Construction Industry and Service Tax Amendments in Union Budget 2010

8/6/2019 Construction Industry and Service Tax Amendments in Union Budget 2010

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CONSTRUCTION INDUSTRY AND SERVICE TAX

PROPOSAL IN UNION BUDGET 2010

Vikas Khare, Practising Company Secretary, Partner KANJ & ASSOCIATES;

Chairman, Indirect Tax Sub Committee, Mahratta Chamber of Commerce, Industries, and Agriculture.

When a common man, who is renamed as AAM ADAMIby our politicians, is badly hit by inflation and

more particularly by unaffordable prices of food grains, pulses, vegetables, Honorable Finance Minister ,

Shri Pranab Mukharjee came in an aircraft named Budget-2010 and thrown few goodies on Aam

Adami. Along with that the minister also threw Petro Bombs. That act culminated into strong reactions

across in India. At that time, whether anyone knew that FM had sent Drones in form of Fine Prints in

the Finance Bill 2010 and Notification to attack the Aam Adami directly or indirectly? The fact is

Drones have attacked the Aam Adami and the damages, immediate and the future with respect to

construction industry, are summarized below:

The Finance Minister has proposed significant changes in taxation of Construction Industry by way of

Service Tax in the Union Budget for the year 2010-11. The service tax on construction of commercial or

industrial construction services was introduced in 2004 and that on construction of complex was

introduced in 2005. The proposed changes are introduced in the Finance Bill 2010 and accordingly

amendments are proposed in the definition of taxable services in sub-clause (zzq) of Clause 105 of

Section 65 of the Finance Act, 1994 . Sub clauses (zzq) and (zzzh) are respectively for commercial or

industrial construction and for construction of (residential) complex service. Both the amendments are

on the same footings and the following explanations are proposed to be inserted in the charging section.

Explanation.For the purposes of this sub-clause, the construction of a new building /complex which is

intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or

after construction (except in cases for which no sum is received from or on behalf of the prospective

buyer by the builder or the person authorized by the builder before grant of completion certificate by

the authority competent to issue such certificate under any law for the time being in force) shall be

deemed to be service provided by the builder to the buyer;;


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It is also proposed to add new service with respect to a residential complex, or a commercial building by

inserting new sub clause (zzzzu)to cover the service provided to a buyer, by a builder of a residential

complex, or a commercial building, or any other person authorized by such builder, for providing

preferential location or development of such complex but does not include services covered under sub-

clauses (zzg), (zzq), (zzzh) and in relation to parking place. The proposed clause has the following

explanation:

Explanation.For the purposes of this sub-clause, preferential location means any location having

extra advantage which attracts extra payment over and above the basic sale price;

The purpose of the amendments is to bring the Promoters and Builders under service tax net who

remained outside the service tax net despite of lots of futile efforts by the Service Tax Department .

It is worth mentioning, briefly, chronicled of the legal tussle between the Service Tax Department and

promoters and builders.

1. Is service tax applicable on Builder, Promoter or Developer who builds a residentialcomplex with the services of his own staff and employing direct labour or petty labour

contractors whose total bill does not increase 4.0 lacs in one Financial Year was on the

fire right from the introduction of these services.. The answer given by the Department

vide Circular F. No. 332/35/2006-TRU, dated 1-8-2006 was that the contractor shall be

liable to pay service tax on the gross amount charged for the construction services

provided, to the builder/ promoter/developer under construction of complex .If no

other person is engaged for construction work and the builder/promoter/developer

undertakes construction work on his own without engaging the services of any other

person, then in such cases in the absence of service provider and service recipient

relationship, the question of providing taxable service to any person by any other

person does not arise. Service tax exemption for small service providers up to an

aggregate value of taxable services of Rs. 4 lakh provided in any financial year vide

Notification No. 6/2005-Service Tax, dated 1-3-2005 is applicable for construction of

complex service also. Commercial complex does not fall within the scope of

residential complex intended for personal use. Hence, service provided for


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construction of commercial complex is leviable to service tax.

2. On the issue on applicability of service tax on real estate developers/ builders it wasClarified vide F. No. B1/6/ 2005-TRU, dated 27-7-2005, that residential complex

constructed by an individual, intended for personal use as residence and constructed

by directly availing services of a construction service provider, is not liable to service

tax.

