Service tax builder without abatement

If you work as real estate developer and land is registered in the name of builder than no question arrise to exclude land from total amount irrespective you take 75% or 70% abatement or not.... If you work as a contractor and land is registered in the name of contractee than land amount excluded from the amount you charge as construction cost subject to abatement of 60%...

So Basically, there is only one way, use the 75% or 70% abatement. thats it?

In case you dont want to choose abatement of 75% or 70%....than you have to pay 12.36% service tax on total amount including land amount and take cenvat credit for input received..

Agreed with Rakesh. It is not compulsory to opt for the abatement option under Service tax law. Meaning, you may refer to the Rule 2(a) of the Valuation rules wherein you will have to segregate various things out of the total contract value to arrive at the service value for payment of service tax.

No, from what I understand,  Rakesh has said that Rule 2A is not applicable. In case abatement is not used, the Builder charges 12.36% on the total transaction value (i.e. Land + Construction + Profits) but in turn he can claim Cenvat Credit on inputs(which is not available in abatement). Am I Not Correct? Just to clarify, This is a case of a Real Estate Developer and not a Works Contractor

 

My friend Maanick,

 

Please note the following -

 

1. The definition of term ‘Works contract’ under Section 65B(54) includes ‘Construction’;
2. The valuation option can be exercised under Rule 2A, if you are not opting for abatement option;
3. Rakesh has said that Service tax @ 12.36% has to be paid on Service portion and not on the entire contract value. This service portion is calculated as per Rule 2A (i) of the Valuation Rules.

 

Hope, this clarifies your concern.

mannick you are correct...in case you opted normal scheme service tax @ 12.36% charge on total amount i.e land amount plus construction cost plus profit and you can take cenvat credit on input received.... in case of composite scheme govt gave abatement of 75% in respect of land amount plus material cost excluding service portion.....

vikas there is difference between real estate developers and work contractors....govt give 75% abatement instead of 60% to real estate developers because of land portion includes in case of real estate developers...

If Rakesh is correct, then the government has been highly arbitrary in imposing the abatements percentages. It seems they are implying that Land component shouldnt be more than 10% (Rs 1 crore plus) or 15% of the transaction value. In my experience Land Component can be as high as 90% of transaction value in some cases. In this case,amount of Service Tax becomes disproportionately and unfairly high. What does one do in these cases?

 

 Also, if 12.36% is charged on Land + Material + Services with input cenvat credit, then isnt it akin to indirect taxation of a land transaction? (Land obviously will have no cenvat credit available)

 

Unfortunately Section 66E doesnt provide any method or rules to exclude value of land in case abatement isnt used. I guess, because 66E exists only for complex building, 65B would not be applicable in such a transaction.(Interestingly, Delhi VAT department has come out with detailed rules and examples on how to exclude value of land in Builder Transactions in case abatements arent used, and they seem to be quite fair).

 

 

In support of Vikas's Explanation, An author, Rakesh Garg, FCA, has written a descripttive and informative paper on Builders VAT & Service Tax liabilities.

His paper is attached. Its also freely available online.

On pages 12-13, he talks about how the government hasnt made the rules clear and builders could be at the mercy of the assessing officer in the future if one excludes the value of land and materials, using a method different from the abatement scheme offered. (Even though he has provided supreme court case law which suports it)

Anyone has had any practical interaction with the service tax department regarding normal scheme vs abatement scheme?