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In this article we have examined the provisions relating to real estate with focus on what is more relevant for the builders and developers.

The second part of this article is on issues only. This article maybe read along with the ppt in this regard attached. 

1 Real Estate & Service Tax

1.1  Definition of term Service – Section 65B(44)

Section 65B (44) defines service as - "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—

(a) an activity which constitutes merely,––

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his employment;

(c) fees taken in any Court or tribunal established under any law for the time being in force.

1.2  Declared Service – Section 66E

Declared Services – Service has been defined to include declared services. Declared Services are defined under Section 65B (22) of the Finance Act, 1994 to mean any activity carried out by a person for another person for consideration and declared as such under Section 66E of the Finance Act, 1994. It means for a service to come under the category of declared services, it has to satisfy two basic conditions conjunctively

· it must be an activity by one person to another for consideration

· it must be specified(i.e. declared) under section 66E

Need for Declared Service

The definition of service in the first instant is very wide to cover any transaction done for a consideration. However, there exist few activities which would overlap with the other levies of state with a marginal difference, thereby questioning the constitutional validity of the levy under service tax. In some cases there may be a doubt whether that activity could possibly called a service at all. To rest the doubt about the validity of a transaction to be considered as service, the authority has intended to declare such activities to be a service. To give an instance, the  first declared service “renting of immovable property service” was challenged as to whether it was a “service” as well as the competence of the Union to levy the tax on a property, which is a subject to state governance. Similarly most of the declared services were challenged. For all events and purposes these transactions shall be deemed to be service.

The following are covered under the negative list relating to the Real Estate Industry:

(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority.

Explanation.— For the purposes of this clause,—

(I) the expression "competent authority" means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:––

(A) architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(B) chartered engineer registered with the Institution of Engineers (India); or

(C) licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(II) the expression "construction" includes additions, alterations, replacements or remodeling of any existing civil structure;

(h) service portion in the execution of a works contract;

The discussion on the entries in aspects in declared list is as follows:

A.  Renting of Immovable Property [Para(a) of Section 66E]

·  It was already taxable. Validity of the levy was upheld by many courts. P&H-Shumbh Steel, Orrisa-Utkal Builders, Gujrat HC-Cinemax, Delhi HC- Home Retail, and Mumbai HC also.

· S.65B: “Renting” means allowing, permitting or granting access, entry, occupation, usage or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property.

Renting in negative list (S.66D)

· Services relating to agriculture or agricultural produce by way of renting or leasing vacant land with or without a structure incidental to its use are covered under the negative list vide section 66D(d)(iv). The transaction could be without any sort of the structure, however, in case there is any structure, even that has to be used incidental to agriculture.

·  Services by way of renting of residential dwelling for use as residence is also covered under the Negative list vide section 66D(m) of the Act.

Exemption under Notification No. 25/2012-ST dated 20.06.2012

· Renting of precincts of a religious place meant for general public (Para5 of Notification 25/2012)

· Renting of immovable property to an educational institution in respect of such service relating to providing of education (given in Para9 of the said notification)

· Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a unit of accommodation below rupees one thousand per day or equivalent (Para18 of the said Notification)

· Services by way of vehicle parking to general public excluding leasing of space to an entity for providing such parking facility. (Para24 of the said Notification)

Thus, parking charges collected at cinema theatres, malls etc, is exempted from service tax as it falls under  services by way of motor vehicle parking to general public.

Covers

· Renting for temporary purpose like marriages or other social functions because it includes renting without transfer of possession or control,

· Permitting use of property for vending/dispensing machine

· Allowing erection of tower

· Renting for entertainment or sports

· Renting of theatres by owners to film distributor

Place of property determines taxability

If immovable property is in non taxable territory and is owned by person in taxable territory it shall not be taxable.

B. Construction of Complex [Para(b) of Section 66E]:

· This entry is mentioned as “Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority”.  The expression "construction" includes additions, alterations, replacements or remodeling of any existing civil structure.

·  This service intends to cover whole or part of the construction of a complex, which refers to a group of building, construction of independent building, and construction of civil structure. Such construction whether put to use for commerce or industry, whether the same is used for residential purpose, whether for charitable purpose, whether for the public purpose or by Government would be irrelevant for determining the coverage under this declared service. However, there are few exemptions are there in Negative list and in Mega Exemption Notification No.25/2012-ST.

· Importance of the 2nd limb of the entry- This limb plays a vital role in determining the taxability of the activity. The entire activity of the builder/ developer/ promoter would be deemed to be service only if any amount has been received prior to issuance of completion certificate by a Competent Authority. If any amount is received in this behalf after the issuance of completion certificate, then the activity would be a mere transfer of title in immovable property and thereby doesn’t falling under the definition of service. The same was also there in the earlier regime by way of an Explanation to the taxable service definition w.e.f., 01.07.2010.   

· "Competent authority" means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non requirement of such certificate from such authority, from any of the following, namely:––

(A) architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(B) chartered engineer registered with the Institution of Engineers (India); or

(C) licensed surveyor of the respective local body of the city or town or village or development or planning authority;

Service in Negative List U/S-66D

No specific entry pertaining to construction activity.

Exemption under Notification No. 25/2012-ST dated 20.06.2012

Refer Exemption Chapter of the Material

Valuation Mechanism:

Construction Contract not coupled with transfer of property

Construction Contract coupled with transfer of property in goods

Construction contract intended for sale which includes value of land as well

As per section 67 of the Act.

As per Rule 2A of the Service Tax (Determination of value) Rules, 2006.

Option given in Notification No.26/2012-ST for abatement of 75%(with condition)

Detailed analysis for Valuation is provided in Valuation Chapter of the Material

C. Works Contract [Para(h) of Section 66E]:

· It is worthy to note that the phrase used is ‘works contract’ and not work contract. ‘Works’ has a defined and accepted legal meaning. As per Black’s Law dictionary ‘work’ means ‘buildings or structures on land’.

· Works contract has been defined in section 65B of the Act as a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, maintenance, repair, renovation, alteration of any movable or immovable property  or for carrying out any other similar activity or a part thereof in relation to any movable or immovable property. (‘building or structure on land’ substituted by immovable property). The definition of works contract was earlier given as an explanation to Section 65(105)(zzzza) which is amended to fit into the new scheme of declared services.

· In terms of Article 366(29A) of the Constitution of India, transfer of property in goods involved in execution of works contract is deemed to be a sale of such goods.

· It is a well settled position of law, declared by the Supreme Court in BSNL’s case [2006 (2) STR 161 SC], that a works contract can be segregated into a contract of sale of goods and contract of provision of service.

· This declared list entry has been incorporated to capture this position of law in simple terms under section 66E.

Scope of Works Contract

· The basic requirement is that the activity should be subject to sales tax. However, definition of works contract under service tax and CST/ State VAT is quite different.

· Buildings and structures on land means not only buildings or structures attached to earth but also things permanently fastened to a building or structure attached to earth.