As per Section 68 of the said Act, in case of construction of complex service fallingunder Section 65(105)(zzzh) and commercial or industrial construction service falling

under Section 65(105)(zzq) of the said Act, every person providing taxable service to

any person shall be liable to pay service tax.

3. Letter F.No. V/DGST/22/Audit/Misc/1/2004, dated 16-2-2006 The Board vide Circular No. 80/10/2004-S.T., dated 2. 17-9-2004 [2004 (172) E.L.T.

T3] has clarified that Estate Builders (i.e. who gets such construction done) are not

covered under the ambit of these services. It is only the hired contractors engaged by

these builders who are to be taxed.

In a decision of Supreme Court in case of 4. M/s. Raheja Development Corporation v.State of Karnataka [2005 NTC (Vol. 27)-243 the Honble Court has clarified that the

activities undertaken by builders for construction of flat/building for or on behalf of the

prospective customers for consideration in cash or deferred payment is covered under

the works contract and not under sale.

4. The Department come out openly and commented that divergent practices are beingreported by field formations and in most of the cases, builders are avoidingregistration in view of CBEC Circular No. 80/10/2004-S.T., dated 17-9-2004. Further,

there is wide gap between the amount charged by builders from their customers for

such work contract (sale) and the amount on which contractors are discharging their

Service tax liability. The various miscellaneous charges like cost of the land,

development charges, maintenance charges, etc. are not included in the taxable


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value of services provided by the assessee.

5. It is further clarified that the Circular No. 80/10/2004-S.T., dated 17-9-2004, has noapplicability with reference to Construction of Complex Services which was brought under

service tax net only w.e.f. 16-6-2005, as an independent service. The definition of taxable

service under section 62(zzh) includes Any service provided or to be provided to any person

by any person in relation to construction of complex, and is wide enough to include estate

builders. In such cases, the tax liability is posed on both builders and hired contractors being

independent service providers.

in the construction business, different practices and financial arrangements concerning(a) promoters, developers & builders, (b) land owners (c) contractors and (d) buyers

exist. These practices influence the taxable value under the construction of complex

services. In all such situations, the taxable value under section 67 shall be the gross

amount charged by the service provider (builder in this case) for such services provided

or to be provided by him. This read with Notification No. 18/2005-S.T., dated 7-6-2005

entitles a builder/contractor an abetment of 67% on the gross amount charged, which

shall include the value of goods and material supplied. Further, there is no

deductions/exemptions provided for computation of such taxable value in the

composite contract.

6. The Service Tax Department got real strength from the order of the Advance Rulingauthority in the matter of Construction of Residential Complex service . The question

before the Advance Ruling Authority was whether booking and construction of

residential units with own labour is taxable as Construction of Residential Complex

service in view of words construction of complex qualified by in relation to

widening the scope. It is ruled that point of time at which ownership gets transferred

or control over supervision do not determines liability. Activities performed as peragreement terms for which consideration in installments received from customers.

Construction and allied services referable to agreement with prospective buyer and

not to be viewed in isolation. Facilities and amenities cannot be dissociated from

construction and incidental activities also taxable. Construction of Residential Complex


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service being more specific, impugned construction is classifiable under such service

and not under Works Contract service - Sections 65(30a), 65(105)(zzzh), 65(105)(zzzza)

and 96D of Finance Act, 1994.

While ruling on the issue whether construction of residential units engagingcontractors is taxable the Authority held that applicant is accountable to buyer and

remains service provider vis-a-vis the buyer for construction by engaging own labour or

by sub-contracting. Impugned activity not one of self-service as service recipient is

buyer of flat as per agreement. Engagement of sub-contractor do not absolve applicant

of the responsibility of providing services in relation to construction of residential unit

agreed to be sold to customer ultimately.

7. Then the circular of the DGST was superseded by a consolidated Circular No.

96/7/2007-S.T., dated 23-8-2007 wherein it has been clarified vide clause No.

