E:kalyancpesc.orgService Tax on Construction

Thane Branch of WIRC of ICAI&

Kalyan & Ulhasnagar CPE Study Circles

Service Tax on Construction Industry

By CA. Mangesh Kinare 9th May 2015

Synopsis

•Types of Services•Taxability of Services, Abatements & Valuation Construction Service

(Taxability & Abatement) Works Contract Service

(Taxability & Valuation)•Exemptions•Point of Taxation•Adjustment of Taxes Paid•Reverse Charge and Joint Charge

Types of ServicesThere are many types of services (in the erstwhile classification) which are provided in connection with construction industry or construction activity such as –•Construction of Complex Service•Commercial Construction Service•Works Contract Service•Erection, Commissioning and Installation Service•Maintenance and Repairs Service•Architect Service•Interior Decorators Service

•It should be noted that then last Two services are essentially services wherein no Transfer of goods is involved.

•As regards Erection/ Commissioning Service and Maintenance/Repairs service; after 1st July 2012 ; if Transfer of goods is involved, these services have to be classified under ‘Works Contract Service’ in order to get benefits of Valuation.

•Hence this paper is mainly dealing with “Construction Service” (involving both Residential and Commercial Construction) and “Works Contract Service”

Taxability of ServicesConstruction ServiceSection 66E of Finance Act, 1994 provides for ‘Declared Services’ and clause (b) of the list if declared services specifies the taxable service 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 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:–– • (i) architect registered with the Council of Architecture constituted under the Architects Act, 1972; or • (ii) chartered engineer registered with the Institution of Engineers (India); or • (iii) 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;

Taxability of ServicesConstruction Service

Even if Part of Consideration received before CC – TaxableReceipt of consideration important‐ date of agreement not relevant.All types of constructions i.e. school, colleges, hospitals etc. are Taxable (unless exempt specifically) Resale of under construction flat by flat owner – not included.

Occupation Certificate and Completion Certificate

Occupancy Certificate will become necessary when the Building Completion Certificate is not there. In other words, while building construction may still continue, one may obtain occupancy certificate depending upon the portions that have become habitable and safe for living, while other portions etc., of the building construction can go on. On the other when the entire building has been constructed and building completion has been certified, the occupancy is automatic.

AbatementAbatement post 01/07/2012

Notification No.26/2012‐ST dated 20th June,2012 as amended by Notification No.2/2013‐ST dated 1st March,2013 & Notification No.9/2013‐ST dated 8th May,2013

A

NOTE:‐

Abatement and tax Liability will have to be calculated separately for units i.e. residential & commercial and even in residential units – two calculations depending upon area and consideration.

Description of Taxable Service Abatement Taxable ValueFor Construction of Residential Unit for which (i) amount charged is less than 1 Crore AND (ii) the Carpet area less than 2,000 Sq. Feet

75% 25%

For Other Constructions 70% 30%

Conditions for availing abatement Value of land is included in the amount charged No CENVAT availed for excise duty paid on inputs used. So CENVAT available in respect of Capital Goods & Input Services.

2015-8-20

Taxability of ServicesWorks Contract Service Clause (h) of Section 66E provides that service portion in the execution of a works contract as “Declared Service”.

Clause (54) of Section 65B defines "works contract" to mean •a contract wherein transfer of property in goods involved in the execution of such contract •such transfer 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, repair, maintenance, renovation, alteration of•any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

Points to be remembered‐•Contracts should be liable under VAT laws.•Only specific activities are included.•Activities in relation to movable as well as immovable property.

ValuationValuation of Works ContractRule 2A of Service Tax (Determination of Value) Rules

•Clause (i) specifies method of finding out value of works contract as under‐•Value of a works contract shall be equivalent to the gross amount charged for the works contract less the value of property in goods transferred in the execution of the said works contract.•If Vat or sales tax paid on actual sales value of goods (by bifurcating sales and service) then such value of goods can be adopted.•Vat or sales tax not included in Value.•Charges such as labour charges, subcontractors’ charges, planning, designing and architect's fees, hire charges for machinery and tools etc. to be included.•Cost of consumables like water & electricity, cost of establishment or such other expenses for labour & services to be included.•profit earned in relation to supply of labour and services to be included.