· Pipeline or conduit are structures on land contracts for construction of such structure would be covered under works contract

· Contracts for erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise be treated as a works contract if:

-Transfer of property in goods is involved in such a contract; and

- The machinery equipment structures are attached or embedded to earth after erection commissioning or installation

· Contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under ‘works contract’

· Pure labour contracts are not works contracts

Valuation in Works Contract

Broadly, there are two methods for valuation

(a) Calculate value of service and pay service tax:

i) Value of service = Gross amount – value of property in goods

ii) If not (i) value of service shall be

1. For execution of original works => 40% of total amount shall be value

2. For maintenance or repair or reconditioning or restoration or servicing of any goods => 70% of total amount shall be value

3. For other works contracts => 60% of total amount shall be value

(b) Composition scheme i.e. service tax shall be percentage of total value of works contract including value of free material supplied by customer. But as of now, the negative list based taxation has not notified the effectiveness of composition scheme.

In either case, CENVAT credit cannot be availed of excise duty paid on goods, the property of which is transferred to customer. Thus, CENVAT credit cannot be availed on excise duty paid on building material like cement, steel, tiles, fittings, etc. Cenvat Credit available for goods for which property is not transferred subject to reversal under Rule 6 of Cenvat Credit Rules. [expected to be re examined prior to 1.7.2012 and changes put in place to take the concept of seamless credit further.]

Exemption for Works Contracts - Notification 25/2012

Refer Exemption Chapter of the Material

Reverse Charge mechanism applied for works contract

· Where service provider is-

o   Individual or HUF or proprietary firm or partnership firm, registered or not or AOP

·  And service recipient is company under Companies Act or business entity registered as body corporate located in taxable territory

·  50% tax shall be payable by service provider and 50% shall be payable by service recipient.

1.3 Negative List – Section 66D.

Under the negative list, the entry which merits consideration is:-

(m) Services by way of renting of residential dwelling for use as residence;

Clause 41 of Section 65B defines renting as - "renting" means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property;

1.  SERVICES BY WAY OF RENTING OF RESIDENTIAL DWELLING FOR USE AS RESIDENCE

‘Renting’ has been defined in section 65B as ‘‘allowing, permitting or granting access, entry, occupation, usage or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property’.

Snap shot on taxability/ non-taxability of Renting Transactions:

If

Then

A residential house taken on rent is used only or predominantly for commercial or non-residential use.

The renting transaction is not covered in this negative list entry.

A house is given on rent and the same is used as a hotel or a lodge

The renting transaction is not covered in this negative list entry because the person taking it on rent is using it for a commercial purpose.

Rooms in a hotel or a lodge are let out whether or not for temporary stay

The renting transaction is not covered in this negative list entry because a hotel or a lodge is not a residential dwelling.

Government department allots houses to its employees and charges a license fee

Such service would be covered in the negative list entry relating to services provided by Government and hence non- taxable.

Furnished flats given on rent for temporary stay

These are in the nature of lodges or guest houses and hence not treatable as a residential dwelling

1.4  Mega Exemption – Notification No. 25/2012 dated 20.06.2012

5.  Services by a person by way of-

(a)  renting of precincts of a religious place meant for general public; or

(b)  conduct of any religious ceremony;

12.  Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of-

(a)  a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(b)  a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c)  a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(d)  canal, dam or other irrigation works;

(e)  pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal; or

(f)  a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act;

13.  Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-

(a)  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 a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

(c)  a building owned by an entity registered under section 12 AA of the Income tax Act, 1961 (43 of 1961) and meant predominantly for religious use by general public;

(d)  a pollution control or effluent treatment plant, except located as a part of a factory; or

(e)  a structure meant for funeral, burial or cremation of deceased;

14.  Services by way of construction, erection, commissioning, or installation of original works pertaining to,-

(a)  an airport, port or railways, including monorail or metro;

(b)  a single residential unit otherwise than as a part of a residential complex;

(c)  low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(d)  post-harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e)  mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;

29.  Services by the following persons in respective capacities -

(a)  sub-broker or an authorised person to a stock broker;

(b)  authorised person to a member of a commodity exchange;

(c)  mutual fund agent to a mutual fund or asset management company;

(d)  distributor to a mutual fund or asset management company;

(e)  selling or marketing agent of lottery tickets to a distributer or a selling agent;

(f)  selling agent or a distributer of SIM cards or recharge coupon vouchers;

(g)  business facilitator or a business correspondent to a banking company or an insurance company, in a rural area; or

(h)  sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt;

Relevant definitions:

(q)  “general public” means the body of people at large sufficiently defined by some common quality of public or impersonal nature;

(y)  “original works” means has the meaning assigned to it in Rule 2A of the Service Tax (Determination of Value) Rules, 2006;

(zc)  “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit;

(zb)  “religious place” means a place which is primarily meant for conduct of prayers or worship pertaining to a religion, meditation, or spirituality;

(ze)  “single residential unit” means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family;

1.5 Place of Provision of Service Rules

What is Relevance of Place of Provision of Service?

With the introduction of new scheme of tax, the determination of tax is dependent upon whether the services are provided within the taxable territory or not. If it is provided within the taxable territory, it would be taxable and if not in taxable territory not taxable. This would be the position irrespective where the service provider or service receivers are located.

Services being intangible it requires guidelines as to determination of the place providing service to ascertain taxability considering whether it is provided within taxable territory or not. For providing such guidelines Place of Provision of Services Rules, 2012 is notified.

Determining Location of service provider and location of service receiver:

Before we go to indentify the place of provision of service, one has to first identify where the location of service provider and location of service receiver.

The location of a service provider or receiver (as the case may be) is to be determined by applying the following steps sequentially:

A. If the service provider/receiver has obtained only one registration, may be centralized (in case of multiple places) or otherwise (having only one place) - the premises for which such registration is taken is the location

B. In other cases i.e. either no registration is taken or multiple registration is taken the location of service provider/receiver is identified sequentially as follows:

a. If services are provided from Business Establishment (place where management and control exist) – Place of such business establishment is the location

b.  If services are not so provided but from other establishment (fixed establishments) – Place of such fixed establishment is the location

a. If the services are provided from / received by more than one locations - the establishment most directly concerned with the provision of service / use of the service is the location

b. In the absence of any places mentioned above – usual place of residence is the location.

Determination of place of provision

The Place of Provision of Services has been structured by breaking up the services from Rule 4 to Rule 12 into sectors i.e. on following basis (separately explained later as to its scope):

a. Rule 4-Based on the performance of service

b. Rule 5-Based on location of immovable property

c. Rule 6-Based on place of holding event

d. Rule 7-Based on performance of services at more than one location

e. Rule 8-Based on the provision of service where provider and recipient both located in taxable territory

f.  Rule 9-Based on specified services where place of provision is at location of service provider

g. Rule 10-Based on destination based transportation of goods services

h. Rule 11- passenger transportation service based on place where the passenger embarks on the conveyance for a continuous journey,

i. Rule 12- based on services provided on board conveyance in course of a passenger transport operation.