079.01(b) as follows :

If no other person is engaged for construction work and thebuilder/promoter/developer/any such person undertakes construction work on his

own without engaging the services of any other person, then in such cases, (i) service

provider and service recipient relationships does not exist, (ii) services provided are inthe nature of self-supply of services.

Hence, in the absence of service provider and service recipient relationship and theservices provided are in the nature of self-supply of services, the question of providing

taxable service to any person by any other person does not arise.

8. In GREENVIEW LAND & BUILDCON LIMITED Versus COMMR. OF C. EX.,CHANDIGARH2008 (11) S.T.R. 113 (Tri. - Del.) it was held that Assessee not engaging

any contractor or service provider in relation to construction of complex and entire

work carried out by themselves as developer and builder and ready built flats sold.

Demand confirmed by original authority on basis of DGST Circular dated 16-2-2006 -

C.B.E. & C. Circular No. 96/7/2007-S.T., dated 23-8-2007 superseding previous circular

as submitted clarified that no taxable service provided in absence of service provider


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and service recipient relationship. The Latter circular prima faciein favour of assessee

and applicable retrospectively as is by way of clarification of law. The said Circular not

available when matter decided by lower authorities. The Matter remanded to be

decided in the light of circular ibid - Section 65 (30a) of Finance Act, 1994.

9. In MAHAKAUSHAL BUILDERS WELFARE ASSOCIATION Versus SUPDT. OF CUS. & C. EX.,JABALPUR Circular dated 16-2-2006 issued by Director General of Directorate of

Service Tax, Mumbai not creates liability for payment of service tax if assessee not

liable to pay tax under law relating to service tax -.

10. Further the Supreme Court observed on correctness of proposition laid down by itsdivision bench regarding works contract ratio decidendi that If the ratio of Raheja

Development Corporation v. State of Karnataka [2005 (5) SCC 162] is to be accepted

then there would be no difference between works contract and a contract for sale of

chattel as a chattel hence, the judgment of Division Bench in the case of Raheja

Development (supra) needs re-consideration by the Larger Bench.

11. In Magus Construction Pvt Ltd Versus Union Of India the High Court of Gauhatiobserved that It may be pointed out, at the very outset, that tax on services is an

"indirect tax" and is a relatively new concept in India. As a matter of fact, Government

of India had introduced the levy of "service tax", i.e., tax on the services, for the first

time, in the year 1994, borrowing the concept from developed countries. The basic

purpose of this levy has been to increase revenue, treating the act(s) of rendering

service, as an additional source of revenue. Depending upon its own socio-economic

compulsions, each country evolves its system of taxation adapting either a

"comprehensive approach" or "selective approach". Under the concept of

"comprehensive approach", all services are taxable unless any of the services is

specifically excluded ; whereas under the system of "selective approach", onlyspecified services are taxable and it is the system of "selective approach ", which India

has adopted. This distinction needs to be kept in mind, when we proceed further

Further, in K. Raheja Development Corporation [2005] 5 SCC 162 the apex court wasconsidering the issue relating to "sales tax" and the issue therein was not at all related


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to "service tax". While interpreting the provisions of "sales tax" under the Karnataka

Sales Tax Act, 1957, the apex court held, in K. Raheja Development Corporation [2005]

5 SCC 162 , that the definition of "works contract", given under the Finance Act, 1994,

is very wide and is not restricted to the "works contract" as commonly understood, i.e.,

a contract to do some work on behalf of someone else.

38. The quoted portions of the abovementioned circular make it very clear that theactivities of the petitioner-company do not fall within the purview of "taxable service"

so as to attract levy of "service tax". In Commissioner of Income-tax v. Aspinwall and

Co. Ltd. [1993] 204 ITR 225, the Kerala High Court has held that a circular of the Central

Board of Direct Taxes has the force of law and can even supplant the law in the cases,

where it is beneficial to the assessee and has mitigated or relaxed the rigour of the law,

In the light of what has been laid down in the catena of decisions referred to above, itbecomes clear that the circular, dated August 1, 2006, aforementioned, is binding on

the department and this circular makes it more than abundantly clear that when a

builder, promoter or developer undertakes construction activity for its own self, then,

in such cases, in the absence of relationship of "service provider" and "service

recipient", the question of providing "taxable service" to any person by any other

person does not arise at all.