Deemed Valuation‐•Where value has not been determined under clause (i) following method specified in clause (ii) shall be adopted‐

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ValuationValuation of Works Contract – Deemed ValuationTill 30th September2014

in case of works contracts entered into for execution of original works, service tax shall be payable on 40% of the total amount charged for the works contract

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 70% of the total amount charged for the works contract;

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 60% of the total amount charged for the works contract.• •

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ValuationValuation of Works Contract – Deemed ValuationFrom 1st October 2014 in case of works contracts entered into for execution of original works, service tax shall be payable on 40% of the total amount charged for the works contract

in case of works contract, not covered under sub‐clause (A), including works contract entered into for,— (i) maintenance or repair or reconditioning or restoration or servicing of any goods; or (ii) maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property,•service tax shall be payable on 70% of the total amount charged for the works contract. •

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ValuationValuation of Works Contract – Deemed Valuation•Explanation 1 –• (a) Meaning of “Original Works”• (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 (b)“Total Amount” means the total of the gross amount charged for •the works contract and the FMV (computed as per generally accepted accounting principles) 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, after deducting‐ •(i) the amount charged for such goods or services, if any; and •(ii) the value added tax or sales tax, if any, levied thereon:

•CENVAT Credit on inputs used in or in relation to works contracts is not allowed.

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Exemptions Clause 12 of Notification No. 25/2012Services provided to government / Local authority/ governmental authority.Services provided to the Government or local authority/ governmental authority by way of erection, construction, commissioning, installation, completion, fitting out, maintenance, repair, alteration or renovation of – a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);canal, dam or other irrigation works;pipeline, conduit or plant for (i) water supply (ii) water treatment or (iii)sewerage treatment or disposal;

Exemptions withdrawn w.e.f. 1st April 2015a civil structure or any other original work meant predominantly for a non‐industrial or non‐commercial use or any other business or profession;a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishmenta residential complex predominantly meant for self‐use or the use of their employees or other persons specified in the Expl. 1 to clause 44 of section 65 B .

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Exemptions Clause 12 of Notification No. 25/2012 (contd.)•Governmental authority means an authority or a board or any other body; •(i) Set up by an Act of Parliament or a State Legislature; or •(ii) Established by Government, •with 90% or more participation by way of equity or control, •To carry out any function entrusted to a municipality under article 243W of the Constitution.

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Exemptions Clause 13 of Notification No. 25/2012Services in relation to certain Public utility Infrastructure Facilities.Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,road, bridge, tunnel, or terminal for road transportation for use by general public;a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojanabuilding 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;pollution control or effluent treatment plant, except located as a part of a factory; a structure meant for funeral, burial or cremation of deceased

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Exemptions Clause 14 of Notification No. 25/2012Services in relation to erection, commissioning, installation, construction, w.r.t. certain specified purposes.Services by way of erection, construction, commissioning and installation of original works pertaining to,‐Railways including monorail or metro;single residential unit otherwise than as a part of a residential complex;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;post‐ harvest storage infrastructure for agricultural produce including cold storages for such purposes; ormechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;Exemptions withdrawn w.e.f. 1st April 2015For airport, port

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Exemptions

Clause 14 of Notification No. 25/2012 ‐ Comments:All services in respect of airport, port have become taxable now. As regards railways – only specified activities relating to Original Works are exempt ‐ constructions other than original work, repairs, alteration, restorations and maintenance are taxable.Complex now means more than One residential units having some common facilities like common access road, common compound, common water supply etc.The term “single residential unit” means a self‐contained residential unit which is designed for use, wholly or principally, for residential purposes for one family.

Clause 29(h) of Notification No. 25/2012Service provided by specified persons.Services by Sub‐contractor providing services by way of works contract to another contractor providing works contract services which are exempt.

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Point of Taxation General rule:w.e.f. 1st April, 2011 or 1st July, 2011, as the case may be, point of taxation shall be:Where the invoice for the service provided or agreed to be provided is issued within 30/45 days of the date of completion of provision of services the Point of Taxation shall be earliest of the following dates:

– Date of issue of invoice– Date of receipt of payment

Where the invoice for the service provided or agreed to be provided is not issued within 30/45 days of the date of completion of provision of services the Point of Taxation shall be earliest of the following dates: ‐ Date of completion of provision of services ‐ Date of receipt of payment.

Completion of service: • ‘Completion of service’ ‐ Include not only the physical part of providing the service but also the completion of all other auxiliary activities that enable the service provider to be in a position to issue the invoice. (e.g. activities like measurement, quality testing, etc ) •However such activities do not include flimsy or irrelevant grounds for delay in issuance of invoice.