When none of these specific rules is applicable, then the place of provision is determined based on default Rule 3, according to which, the place of provision of service would be based on location of recipient of service. However, in the ordinary course of business, the location of service receiver is not available (say for example walk in customers where the location of service receiver is not known ordinarily), then the place of provision is the place of the service provider. 

Power of Central Government to notify the place of provision

In addition to the above determination as mentioned above, Rule 13 empowers the Central Government to notify the type of services or circumstances in which cases the place of provision would be the place of effective use and enjoyment of a service. As on date the Central Government has not notified any type services in this regard.

Rule

Situations

Place of provisions of Service

5

Services provided directly related to an Immovable property including

-   services of experts and estate agents,

-  provision of hotel accommodation by a hotel, inn, guest house, club or campsite, by whatever, name called,

-  grant of rights to use immovable property,

-  services for carrying out or co-ordination of construction work, including architects or interior decorators

Location of the immovable property located or intended to be located.

1.6  Point of Taxation Rules

Relevant definitions from the Rules

(ba) “change in effective rate of tax” shall include a change in the portion of value on which tax is payable in terms of a notification issued in the Official Gazette under the provisions of the Act, or rules made thereunder;]

(c)  “continuous supply of service” means any service which is provided, [or to be provided continuously or on recurrent basis, under a contract, for a period exceeding three months with the obligation for payment periodically or from time to time], or where the Central Government, by a notification in the Official Gazette, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition;

(d)  “invoice” means the invoice referred to in rule 4A of the Service Tax Rules, 1994 and shall include any document as referred to in the said rule

Relevant Rules

RULE 3. Determination of point of taxation. — For the purposes of these rules, unless otherwise provided, “point of taxation” shall be,-

(a)  the time when the invoice for the service [provided or agreed to be provided] is issued :

Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules, 1994, the point of taxation shall be the date of completion of provision of the service;

(b)  in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment :

Provided that for the purposes of clauses (a) and (b), -

(i)  in case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service;

(ii) wherever the provider of taxable service receives a payment up to rupees one thousand in excess of the amount indicated in the invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined in accordance with the provisions of clause (a).

Explanation - For the purpose of this rule, wherever any advance by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.

RULE 4 Determination of point of taxation in case of [change in effective rate of tax]. — Notwithstanding anything contained in rule 3, the point of taxation in cases where there is a [change in effective rate of tax] in respect of a service, shall be determined in the following manner, namely :-

(a)  in case a taxable service has been provided before the [change in effective rate of tax],-

(i) where the invoice for the same has been issued and the payment received after the [change in effective rate of tax], the point of taxation shall be date of payment or issuing of invoice, whichever is earlier; or

(ii) where the invoice has also been issued prior to [change in effective rate of tax] but the payment is received after the [change in effective rate of tax], the point of taxation shall be the date of issuing of invoice; or

(iii) where the payment is also received before the [change in effective rate of tax], but the invoice for the same has been issued after the [change in effective rate of tax], the point of taxation shall be the date of payment;

(b) in case a taxable service has been provided after the [change in effective rate of tax],-

(i)  where the payment for the invoice is also made after the [change in effective rate of tax] but the invoice has been issued prior to the [change in effective rate of tax], the point of taxation shall be the date of payment; or

(ii)  where the invoice has been issued and the payment for the invoice received before the [change in effective rate of tax], the point of taxation shall be the date of receipt of payment or date of issuance of invoice, whichever is earlier; or

(iii)  where the invoice has also been raised after the [change in effective rate of tax] but the payment has been received before the [change in effective rate of tax], the point of taxation shall be date of issuing of invoice.

RULE 5. Payment of tax in case of new services. — Where a service is taxed for the first time, then, -

(a)  no tax shall be payable to the extent the invoice has been issued and the payment received against such invoice before such service became taxable;

(b) no tax shall be payable if the payment has been received before the service becomes taxable and invoice  has been issued within fourteen days of the date when the service is taxed for the first time.

Definitions/Meaning

The “Change in effective rate of tax”, which include a change in the portion of value on which tax is payable as per the provisions of the Finance Act, 1994 or rules made thereunder. Earlier this was in the form of an explanation to the Rule 4.

The term “continuous supply of service” is defined to mean any service which is provided, or to be provided,

- Continuously or on recurrent  basis,

- under a contract,

- for a period exceeding three months,

- with the obligation for payment periodically or from time to time

- or where the Central Government, by a notification in the Official Gazette, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition;

PoT as defined under Rule 2(e) means the point in time when a service shall be deemed to have been provided.  The intent is to provide for the point when service shall be deemed to be provided for the purpose of Rule 6 of Service Tax Rules which provides for the liability to pay Service Tax.

Date of Payment (Rule 2A):

The new rule has been inserted for the purpose of setting out what is “date of payment”. Accordingly, earlier of the following dates would be considered as date of payment i.e.,

· Date on which the payment is entered in the books of account; or

· Date on which the payment is credited to the bank account of the person liable to pay tax.

Further the date of book entry would not be considered and only date of credit into bank account would be considered if all the three conditions below are fulfilled-

· Between the date of entry and date of credit, there is change in effective rate of tax or when a service is taxed for the first time; and

· The credit in the bank account is after four working days from the said date of rate change or new levy;

· The payment is made by way of an instrument which is credited to bank accounted.

The above said principle would equally apply for determining the date of receipt as well.

Point of Taxation in general-Rule 3

The above definition of continuous supply of service has been amended to capture the concept in a more wholesome manner, namely the recurrent nature of services and the obligation for payment periodically or from time-to-time.

Since the essence of the rule in case of continuous supply of service is the same as the main Rule, the separate rule for continuous supply of service [Rule 6] is being merged with the main rule.

Thus, the PoT in general is summed up as under:

Sl. No.

Scenario

Point of Taxation

1.        

Invoice Issued within 30days from the completion of service

Date of Invoice

2.        

Service Completed, but  invoice not issued within 30 days

Date of Completion of Service

3.        

Advance Received before completion

Date of receipt to the extent of advance received.

4.        

Invoice issued before completion of service

Date of Invoice

However, small Relaxation is given in case where excess payment up to rupees one thousand (over and above mentioned in the invoice) is received, the POT to the extent of such excess amount, may be worked out as above or in the next billing cycle.

Rule 3 is general rule, identifies three events either of which may be defined as PoT as per the provided Rules.  The said three events are:

-  Issuance of Invoice

-  Rendering of Service if the invoice is not issued within 30 days of completion of provision of service

-  Receipt of Payment

The thumb rule is that PoT shall coincide with the event occurring earliest.

Point of taxation where there is a change in rate of Taxes-Rule 4

Rule 4 states that point of taxation as stated in Rule 3 shall not be applicable for determination of date (point of taxation) in cases where there is change of rate of tax in respect of a particular service.

The change of rate means not only the change of rate by amendment in the Act, but also covers change of rate by amendment in exemption notification. Further also it cover a change in abatement rate or value on which the duty needs to be computed.