In the result and for the reasons discussed above, this writ petition succeeds and theimpugned notice is hereby set aside and quashedP & B Community wants certaintyabout applicability of Service Tax.

12. On the backdrop of the above the Finance Minister has tacitly introduced the above changes asthese were not part of the Budget speech. On the proposed amendments the Board has

clarified in para 8 as under vide letter D.O.F. No.334/1/2010TRU New Delhi, dated26th

February2001:

Service tax on construction services:

8.1 The service tax on construction of commercial or industrial construction services was


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introduced in 2004 and that on construction of complex was introduced in 2005.

8.2 As regards payment made by the prospective buyers/flat owners, in few cases the entire

consideration is paid after the residential complex has been fully developed. This is in thenature of outright sale of the immovable property and admittedly no service tax is chargeable

on such transfer. However, in most cases, the prospective buyer books a flat before its

construction commencement/completion, pays the consideration in instalments and takes

possession of the property when the entire consideration is paid and the construction is over.

8.3 In some cases the initial transaction between the buyer and the builder Is done through an

instrument called Agreement to Sell. At that stage neither the full consideration is paid nor is

there any transfer in ownership of the property although an agreement to ultimately sell the

property under settled terms is signed. In other words, the builder continues to remain the

legal owner of the property. At the conclusion of the contract and completion of the payments

relating thereto, another instrument called Sale Deed is executed on payment of appropriate

stamp duty. This instrument represents the legal transfer of property from the promoter to the

buyer.

8.4 In other places a different pattern is followed. At the initial stage, instruments are created

between the promoter and all the prospective buyers (which may include a person who has

provided the vacant land for the construction), known as Sale Of Undivided Portion Of The

Land. This instrument transfers the property right to the buyers though it does not demarcate

a part of land, which can be associated with a particular buyer. Since the vacant land has lower

value, this system of legal instrumentation has been devised to pay lesser stamp duty. In many

cases, an instrument called Construction Agreement is parrallely executed under which the

obligations of the promoter to get property constructed and that of the buyer to pay the

required consideration are incorporated.

8.5 These different patterns of execution, terms of payment and legal formalities have given

rise to confusion, disputes and discrimination in terms of service tax payment.

8.6 In order to achieve the legislative intent and bring in parity in tax treatment, an Explanation

is being inserted to provide that unless the entire payment for the property is paid by the


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prospective buyer or on his behalf after the completion of construction (including its

certification by the local authorities),the activity of construction would be deemed to be a

taxable service provided by the builder/promoter/developer to the prospective buyer and the

service tax would be charged accordingly. This would only expand the scope of the existing

service, which otherwise remain unchanged.

13. Whether Builder will be entitle for 67% AbatementThe present abatement notification no 1/2006 1-3-2006 will not as it is will be applicable to the

proposed service tax on builder. Further, the CENVAT credit of duty on inputs or capital goods

or the CENVAT credit of service tax on input services, used for providing such taxable service is

not available if the abetment is claimed. Similarly, exemption under notification No. 12/2003-

Service Tax, dated the 20th June, 2003 is not available if the abetment is claimed.

Legality of the Levy

14. It is well settled principle in GANNON DUNKERLEY & CO. LTDs case ( when the levy of WorksContract Tax was imposed under the power to levy tax on sales) that the Government cannot

give artificial meaning to the entries appearing in the Seventh Schedule and assume powers to

levy of taxes. In the whole issue the Government has conveniently ignored a basic issue,

whether promoter and builders are service providers or property dealers. It can be seen from

the circulars referred earlier that Government has been going back and forth in giving clear

answer to the issue. If the fact is accepted that they are property dealers then how they

become service provider at the same time. Just by calling a property dealer as a service

provider, whether he becomes a service provider? Whether he becomes service provider

because he gets the consideration in installments? Probably government wants its share in

pie. The Government has every right to do so but it shall do it in more graceful and legal

manner. If a builder is owner of a land and if he enters into contract for sale of future property

which he is going to construct whether it will become service just because the buyer has

agreed to pay the consideration in installments?