Point of Taxation

Continuous Supply Of Services [Rule 2(c)]A ‘continuous supply of service’ has been defined to mean – any service provided or to be provided continuously or on recurrent basis by a service provider under a contract for a period more than 3 months; orsuch services which the Central Government prescribes by a notification to be in the nature of continuous supply of services.•Note: Services on recurrent basis would mean services which are provided on recurring basis and are not continuous in nature.

W.E.F. 1st July, 2012 following services shall be considered as continuous supply of service:•Telecommunication Services, and•Service portion in execution of Work Contract

Point of TaxationContinuous Supply Of Services [contd.]

In case of ‘continuous supply of service’ the general rule would be applicable subject to the following modifications:where in terms of the contract the provision of the whole or part of the service is determined periodically on the completion of an event; and Such event obligates payment by the service receiver, •the date of completion of each such event shall be the date of completion of provision of services.

Hence in ‘Construction Service’ stages of completion of construction which obligate the buyer to make payment would give rise to tax liability. •Difficulties arise because the accounting of receivables from customers is not done as per the abovementioned stages. Moreover the Financial Statements (especially for companies) are prepared according to AS‐7; Percentage Completion Method. Hence at times mismatch arise in Accounting Records and Service Tax Records.

Adjustment of Taxes PaidAdvance Payment of Service Tax [Rule 6(1A)]The assessee who is paying service tax in advance should follow the following procedures:Intimate to the jurisdictional Superintendent of Central Excise within 15 days of such payment.Service tax paid in advance is allowed to be adjusted against service tax liability for the subsequent period. It is sufficient that such adjustment is disclosed in the periodical return to be filed.

Self adjustment of excess tax paid: Rule 6(4A) and 6(4B)Self‐adjustment of excess tax paid is allowed subject to the following conditions:Self‐adjustment of excess credit is allowed on account of reasons other than interpretation of law, taxability, valuation or applicability of any exemption notification.Adjustment of excess paid service tax without any monetary limit. Adjustment can be made only in the succeeding month or quarter. No intimation required.

Adjustment of Taxes PaidService not wholly/partly provided or amount renegotiated: Rule 6 (3)Where an assessee has issued an invoice, or received any payment, against a service to be provided which is not so provided by him either wholly or where the amount of invoice is renegotiated due to deficient provision of service, or any terms contained in a contract, the assessee may take the credit of such excess service tax paid by him, if the assessee.‐

(a) has refunded the payment or part thereof, so received for the service provided to the person from whom it was received; or (b) has issued a credit note for the value of the service not so

provided to the person to whom such an invoice had been issued.

It has been clarified that in such cases of adjustment the assessee is required to file the details in respect of such suo motu adjustments done by him at the time of filing the service tax returns along with enclosure of documentary evidence for adjustment of such excess service tax paid. Adjustment of excess payment of service tax due to clerical mistake etc. not allowed under this Rule.

Reverse Charge and Joint ChargeProvisions relating to services which are regularly used and on which service tax is payable on Reverse Charge in construction industry are given below‐Following services are notified for the purpose of Section 68(2)-Services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road, where the consignor or the consignee isany factory registered under or governed by the Factories Act, 1948; any society registered under the Societies Registration Act, 1860 or under any other law for the time being in force in any part of India; any co‐operative society established by or under any law; any dealer of excisable goods, who is registered under the Central Excise Act, 1944 or the rules made thereunder; any body corporate established, by or under any law; or any partnership firm whether registered or not under any law including association of persons;

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Reverse Charge and Joint ChargeServices provided or agreed to be provided by an individual advocate or Firm of Advocates by way of Legal Services to any business entity.Services provided or agreed to be provided by way of supply of manpower for any purpose or Security Services or service portion of works contract by any individual, Hindu Undivided Family or proprietary firm or partnership firm, whether registered or not, including association of persons; located in the taxable territory to a business entity registered as body corporate.Services provided or agreed to be provided by a director of a company or Body Corporate to the said company or Body Corporate.Percentage of service tax liability to be discharged under joint charge ‐

Description of Service % of tax payable by service prov.

% of tax payable by service recpt.

Goods Transport Agency’s Services NIL 100%

Services by Individual Advocate or a firm of advocates by way of legal service

NIL 100%

Services by a director to the company NIL 100%

Supply of manpower or Security Services NIL 100%Works contract 50% 50%

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Para 6.2 of Educational Guide dated 20th June,2012Applicability of Service tax on Construction Services under various modes of transactions‐

Nature of Transaction

Clarification on taxability

Flats/Houses given by Builder/ Developer to Land Owner for Land/ Development Rights

Sale of land by the landowner to the builder/developer is not a taxable service.