When there is change of tax rate for a particular service the point of taxation shall be decided in accordance with Rule 4 as under:

Rule 4 provides for determination of PoT in such cases in the following manner:

Rule

Event prior to change of effective rate

Event subsequent to change of effective rate

Point of Taxation

Provision of service, issuance of Invoice and receipt of payment

N.A.

N.A.

4(a)(i)

Services rendered

Invoice issued and payment received

Issuance of Invoice or receipt of payment, whichever is earlier

4(a)(ii)

Services rendered and invoice issued

Payment received

Issuance of Invoice

4(a)(iii)

Services rendered and payment received

Invoice issued

Receipt of Payment

4(b)(i)

Invoice issued

Payment received and Services rendered

Receipt of payment

4(b)(ii)

Invoice issued and payment received

Service provided

Issuance of Invoice or receipt of payment, whichever is earlier

4(b)(iii)

Payment received

Invoice issued and services rendered

Issuance of Invoice

Assumptions:

a) The present rate is 10%, changed rate (in the future) is 12%.

b) Words used in table: Before is in relation to the service, invoice or payment as mentioned in the header.

The rate changes from 10% to 12% as on 14th May

Rule

Service Provided

Invoice Issued

Payment

Point of Taxation

Remarks

4(a)(i)

Before (10%)

(30th April)

After (12%)

(15th May)

After (12%)

(31st May)

Date of invoice or payment, whichever is earlier i.e. 15th May

As service was already taxable, and the tax point invoice issued date, ST charged @ 12%

4(a)(ii)

Before (10%)

(30th April)

Before (10%)

(5th May)

After (12%)

(31st May)

Date of invoice i.e. 5th May

ST shall be charged @ 10%

4(a)(iii)

Before (10%)

(31st March)

After (12%)

(31st May)

Before (10%)

(31st May)

Date of payment i.e. 31st May

ST shall be charged @ 10%

4(b)(i)

After (12%)

(5th June)

Before (10%)

(30th March)

After (12%)

(15th May)

Date of payment i.e. 15th May

ST shall be charged @ 12%

4(b)(ii)

After (12%)

(31st May)

Before (10%)

(30th March)

Before(10%)

(20th March)

Date of invoice or payment, whichever is earlier i.e. 20th March

ST shall be charged @ 10%

4(b)(iii)

After (12%)

(30th May)

After (12%)

(31st May)

Before (10%)

(30th April)

Date of Invoice

i.e. 31st May

ST shall be charged @ 12%

Taxability of services coming into service tax net for first time-Rule 5:

Rule 5 states the taxability of a transaction being chargeable to Service tax for the first time. It provides if the invoice has been issued & payment has been received before the service becoming taxable, then service tax need not be paid.

If payment has been received before the service becoming taxable & invoice has been issued within 14 days of the date when the service is taxed for the first time. Then service tax need not be paid.

1.7  Principles of Interpretation (Classification) of Service

Service Tax was introduced for the first time in the year 1994 through insertion of Chapter V of Finance Act, 1994. There is no Service tax Act as such. The services were earlier classified as per section 65A of the Act. Section 65A provided for principles for classification of service specified in erstwhile section 65. However, in the Finance Act, 2012, radical changes have been made and now service tax law has done away with the service specific description of services.

Under the system of Indirect Taxation, classification plays a very important role. The importance of classification is, however, somewhat diluted if the rate of taxation is uniform for all the categories. Though the service tax rate is constant for all categories of services i.e., 12%, still the accurate classification of taxable services has its own importance and the uniform rate should not be taken to suggest that there is no need for classification. Thus, the classification provision was introduced by the Finance Act, 2003 by inserting section 65A. However, Classification provisions which was contained in section 65A is no longer applicable from 1st of July, 2012, by virtue of notification 21/2012-ST, dated 5th June, 2012. The law makers at the same time felt the need to introduce a new section providing for the principles/ rules to interpret specified description of services or bundled services. Hence, Finance Act, 2012 introduced Section 66F.

LAW PRIOR TO 1stJULY, 2012

Before understanding the new provisions it is always better to get a hand of the old law. Section 65A was inserted in the Finance Act, 2003, which provided for classification of taxable services. The classification of taxable services was determined according to the terms of the definition of erstwhile ‘taxable service’ prescribed in the various sub clauses of section 65(105). This was given under sub section (1) of section 65A. However, when for any reason a taxable service was prima facie classifiable under two or more sub-clauses of section 65(105), the following rules of classification were required to be applied:

• The sub-clause which provides the most specific description was preferred to sub-clauses providing a more general description. [clause (a)]

• Composite services consisting of a combination of different services which was not able to be classified in the manner specified above was classified as if they consisted of a service which gives them their essential character, insofar as this criterion was applicable. [clause (b)]

• When a service was not able to be classified in either of the manner specified in clause (a) or clause (b), it was required to be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration. [clause (c)]

LAW AFTER 1st JULY, 2012

Principles of interpretation of specified descriptions of services or bundled services.

After the notified date i.e., 1st July, 2012 all the services have become taxable except those specified in the Negative List. Although the negative list based taxation obviated the need for descriptions of services and classification of services, such descriptions has continued to exist in the following areas-

• In the Negative list of services.

• In the Declared list of services.

• In exemption notification 25/2012.

• In the Place of Provision Rules, 2012.

• In few other rules and notifications ( e.g., CENVAT Credit Rules, 2004)

Despite doing away with the service-specific descriptions, there will be some descriptions where some differential treatment will be available to a service or a class of services. Hence, Section 66F has laid down the principles of interpreting the same.

SCOPE OF SUB SECTION (1) TO SECTION 66F:

The sub section (1) of section 66F provides that any input service required to provide main service will not be covered in main service. This means input service will be considered as a separate service. This position was also prevalent prior to 1st July, 2012. The sub section reads as follows:

“Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service.”

The sub section (1) of the section 66F deals with interpretation of specified description of services. This is emphasizing that the classification of the main contract cannot be used for the sub-contract or any other service provided for rendering the main service. This means, if a service (main service) is specifically excluded or exempted by way of Negative List or Exemption notification then any service used for providing the main service is precluded from the same benefit.

For example, ‘provision of access to any road or bridge on payment of toll’ is in Negative List. However, service provided for collection of toll or security of cash would not fall under negative list – Paras 4.8.2 and 9.1.1 of CBEC’s Taxation of Services: An Education Guide’ published on 20.06.2012.

If construction of a Government building is exempt (main service), architect or labour supplier providing service to builder/ contractor for such contract will not be able to avail that exemption, even if used to provide ‘main service’.

However, if a contractor outsources the work of construction to a sub-contractor, the service provided by the sub-contractor is exempt. This is because of a specific exemption given under Notification No. 25/2012-ST dated 20.06.2012 effective from 01.07.2012 which provides that if the main Works contract is exempt, sub-contractor providing works contract service to main contractor will be exempt from service tax. This exemption is only when the sub-contractor provides works contract service and not in other cases.

