt of occupancy certificate?
The effect of the amendment is that transaction which is essentially one of sale of immovable property is deemed to be a provision of service and any sale contract in general would not separately spell out amount attributable to land. The service provider in our view can claim the deduction for the value of land as service tax can be levied only on the service portion.
22. In case the part of the construction is for residential and part for commercial purposes, whether service tax is leviable under this head?
In case of multi-purpose buildings such as residential cum commercial construction, tax would be leviable in case such immovable property is treated as a commercial property under the local/ municipal laws.
ISSUES RELATING TO CONSTRUCTION OF COMPLEX SERVICES
23. If there are more than 13 residential units under the same compound but with separate plan sanction, (6 +8 units) is such construction of units are liable?
If there is a separate plan sanction for each such unit, then each such unit is considered as a building and such building having less that 12 residential units are not covered under the residential complex definition. Then there is no liability under this entry.
24. If the construction of residential quarters is undertaken for the employees of the factory, is there a liability under this entry?
The definition of the residential complex excludes the buildings that are constructed for the personal use. Further the personal use covers letting it out or allowing others to use. Hence in such case the construction is said to be for the personal use and therefore not covered under service tax net.
However if the residential complex is construct for sale to sister concerns or any third part for that matter, who are proposing to utilize the same further for other activities, then it is subject to tax under this category of service.
25. Whether the developer who sells developed sites in an enclosed area to the client, and who also provides the labour to construct the same as per the design of the buyer for which there is a separate plan sanction is liable?
Since each plan sanction would be for one unit, there would be no liability under this category. This would not be liable under the works contract entry also as it does not qualify as a residential complex.
26. Whether the builder constructing with his own materials is covered?
Since being a composite contract element of goods is involved in this case, it is covered under the category of ‘works contract’ and hence is liable to tax only with effect from 01.06.2007.
27. Whether the amounts received by builder prior to completion of construction are liable to service tax?
Now the explanation in the construction of complex service (Section 65(105)(zzzh) says that unless the entire consideration for the property is paid after the completion of construction (that is after receipt of completion certificate from the competent authority) the activity of construction would be deemed to be a service provided by the builder/promoter/developer to the prospective buyer and the service tax would be liable to be charged accordingly.
The definition of Residential Complex given under section 65(91a) of the Finance Act excludes a 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. The explanation to the sub-section gives the meaning of personal use to include permitting the complex for use as residence by another person on rent or without consideration. It is interesting to note that the concept of personal use spoken about here is unchanged by Budget 2010 thereby implying that apartments constructed for personal use of the service receiver could continue to be excluded from the definition of residential complex.
28. Is the circular No.108/2009-ST applicable to two agreements namely, construction agreement and sale deed?
The circular No.108/2009-ST classifies that if the ultimate owner enters into a contract for construction with a builder / developer,; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’. Therefore, the circular is applicable to the two agreements concept also.
29. Whether the material provided by the client has to be included for the purpose of claiming abatement under notification 1/2006?
Since the value of materials provided by the customer is not a part of the assessable / taxable value, question of claiming abatement under Notification No. 1/2006 does not arise. This would also not be in line with section 67.
Here it should be noted that a recent amendment has been made in Notification No.1/2006-ST dated 1.3.2006 by notification No.29/2010-ST dated 22.6.2010 which requires even the value of land transferred to be included in the gross amount charged for the service. This would entitle contractor to avail a deduction of 75% of the gross amount.
30. Whether the consulting engineer executing the work is covered?
As discussed above, the services taxable are advisory, consultancy and technical assistance. If the Consulting Engineer undertakes to perform the actual work in whole, here there is execution of the work and no assistance is provided. The assistance is said to be provided where the execution work is performed by the client and the consulting engineer extends his support based on his expertise.