Services provided by builders/developers are taxable in case any part payment (including by way of development right) is received before issuance of completion certificate.

Service tax is required to be paid even in respect of

flats given to land owner for acquiring development right. The value of taxable services in respect of these flats would be the value of land when the same is transferred … .POT to be determined accordingly

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Para 6.2 of Educational Guide dated 20th June,2012



Redevelopment Re‐construction undertaken by a building society by directly engaging a builder/developer will be chargeable to service tax as works contract service for all the flats built.

The builder/developer executes the agreement with prospective buyer (other than existing member) for sale of flat which includes value of land.‐

Society may be a confirming part to the extent that they would admit the prospective buyer as a member.

Issue:‐ Value of Service for existing flat owner and POT ?

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Flats given to Land Owner under

Collaborative Agreement

Service tax to be paid by Land Owner on further transfer of flats if any consideration is received by him from any person before the receipt of completion certificate.

Conversion of untaxed residential

complex into Commercial

Mere change in use of the building does not involve any taxable service … If the renovation activity is done on such a complex on contract basis the same would be a works contract, which would also be taxable if other ingredients of taxability are present.

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Built‐Operate‐Transfer (BOT) Projects

Upfront lease amount or annual charges paid by the concessionaire to Government would be in the Negative List U/s.66D(a) unless the same qualify as “Support Services” under Exception 66D(a)(iv)….If the nature of concession amounts to “ Renting of Immovable Property ” , the same would be taxable…ST payable by Government since no RCM.

Concessionaire undertaking construction not liable since such construction is on his own account … However, independent contractor engaged by concessionaire for construction would be liable.

Commercial exploitation of the building by concessionaire by way of sub‐lease is liable.

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Builder receiving FD converted into consideration after completion

May be a colorable device wherein the consideration for provision of construction service is disguised as fixed deposit, which is unlikely to be returned… ..interest earned by the builder on such fixed deposits will be a significant amount received prior to the completion of the immovable property … ..interest in such cases would be considered as part of the gross amount charged for the provision of service and the service of construction will be taxable.

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Cases where requirement for

completion certificate waived

In terms of Explanation to clause (b) of section 66E in such cases the completion certificate issued by an architect or a chartered engineer or a licensed surveyor of the respective local body or development or planning authority would be treated as completion certificate

Transfer of interest in under construction of flat

Such transfer does not fall in this declared service entry as the said person is not providing any construction service.

Transfer of such an interest would be transfer of a benefit to arise out of land is part of immoveable property. Such transfer would therefore be outside the ambit of ‘ service ’ being a transfer of title in immoveable property.

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ISSUES1. In addition to cost of flat, various other charges like development

charges, clubhouse charges, parking charges, maintenance charges are recovered by Builders. – Whether it will be counted in consideration (for abatement) and tax will be payable ?

2. Taxability of Plot Schemes‐ Converting Agricultural plots in NA Plots and selling or developing the same. – Consolidated Agreement specifically shows separate consideration for Land and Construction – Whether separate agreements are advisable.

3. Rule 2(l) of Cenvat Credit Rules specifically excludes Construction and Works Contract Service in so far as they are used for construction or works contract of a building or civil structure or laying foundation or making structure for support of capital goods‐ Whether Cenvat available to Builders or Contractors on subcontracts given.

4. Whether Cenvat Credit to be reversed for after grant of CC for unsold flats ?

ISSUES5. If the Flat Bookings are cancelled, Builders may refund the amount

received (incl. service tax), keeping some amount as ‘Cancellation Charges’. Whether such charges are taxable ?

6. After Construction is over, CC received and all flats are sold, Builders take responsibility to form a Society. Till that time, society formation Charges, maintenance charges etc. are collected from Flat owners. What is the taxability of such charges ?

7. How can a Builder take Cenvat Credit on ‘Retention Amount’ kept from the contract value of the Contractors ?

8. Whether transfer of TDR is liable for Service Tax ?9. Whether Service Tax at full rate is applicable on floor rise or benefit of

abatement can be taken?10. A company has been awarded contract from MSEDCL for shifting of

public utility [polls, wires etc] and the company has sub contracted the work after retaining 2% commission to sub‐contractor who is individual.

• In the above arrangement:• Applicability of service tax on company and category of service.• Applicability of service tax on contractor and category of service.• Applicability of reverse charge on company.• Whether sub contractor has option to pay service tax himself.

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