SCOPE OF SUB SECTION (2) TO SECTION 66F

 Section 66F(2) reads as follows-

“Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description”

This sub section implies that if a particular service is classifiable under more than one category then the category of service which specifically covers such service will be preferred than the general service. The same can be understood with the examples. For example, a hotel rents out a conference room for an official conference where lunch is also served. It can be classified as ‘mandap keeper’ or ‘convention service’. Between these two entries, ‘convention service’ is more specific as it covers only conventions which are like official function. ‘Mandap keeper’ is general description as it includes official, social as well as business functions. Hence, such service will be a ‘convention service’. – CBEC circular No. 51/13/2002-ST dated 07.01.2003.

The same principle was applied in Coal Handlers P Ltd. v. CCE (2007) 6 STT 513 (CESTAT), where it was held that C&F Agent is specific description compared to ‘business auxiliary services’.

It is also otherwise a general rule of interpretation that a specific heading should be preferred over general heading. There are many Supreme Court cases supporting the same, like CCE v. Frito Lay India (2009) 242 ELT 3 (SC), and Hindustan Poles Corporation v. CCE (2006) 196 ELT 400 (SC), etc.

SCOPE OF SUB SECTION (3) TO SECTION 66F

It is pertinent to understand what Bundled Services is before proceeding to sub section (3) of section 66F. The meaning of ‘Bundled Services’ has been given in Explanation to section 66F(3) of the Finance Act, 1994. It means a bundle of provision of various services wherein an element of provision one service is combined with an element or elements of provision of any other service or services. Basically it is a composite service consisting of two or more services. For example, an airline provides movie or catering on board. Each service involves differential treatment as the manner of determination of value of two services for the purpose of charging service tax is different.

However, if the service provider clubs two or more services to provide a single service to a service recipient and such single service is already present in the statute as a separate entry in Negative List, or exemptions or Declared services, then the same will be accordingly classified instead of following the principle of Bundled services. Two rules have been prescribed for determining the taxability of such bundled services in sub-section (3) of section 66F of the Act. These rules, which are explained below, are subject to the provisions of the rule contained in sub section (2) of section 66F, viz a specific description will be preferred over a general description as explained above. The sub-section (3) of section 66F reads as follows:

“Subject to the provisions of sub-section (2), the taxability of a bundled service shall be determined in the following manner, namely:–– (a) if various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character; (b) if various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of service tax.”

Section 66F(3)(a) explains that if services are naturally bundled in the ordinary course of business then it should be classified as per the category of service which gives it the essential character. For example, a hotel provides a 4-D/3-N package with the facility of breakfast. This is a natural bundling of services in the ordinary course of business. The service of hotel accommodation gives the bundle the essential character and would, therefore, be treated as service of providing hotel accommodation.

It is provided in section 66F(3)(b) of the Act that when various services are not naturally bundled in the ordinary course of business, then the service shall be the one attracting highest service tax liability. The following has been given in the Education Guide issued by CBEC on 20th June, 2012.

For example, premises are rented which are partly for residential purposes and partly for manufacturing activity. Thus, it is not service bundled in ordinary course of business. In such case, though residential use is not taxable, commercial use is taxable. Hence, the entire bundle will be treated as renting of commercial property.

1.8  Valuation of taxable services for charging Service tax – Section 67

(1) Subject to the provisions of this Chapter, service tax chargeable on any taxable service with reference to its value shall,—

(i) in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money, with the addition of service tax charged, is equivalent to the consideration;

(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner.

(2) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged.

(3) The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after provision of such service.

(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such manner as may be prescribed.

Explanation.—For the purposes of this section,—

(a) “consideration” includes any amount that is payable for the taxable services provided or to be provided;

(b) [ * * * ]

(c) “gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and 3[book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.

SERVICE TAX (DETERMINATION of VALUE OF TAXABLE SERVICE) RULES, 2006

Rule 2A: Determination of value of service portion in the execution of a works contract

What is works contract as per the new definition?

There was lot of discussion and debate as to whether works contract is a subject matter of service tax. It is now specifically set out in the definition of service to include declared service. In the declared services definition, service portion in a works contract is specifically included.

Works contract for the purpose of service tax is specifically defined in section 65B (54) to mean the contracts for the specified purposes which involves transfer of property in goods in the execution of such contract and such transfer of property in goods is leviable to tax as sale of goods.

The specified purposes are for:

-  carrying out:

o   construction,

o   erection,

o   commissioning,

o   installation,

o   completion,

o   fitting out,

o   repair,

o   maintenance,

o   renovation,

o   alteration of

·  any moveable or

· immovable property

-  for carrying out

o   any other similar activity or

o   a part thereof in relation to:

· any moveable or

·  immovable property

It is important to note that the scope and coverage of the definition of works contract is now very vide and covers many other services which was earlier covered under different categories like, management maintenance or repair services, Business Auxiliary Services, Authorized Service Station, etc.,

Valuation for works Contract

The valuation of taxable service in relation to services involved in the execution of works contact has been separately dealt with in Rule 2A of the valuation Rules. In terms of the said Rule, the value of service portion in the execution of a Works Contract would be equivalent to –

-  The gross amount charged for the works contract

-  less the value of transfer of property in goods involved in the execution of the said works contract.

-   Less the VAT or Sales Tax paid or payable, if any, on transfer of property in goods involved in the execution of the said works contract The same would be computed in following:

The question would arise how to determine the value of goods said to have been transferred in the execution of works contract. For this it should be done in the following manner:

-  Where VAT/sales tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, i.e. based on records maintained the actual value of goods transferred is identified and VAT/Sales Tax is paid accordingly, then the same value be taken as deduction for computing taxable value  for payment of service tax.

- If it is not so, then the value may have to be determined in any manner which can be substantiated  with on sufficient documentary evidence (irrespective of the method adopted for VAT/Sales Tax).

-  In case the valuation has not been or cannot be determined by the above methods, then taxable service has to be compulsorily be determined and be tax paid by the person liable to pay tax as per the manner mentioned below:

· If the works contract is for original works, the service tax should be payable on 40% of the total amount charged for the works contract.

· If the works contract is for maintenance or repair or reconditioning or restoration or servicing of any goods, the service tax should be payable on 70% of the total amount charged for the works contract

· If the contract is for other than the above, including, maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tailing, , installation of electrical fittings of an immovable property, service tax would be payable on 60% of the total works contract value.

For the purpose of the above computations, there are few things which are relevant. Firstly, the term ‘Total amount” which is relevant for computation of taxable value based on fixed percentage as discussed above. In this regard, the said term is defined to consider the total sum of the following:

-  Gross amount charged for the works contract

- Fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract.

Out of the said amount the following has to be deducted-

-  Any amount already charged for the said goods or services

- VAT/Sales tax if any levied thereon.

For determining the fair market value of goods and services so supplied, generally accepted accounting principles have to be followed. The determination of fair market value is going to be an very challenging task as may be difficult to convince the revenue authorities about the methodology adopted.

Though there was specific wording in the earlier provision as to goods and services supplied by the service recipient, the same is silent in the present rule. Obviously the same is implied.

Secondly the term ‘Original works’ has been defined to mean all new constructions; all types of additions and alterations to, abandoned or damaged structures on land that are required to make them workable and erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise.