ISSUES RELATING TO WORKS CONTRACT
31. Whether the Circular No.108/2009-ST is applicable to works contract also?
Service tax was always applicable on works contract service in relation to construction of complex service from 1.6.2007. However, this was subject to exclusion of a complex constructed which was for the personal use of the person getting the complex constructed. This meant a buyer getting an apartment constructed for his personal use would bring the construction fall under this exclusion and consequently service tax was not to be paid. This was clarified by the Circular 108/2/2009 ST as the definition of “residential complex” always excluded a complex meant for personal use. Therefore, this circular would be applicable to the works contract category also.
32. Whether the levy of service tax on works contracts by considering it as service is constitutionally valid?
The Union Government has the right under Entry 97 of List I of Seventh Schedule to levy a tax on a subject, which is not specifically covered under List II or List III of ibid. The transaction of Works Contract is neither a sale nor a service as held by the Supreme Court in case of Gannon Dunkerly. The amended definition of sale of goods as per the constitution covers only the transfer of goods in the course of execution of works contract. Therefore the service element is not a subject matter of levy either under List II or List III. Therefore in the opinion of the paperwriter the same would be well within the powers of the Union Government to levy tax. However another view in the industry is that there is no facility under the constitution to vivisect a single transaction and tax the portion of the same.
33. Whether all works contracts as per VAT laws would also be works contracts for service tax?
The concept of taxing the works contract under service tax is different from that under VAT as only the select categories of services as laid down in the definition of works contract would be subject to service tax under this head. In other words, there may be works contract under VAT laws, which may not be works contract under service tax.
But in the context of ‘real estate’ all the contracts which are considered as ‘works contract’ under the VAT laws will also be considered as works contract’ under the service tax law. Circular No.B1/16/2007-TRU dated 22.5.2007 in para 9.10 says that” 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.
34. Whether CENVAT credit of excise duty on inputs and materials would be available where the composition scheme is not opted for?
Where the composition scheme is not opted for, the valuation would be as laid down in Rule 2A of the Service Tax (Determination of Value) Rules 2006 as per which deduction from the gross amount charged would be given on account of VAT/sales tax paid and the value of materials transferred during the course of execution of such works contract. Thus since deduction for material is given, there can be a question mark over the availment of excise duty paid on inputs as credits though there is nothing to prevent the assessee from availing such credits at present. Advisable not to avail credit on inputs. However the credit on capital goods and input services can be examined.
35. Whether there would be any impact of the scheme opted for under VAT laws on valuation under service tax?
The assessee is not likely to face issues where he opts for composition scheme both under service tax as well as VAT law. This is because the service tax provisions provide for deduction of VAT/sales tax paid from the gross amount charged. But where the assessee opts for the regular scheme under service tax instead of the composition scheme, there could be some issues as far as the amount to be allowed as deduction for material transferred is concerned, where there is difficulty in ascertaining the actual values.
36. Whether the composition scheme once opted for is to be followed for all contracts?
The scheme can be opted for on a contract to contract basis and once adopted for a particular contract, would be in force till the end of the said contract and the option cannot be changed midway.
41. Whether the amendment made in Finance Act 2010 applies to Works contract service?
The amendment is in the definition of taxable service under the category of construction of complexes as well as commercial or industrial construction service and not works contract service.
42. If prior to the introduction of ‘works contract’ category, if the service provider is paying the service tax under the other category of services such as ‘commercial or industrial construction services’ or ‘construction of complex services’, whether he can shift the liability to ‘works contract category of service’?
The paper writer is of the view that prior to the introduction of works contract there was no levy on the composite contracts pertaining to ‘commercial or industrial construction services’ or ‘construction of complex services’. The Circular No.128/10/2010-ST dated 24.8.2010 has also indicated that in respect of on-going long term contracts where the service tax was being paid under other categories such as construction, erection, commissioning & installation, repairs, the classification could be shifted to works contract category. However, it is not clear on the payment of service tax.
These are a few issues in the categories covered above.
Practical Guide to Service Tax - Bharat Law House
Madhukar N Hiregange F.C.A.