It is also worth to note that the Supreme Court Bench comprising Honble Mr. Justice S.N.


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Variava and Honble Mr. Justice A.K. Mathur on 2-8-2004 dismissed the Petition for Special

Leave to Appeal (Civil) No. 24294 of 2003 filed by Commissioner of Central Excise, Vadodara

against the CESTAT Order No. ST/7/2003-NB(A), dated 4/5-6-2003 and reported in 2006 (3)

S.T.R. 124 (Tri. - Del.) (Daelim Industrial Co. Ltd. v. Commissioner). The Appellate Tribunal in its

impugned order had held that works contract is not liable to Service tax under consulting

engineer services as the contract cannot be vivisected and part of it (design and detailed

engineering, commissioning of the plant) subjected to Service tax.The Tribunal after going

through the clauses of the contract, had held the contract to be a work contract on turnkey

basis and not a consultancy contract to be liable to Service tax under consulting engineer

services. [Commissioner v. Daelim Industrial Co. Ltd. 2007 (5) S.T.R. J99 (S.C.)].

Though it is not said in so many words, the ratio of the Judgment is while executing a turnkey

project what is subject matter of a contract in resultant property and any service going into

building of a property is self service (input service). Such input services may be purchased from

outside contractors or may be by way of captive production engaging self work force. Self

Service is no service liable to service tax as the provider and the recipient is the same person.

What is ultimately sold in the contract is resultant property and not the bundle consisting of

goods and input services. It is also to be noted that the Contract executed by a buyer is for the

resultant property and not for the input services of the supplier of the property.

The new levy will also amount to a tax on land and would therefore fall outside the legislative

competence of Parliament inasmuch as the said subject is covered under Entry 49 of List II of

the Constitution of India and would fall within the exclusive domain of the state legislature. As

such, the proposed explanations seem to be apparently un-constitutional.

Thus, after this amendment the litigations between the Government and the Promoters and

builders are expected.

15. The new Service with respect to ConstructionIt is also proposed to add new service with respect to a residential complex, or a commercial

building by inserting new sub clause (zzzzu)to cover the service provided to a buyer, by a

builder of a residential complex, or a commercial building, or any other person authorized by


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such builder, for providing preferential location or development of such complex but does not

include services covered under sub-clauses (zzg), (zzq), (zzzh) and in relation to parking place.

The proposed clause has the following explanation:

Explanation.For the purposes of this sub-clause, preferential location means any location

having extra advantage which attracts extra payment over and above the basic sale price;

In my opinion, this can be called as service by any stretch of imagination. It is very common in

construction industry that some of the locations in the complex have more intrinsic value and

some locations have disadvantageous factors associated with it. For example, a particular flats

has view of panoramic valley and back side flats has a view of cemetery. The builder will sell

the flats facing valley at premium and facing cemetery at discount. Where is the question of

Service? Builder may charge for podium garden extra to a buyer, is it a service?

For the reasons stated earlier the proposed levy also seems to be illegal as what is being sold is

property and it is not a subject matter of service.

16. Is it to Prepare for GST?Other reason for coverage of Promoters and Builders could be to prepare for the flawless

Goods and Service Tax which is round the corner. It is expected that under the GST the

Promoters and Builders would be given full Cenvat Credit of input credit of input services and

may be capital goods deployed in providing output services.

If that is the reason then why Government should indulge into an arm twisting tactics to collect

the Service Tax from builders. It is to be appreciated that there will be statutory authority

under GST to tax builders. That authority is not presently available to the Government under

present set of laws.

17. What will happen to the construction of a new building /complex getting CompletionCertificates after the Finance Act, 2010 is given an assent by the President of India and


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Notified? Whether Service Tax will be attracted?

In my opinion service tax will be attracted on the whole amount paid by the buyer to the

Promoter unless Government issues notification to that effect. Thus, the Government is

required to give enough clarity to ensure that unknown and unforeseen liability should not

hover and then fall on them or their buyers. The Government may consider giving an

exemption from service tax for installments already paid and realized by the Promoters and

Builders through banking channel before the enactment of the Finance Act, 2010. The impact

of service tax under different situations is shown in annexure A.