Thirdly, for the purpose of computing the value of services involved in the works contract, it is specifically said that the following shall be included.

a. Labour charges for execution of the works;

b.  Amount paid to a sub-contractor for labour and services;

c.  Charges for planning, designing and architect’s fees;

d.  Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

e. Cost of consumables such as water, electricity, fuel, used in the execution of the works contract;

f. Cost of establishment of the contractor relatable to supply of labour and services;

g.  Other similar expenses relatable to supply of labour and services;

h. Profit earned by the service provider relatable to supply of labour and services;

Eligibility of CENVAT Credit:

As regards to CENVAT Credit, there is no bar on availment of credit of service tax paid on any inputs services in relation services involved in such works contract. However as far as duty paid on goods are concerned, it is specifically restricted for ‘inputs’ used in or in relation to the said works contract. It would be interesting to note that benefit of CENVAT Credit of Capital Goods would to be available.

Transition for existing schemes

Many service providers who are presently paying taxes under different schemes, are all required to fall into one umbrella as discussed above and there is no option for them to continue under their old scheme. This may create lot of difficulties in various running contracts, where the prices are fixed based on earlier tax structure and Work Orders are issued on particular basis. Further the computation of service tax to some extent depends upon the scheme under which the payments are being made under their respective state sales tax/VAT laws. Therefore the impact of the same has to be examined. Further question would arise in cases where reverse charge as discussed below, how the past contracts to be given effect to.

Reverse Charge

In respect of services provided or agreed to be provided by way of works contract, by

-  any individual,

-  Hindu Undivided Family or

- proprietary firm or

- partnership firm, whether registered or not,

-  including association

Provided or agreed to be provided to –

-  any company formed or registered under the Companies Act, 1956 (1 of 1956) or

-  a business entity registered as body corporate 

The service tax only to the extent of 50% of service tax payable has to be paid by the service provider and balance 50% has to be paid by the service recipient.

As a consequence of this, the specified service recipients who are not at all providing any taxable service would also be liable to register under service tax and pay service tax for the services received. This would add additional compliance to such companies/corporate bodies.

Further question arises where the service provider is eligible to claim the benefit of small service providers exemption, whether the service recipient is liable to be registered and paying tax, in the opinion of paper writers, the same is not required as the 50% of the tax needs to be paid is that of service tax payable, whereas the service tax payable after claiming exemption would be Nil.

Valuation alternatives under the new law i.e after 01.07.2012:

The ‘Works Contract’ has been defined under the new law to include such contracts where transfer of property in goods involved along with services pertaining to the movable properties. The service portion involved in execution of works contract service is declared to be a service under Section 66E of Finance Act.

Option-1:

Valuation under Rule 2A of the Service Tax (Determination of Value) Rules, 2006: 

Situation A- New:  The service provider can pay service tax on the labour portion at full rate after adopting the process laid under Rule 2A. This is more relevant if the service provider knows the value of the transfer of property in goods involved while execution of works contract. The gross amount charged will be equal to amount charged for works contract minus the value of property in goods involved and VAT. However, it also specifies certain other items which are to be included for arriving the gross amount charged. The only difference being that cenvat credit on inputs is specifically disallowed under the new law and however the credit of input services and capital goods are allowed.

Situation B - New: If the service provider is unable to reckon the value of as provided in the manner as per Rule 2A, then he shall be liable to pay service tax in the following manner:

Works contract for executed: 

a. for original works – 40% of the total amount charged for works contract

b. for maintenance and repair or reconditioning or restoration or servicing of any goods – 70% of total amount charged for works contract

c. any other work not covered above including maintenance, repair, completion and finishing service such as glazing, plastering, floor and wall tiling, installation of electrical fitting of an immovable property – 60% of total amount charged for works contract.  

Cenvat credit on inputs is restricted but the service provider can avail the credit of input services and capital goods. 

Note:

1. For this purpose “original works” means -

i.  All new constructions,

ii.  All types of additions and alterations to abandoned or damaged structures on land that are required to make them workable,

iii. Erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise.

2. ‘Total Amount’ means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of works contract, whether or not supplied under the same contract or any other contract after deducting the amount charged for such goods or services, if any and VAT, if any levied thereon. Fair market value of goods and services shall be determined in accordance with generally accepted accounting principles.  

Option -2:

Valuation of service portion involved in construction of complex, building, civil structure or a part thereof vide Entry No: 26/2012-ST dated 20.06.2012:

Situation – C New:  This is the case where service provider has engaged in construction of 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. The service portion in such a contract is deemed as 25% of the total amount charged on condition that value of land is included in such total amount.

Explanation:

The amount charged shall be the sum total of the amount for the service including the fair market value of all goods and services supplied by the recipient(s) in or in relation to the service, whether or not supplied under the same contract or any other contract after deducting the amount charged for such goods or services supplied to the service provider, if any and VAT, if any levied thereon. Fair market value of goods and services shall be determined in accordance with generally accepted accounting principles.   

For easy comprehension, the situations are tabled as under:

A

67% abatement

B

75% abatement

C

Completion & Finishing Services

D

Composition Scheme

E

Rule 2A Valuation

A-New

Rule 2A Valuation

B- New

Standard  Deduction

C-New

75% abatement

Num

Situation

Situation

Transition

Challenges

Remarks

1.

A, B, D

A-     New 

The flats for which advance has not received as on 01.07.2012 or advances received but adjusted towards land value can go for new valuation by recording the material cost.

Service provider should maintain separate records for the cost of materials involved. If it is possible,   then he can choose payment of service tax on the labour portion alone after deducting material cost. 

This is practically hard to comply. However, credit of input service and capital goods can be availed.

2.

A, B, D

B-      New

Service provider shall pay 4.95% (40%*12.36%)  as service tax on every receipt after 01.07.12

The additional increase in service tax might be hard to recover from the buyer.

Credit on input services and capital goods shall be available.

3.

A, D

C-      New

Service provider shall pay at 3.09% (25%*12.36%) on the advances received post 01.07.12 subject to inclusion of value of land

-do-

6.

B

C- New

Can continue in the same old manner

No challenges

-do-

7.

C

A-New, C-New

Not possible

Not applicable

Not applicable

8.

C

B- New

Service provider can start paying service tax at the rate of 7.42% (60*12.36%) instead of full rate

No challenges

Credit on input services and capital goods shall be available

9.

E

A-     New

Can continue in the same old manner

No challenges

Easy to adhere & Comply

10

E

B-      New

Include the material value and pay at 4.95% (40*12.36%) for the advances received post 01.07.12

No challenges

Credit on input services and capital goods shall be available

11

E

C-      New

Include the value of land and need to pay service tax 3.09% (75*12.36%) for the advances received post 01.07.12

Including the value of land for the first time might be challenge.

Credit on input services and capital goods shall be available

Current Issues in Real Estate- Service Tax [ Some repetition of above possible]

In this paper we restrict only to the discussion on current issues faced by service providers in the real estate. This has been made in the form of a question/ answer as under:

1.1  Whether Composite contract of sale of land and building where any part of consideration received before completion certificate is liable to service tax?

· Some Developers were entering into single agreement of a future sale of the apartment on the basis of the view that, amounts received by them prior to the completion of the flat would be in the nature of advance monies for the future conveyance of immovable property and consequently, cannot be treated as ‘works contracts' under the sales tax / VAT law.

· There was a similar view in a Service Tax dispute of Magus Constructions (2008 (11) STR 225) where High Court observed that where the agreement indicated that the transaction is one of sale and purchase of premises and not for carrying out construction activity on behalf of prospective buyer. The documents treated as agreement for sale of flat/premises by registering authorities and stamp duty levied on sale consideration and advance amount given by prospective buyer is against sale consideration of flat/building and not for obtaining service i.e. the construction linked payments are to be made in stages by the buyer towards flat allotted. The delivery of the flat is given to buyer only after all the instalments are paid to the vendor.

·  It was in this background that the Apex Court delivered its historic verdict in the K Raheja case, in 2005 (2005-TIOL-77-SC-CT), under the then prevailing Karnataka Sales Tax Act, 1957. It was held that the no works contract if agreement made after construction. Held that the agreement made before completion of construction is works contract. This view has been upheld in recent decision in L&T case (2013-TIOL-46-SC-CTLB) by Supreme Court.

· Most transactions involving construction and sale of flats would also get covered under Section 66E(b) of the Finance Act, 1994, which reads as under:

· (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority.

·  Service tax might have to be paid on the entire construction value, including the value of the construction attributable to the period, prior to the date of the agreement, after availing the abatement.

1.2  Whether service tax is leviable when two contracts one for undivided interest in land + semi finished building + another for construction/  completion is entered?

·   Every Developer/Builder could estimate the quantum of work that has been completed in respect of each of the flat and treat the value of the constructed portion (up to the date of the agreement) as a transaction of sale of immovable property and offer only the balance consideration (on and from the date of the agreement) for purposes of VAT levy.

·  The service tax is not leviable on the UDS of land plus semi-finished flat [immoveable property]. The service tax may be paid on the construction and completion services. It was clarified in L&T case (2013-TIOL-46-SC-CTLB) that activity of construction undertaken by the developer would be works contract only from the stage the developer enters into a contract with the flat purchaser.

1.3 Whether service tax is leviable on the construction done for landlords by developer under JD agreement?

a.    The service tax is leviable on value of services provided by one person to another for a consideration. As per the declared services entry, the activity of the construction of complex for sale would be deemed to be service only if consideration has been received prior to issuance of completion certificate by the competent authority. Consideration includes any amount that is payable for the taxable services where land is included in amount charged from service receiver.

b.  The ST Edu Guide also clarified in Guidance Note 6-para 6.2.1 as follows:

Construction service provided by the builder/developer is 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 and the service tax would be required to be paid by builder/ developers even for the flats given to the land owner.

c.  Though there is a possibility of challenge, there could be a demand of service tax on land owner’s share of constructed area by revenue as the law stands presently after 1.7.2012.

1.4 Whether landlord is leviable to service tax on his share of building which he sells to end buyer?

The land owner is entitled to certain portion of built up area. When the land owner enters agreement with the interested buyer and he receives payment prior to completion of construction, he is liable to service tax.

1.5  Issue  of Major exemptions under negative list and changes

(a)  Whether the construction of buildings for educational institutions providing  school education [till HSC] is exempted from service tax?

There is no specific exemption to the construction done for educational institutions which are engaged in providing school education covered in negative list. Maybe afit case of making representation in the election year.

(b) Whether there is exemption for ongoing contract of construction of educational institution/ hospital which was commenced earlier to 1.7.2012?

If the contract was entered during earlier period [prior to 1.7.2012] it would be excluded from service tax levy as commercial and industrial construction service does not cover construction mainly for other than commercial or industrial purpose.

Therefore subsequent imposition of tax after negative list maybe disputed as not valid. This view is supported in L&T vs CST Mumbai (2013-TIOL-1138-CESTAT). In our considered view could be difficult to get relief on this count unless clarity form the Apex court exists.

(c)  Whether the construction of Government hospitals is leviable to service tax?

Yes, the construction of government hospitals is exempted vide sl no 12 of mega exemption notification no.25/2012-ST as follows

12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –

(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

As the construction services are provided to the Government for construction of a structure meant for clinical use it is covered in said exemption at sl no.12(c).

(d)   Whether the construction of three floor house by contractor is leviable to service tax?

Service tax is payable on construction of a residential complex having more than one single residential unit. Single residential unit is defined in the notification and means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family.

If each of the floors of your house is a single residential unit in terms of the definition, then service tax is leviable on same by the contractor.

If the title of each of floors is capable of being transferred to another person by mutation in land/ municipal records, both the floors may be considered as separate single residential units.

(e)   Whether installation of rice milling machines in the rice mill is leviable to service tax ?

Under Sl. No. 14(e) of the Mega Exemption notification no 25/2012 dated 20.06.12, there is an exemption as follows-

Services by way “ construction, erection, commissioning or installation” of original works pertaining to mechanized food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcohol beverages are exempted from service tax.

When the machinery or equipment is installed for units processing agricultural produce [paddy] as food stuff that is rice. It is exempted under this entry.

(f) The contract of construction of water pipeline is given to A Ltd by Municipality. It has sub-contracted to Mr B. whether he is exempted from service tax?

There is an exemption in sl no of 25/2012-ST as follows-

12. Services provided to a local authority as follows- (e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal;

As this exemption is available only to the contractor who is contracted works by specified persons including Government, local authority.

As Mr B is not getting order from local authority but A Ltd.

No, he is not covered in said exemption.

At same time if the works done by Mr B involves a transfer of material and the work is covered under definition of works contract.

Then same is eligible for exemption at sl no.29(h) which exempts sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt;

1.6 What are the Valuation options for sub-contractor & developer under service tax law?

The valuation options are as follows-

Valuation Mechanism:

Construction Contract not coupled with transfer of property

Construction Contract coupled with transfer of property in goods

Construction contract intended for sale which includes value of land as well

As per section 67 of the Act-12.36%

As per Rule 2A of the Service Tax (Determination of value) Rules, 2006.

When value of service portion is not determined-

· Original works-40% of total amount charged

· Finishing works-60% of total amount charged

Option given in Notification No.26/2012-ST for abatement of 75%/70% (with condition).

Main contractor executing material plus labour contract

Sub-contractor-pure labour jobs

Pays service tax on the following method-

12.36% on total amount charged.

Cenvat credits of service tax charged by sub-contractor can be availed by main contractor.

Sub-contractor executes material plus labour job:

·Same options as main contractor to discharge service tax liability.

· Main contractor can avail Cenvat credits on same.

Pays on either of following options- ST on service portion

· Service portion after deducting actual value of goods transferred and VAT/Sales Tax is paid.

· The value of service portion to be determined in any manner based on sufficient documentary evidence.

·In case the valuation cannot be determined by the above methods, then taxable service as mentioned below:

·If the works contract is for original works, the service tax should be payable on 40% of the total amount charged for the works contract.