Role of the Government

The Government shall not enforce this levy as it is not going to stand on legal grounds . Legal

disputes in indirect taxes are not good for the assessee, as, any such dispute affects him and/or

the end consumer and the industry as a whole. Probably Government has taken a chance with

thought in mind that an assessee can win legal battle but not war of legal disputes as

Government holds atomic weapon of retrospective amendments. Now time has come to

show that Assessees can also win legal wars.

Any assessee will not mind any indirect tax when it is legal and enforced with clarity. It is time

that the Government plays its role in the interest of Construction Industry and the Consumers

of Construction Industry which includes Aam Adami.


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Annexure A

THE EFFECT OF NOTIFICATION ON THE DIFFERENT EVENTUALITIES

The new Explanation provides that:

For the purposes of this sub-clause,

It shall be the construction of a new building or the construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorized by the

builder before, during or after construction shall be deemed to be service provided by

the builder to the buyer

The construction of a new building or a complex will not be treated as service when nosum is received from or on behalf of the prospective buyer by the builder or the person

authorized by the builder before grant of completion certificate by the authority

competent to issue such certificate under any law for the time being in force).

The effect of the explanation with respect to following situations will be as under

Situation Issues Taxability/ Comments

Project is in construction stage

in the month of march 2010

and expected to be completed

by December 2010. 60% of the

consideration is received by the

builder.

In this case completion

certificate will be received after

the enactment of Finance Act,

2010. At that time, assume 75%

of the consideration would be

received by a builder.

What will be the amount on

which service tax would be

payable?

As per the proposed

amendment if no sum is

received from the

prospective buyer by the

builder before grant of

completion certificate.Hence it would be a taxable

Service. Builder will have to

pay service tax. As per

section 67 (3) The gross


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On 40% (after deducting paid

sum)

On 25% (after deducting paid

sum)

Or any other percentage.

amount charged for the

taxable service shall include

any amount received

towards the taxable service

before, during or after

provision of such service.

Therefore, Service Tax

Department may insist for

tax on 100% of amount

(already paid and to be

paid).

Construction is completed to

100% on 1st

February 2010.

100% of the consideration is

received by the builder form all

buyers on 25th

February 2010.

Application for completion

certificate made on 1st

March

2010. Completion Certificate

received on 1st

June 2010.

Service Notified as taxable

service on 16 May 2010.

Construction is completed even

before the Budget proposal.

Consideration is also received

in full. Only technical formality

of Completion is pending.

However, Completion

Certificate received after the

Service Notified as taxable

service on 16 May 2010.

As all the sum is received

from or on behalf of the

prospective buyer by the

builder before grant of

completion, it would be a

taxable Service builder will

have to pay service tax. As

per section 67 (3) The gross



any amount receivedtowards the taxable service

before, during or after



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Therefore, 100% of amount

(already paid and to be paid)

would be taxable

Construction is completed to

100% on 1st

February 2006.

75% of the amount is paid by

one of the buyer. Completion

certificate received on 1st

March 2007. However due to

dispute with him in a court of

law the possession was not

given. On 1st

June 2010. Dispute

is resolved and buyer made

balance payment of 25% and

builder handed over

possession. Service Notified as

taxable service on 16 May 2010

Construction is completed long

back. Consideration to the

extent of 75% is also received.

25% of the amount is not paid

by the buyer due to legal

dispute. Now dispute is settled

and balance amount is paid

when the service is taxable.

As per the proposed

amendment if no sum is

received from prospective

buyer by the builder before

grant of completion

certificate then it would not

be a taxable service.

As 75% amount was received

before the completion

certificate and 25% received

when the service got

notified. Hence it would be a

taxable Service builder will

have to pay service tax. As

per section 67 (3) The gross



any amount received

towards the taxable servicebefore, during or after



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In short if any sum is received prior to completion certificate it will be a taxable service from the

notified date and considering the attitude of Service Tax Department, service tax would be asked on

100% amount in view of Section 67. The above situations have been assumed and answers are given

from the Departments perspective. There could many unforeseen complex situations in reality.

The new levy is going to create more disputes if it is enforced in the same format as proposed.

Construction Industry and Service Tax Amendments in Union Budget 2010

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