·If the contract is for other than the above, including, maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property, service tax would be payable on 60% of the total works contract value.

1.7  Issue  of Credits on inputs

Whether Mr X who is engaged in construction of building works for Mr Y by supplying his own materials is availing cenvat credits of duty paid on steel and cement of Rs 100000 during 2012-13. Whether he is eligible to avail such credits?

No, as he is engaged in executing works contract, he is not permitted to avail such credits of duty paid on inputs, such as steel and cement due to explanation inserted below Rule 2A of  Valuation Rules.

1.8  Issue  of Credits on capital goods

Whether cenvat credits can be availed on the pipes and tubes used to make scaffolding by the construction contractor?

Yes, as it is capital goods which is covered as tubes and pipes and fittings in capital goods definition. Can avail 50% cenvat credits in the first year and the balance in subsequent years.

1.9  Issue  of Credits on input services.

Whether the developer can avail cenvat credits of service tax charged in the contractor bills?

The developer who is collecting payments (prior to completion certificate) for construction and sale of buildings can avail cenvat credits of input services charged in bills of contractor for construction or execution of works contract for construction of building.

1.10  Issue  of Credits for service receiver.

Whether the manufacturer can avail cenvat credits of the service tax charged by the contractor for construction of new factory?

No, the cenvat credits which are for setting up factory cannot be availed post 1.4.2011 due to specific restriction in input services definition. However for modernization, renovation or repairs of factory or premises of manufacturer or service provider it is available.

1.11 Other issues:

What happens to continuing works where service tax was being on 33% without credit prior to 01.07.2012?

There is no option to continue under abatement scheme set out in notification No.1/2006-ST. The service provider had to change over to either of following options:

a. Discharge service tax on 25% of total amount charged including land value vide notification no.26/2012-ST or

b. Discharge service tax on service portion of works contract following one of the valuation options set out in Rule 2A of Service Tax Valuation Rules.

What happens to continuing works where service tax was being paid under works contract composition prior to 01.07.2012?

The works contract composition scheme was rescinded wef 1.7.2012. There is no option to continue under said option post 1.7.2012. One of the options set out in valuation options at 1.6 above needs to be followed.

What happens to continuing works of construction of residential houses less than 12 units but more than 1?

The service tax would need to be discharged on such construction works post 1.7.2012.

As a tax saving measure the service provider could obtain a certificate from an architect or a Chartered engineer about the percentage of the completion of works done earlier to 1.7.2012.

Service tax need not be paid on such services which were provided before the construction activity became taxable even if the payments were received post 1.7.2012.

Whether  Service Tax can be paid on full value and take credit of duty paid in inputs in full in new law?

In Service Tax Valuation Rules, there is a specific restriction on availment of cenvat credits related to inputs used for executing works contract [ material plus labour works].

At same time there is no such restriction for availment of cenvat credits related to inputs, input services and capital goods used for providing pure labour services of construction related services.

Whether developer is liable to pay service tax under works contract?

Yes, even though the developer may not be supplying the materials and executing the works. As long as any part of consideration is received prior to completion of building it could be treated as a works contract in light of recent decision of L&T(2013-TIOL-46-SC-CTLB) by SC and service tax could be leviable under works contract service.

At same time, it needs to be noted that under service tax law, works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and such contract is for carrying out specified activities in relation to moveable or immoveable property.

If liable on what value and when it is to be paid?

The valuation could be on 25% of total amount charged including land.

Alternatively could follow one of the following options as  it could be treated contract if any part of the consideration is received before completion certificate:

Calculate value of service and pay service tax

 i) Value of service = Gross amount – value of property in goods

 ii) If not (i) value of service shall be

For execution of original works => 40% of total amount shall be value.

Whether the land value claimed by the developer is in case of joint development, where land is registered directly by the land owner to buyer, is eligible for exclusion from scope service definition?

The service tax is leviable on value of services. Therefore not leviable on value of land. If this stance were taken then land value is excluded from service tax levy.

Where land is directly registered by land owner to buyer the revenue could take a stance it is not allowed such a deduction to a developer as land is belonging to the land owner.

Karnataka Appellate Tribunal in State of Karnataka vs. Reddy’s Structures Private Limited, Bangalore (2011(71)Kar.L.J.32(Tri)(DB) where in context of the agreements entered with purchaser, a deduction of land value was taken by the builder from the total receipts. Held that deduction of land value from total receipts is illegal because land does not belong to developer who only has authority to built.

Whether the profit/gross amount charged by the developer on land is liable for service tax?

The service tax is leviable on the value of services. The land value and profit thereon is excluded from service tax levy.

Revenue could take a view cannot claim exclusion for land value as land does not belong to developer.

}  Whether flooring work, plastering, painting, glazing, carpentry, plumbing, interiors etc., done during the course of construction can be considered as original works for valuation purposes and pay tax on 40%?

There is some confusion as to tax rate on these type of works which are not building constructions but related others.

The relevant provisions are as follows:

(ii) Where the value has not been determined under clause (i) (based on actual value of materials), the person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner, namely:-

(A) in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent. of the total amount charged for the works contract;

(B) in case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods, service tax shall be payable on seventy percent. of the total amount charged for the works contract;

(C) in case of other works contracts, not covered under sub-clauses (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property, service tax shall be payable on sixty per cent. of the total amount charged for the works contract;

Since there is specific mention about completion and finishing services and the word used therein is ‘such as’ which means merely examples. Therefore the risk is that it would be covered under 60% and not under 40%.

But in my view it should be original work and attract tax on 40% of total amount. Therefore effective tax may be 4.944%.

•  Whether scope of entry 14 in exemption is restrictive in its scope as it covers only erection or construction of original work only?

Yes it covers the following construction, erection, commissioning, installation of original works only.

(a) "original works" means-

(i) all new constructions;

(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

Whether the said activities in relation to single residential unit can be claimed as exemption- Villa?

Yes, it can be claimed as exemption when the villa is a single unit for residential use of one family.

Whether the amounts forfeited for non-payment of instalments is liable for service tax? If yes whether it is applicable on full value or as per valuation rules?

The revenue could take a view that the forfeited sum is attributable to agreeing to the obligation of tolerating act of non-payment of instalments. Therefore covered in declared services entry.  Liable to service tax.

The service tax levy is attracted on the services provided by one person for another for a consideration.  The amounts forfeited could be treated as incidental damages due to unforeseen actions not related to provision of service which is excluded from value of taxable service under ST Valuation Rules. Alternatively it could be a penalty or punishment and therefore not for a service.

The understanding above needs to be confirmed along with the relevant agreement between the landlord/ buyer, options chosen for value of registration under the Stamp Act as well as the compliance under the local VAT law.

There could be many more issues/ doubts. Delegates may host them on pdicai.org.

Acknowledgements to CA Roopa Nayak to assisting in preparation of this material. 

CA Madhukar N.Hiregange


 

Published by

Madhukar N Hiregange
(Chartered Accountant)
Category Service Tax   Report

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