1. Construction Activity
1.1. Validity
of levy of service tax
In Maharashtra
Chamber of Housing Industry v. UOI (2012) 34 STT 384 (Bom HC), the
constitutional validity of levy of service tax on construction service has been
upheld.
1.2. Definition
With effect from
01-07-2012, the following definition of “Works Contract” as given in Section
65B(54) of the Act is applicable:
"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 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;
1.3. Activities
considered as Construction services
With effect from
1-7-2012 all activities relating to construction fall within the purview of
following “Declared Services” under section 66E of finance act, 1994:
66E(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.
66E(h): Service portion in
the execution of a works contract.
Illustrative list of services in relation to
construction activities would be taxable:
·
Construction
of boundary wall
·
Construction
of parking wall
·
Services
in respect of cutting of plots and development of colonies received by builders
·
Construction
of residential complex and units ranging between 2-12 units (more than one
unit)
·
Construction
of private roads
·
Construction
services provided to non-commercial organization in respect of building which
are used for other than religious purpose.
·
Services
provided in respect of construction of hospitals to any person other than
government or government authorities or local authorities
·
Services
provided in respect of construction of building to be used for the purpose of
education to any person other than government or governmental authorities or
local authorities
1.4. Exemption
to certain Construction activity
Following
construction activities stated in entry no. 12, 13 & 14 are exempted by
notification 25/2012 dated 20-06-2012:
i. 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;
ii. 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;
iii. 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;
1.5. Relevance
of completion certificate in construction services:
Completion
certificate plays a vital role in determining the taxability of activity. The
entire activity of builder / developer 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 after issuance of completion certificate, then the activity would be a
mere transfer of title in immovable property and thereby doesn’t fall within
definition of service.
“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.
1.6. Valuation
of service portion under works contract:
For valuation of
service portion under construction, following 3 options are available:
Option 1- Actual
method: As
per rule 2A(i) of service tax (Determination of value) Rules, 2006, inter alia,
provides that the value of service portion in the execution of a works contract
is 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. Accordingly, taxable value of
service portion in execution of a works contract can be determined in following
manner:
A
|
Gross amount charged for the works
contract (Note 1)
|
XXXXX
|
B
|
Less: value of property in goods
transferred in execution of works contract (Note 2)
|
(
XXXXX )
|
C
|
Net amount chargeable for service Tax
(A-B)
|
XXXXX
|
D
|
Service Tax on ‘C’ above
|
XXXXX
|
E
|
Input CENVAT credit
|
NIL
|
F
|
Net Service Tax payable (D-E)
|
XXXXX
|
Note 1: Gross amount of works contract shall include:
I.
labour
charges for execution of the works;
II.
amount
paid to a sub-contractor for labour and services;
III.
charges
for planning, designing and architect’s fees;
IV.
charges
for obtaining on hire or otherwise, machinery and tools used for the execution
of the works contract;
V.
cost
of consumables such as water, electricity, fuel used in the execution of the
works contract;
VI.
cost
of establishment of the contractor relatable to supply of labour and services;
VII.
other
similar expenses relatable to supply of labour and services; and
VIII.
profit
earned by the service provider relatable to supply of labour and services;
Note 2:
For value of property in goods
transferred in execution of works contract:
Value added tax or sales tax has been paid
or payable on the actual value of property in goods transferred in the
execution of the works contract, such value adopted for the purposes of payment
of value added tax or sales tax, shall be taken as the value of property in
goods transferred in the execution of the said works contract.
Option 2 - Abetment for goods
portion: As per rule 2A(ii)
of service tax (Determination of value) Rules, 2006, taxable value of service
portion in execution of a works contract can be determined in following manner:
A
|
Total amount charged for works contract
(Note 1)
|
XXXXX
|
B
|
Value of Taxable amount for Service tax:
For Original works (Note 2) – 40% of
value of ‘A’
For maintenance or repair or
reconditioning or restoration or servicing of any goods – 70% of value of ‘A’
For any other case - 60% of value of ‘A’
|
XXXXX
|
C
|
Service Tax on value ‘B’
|
XXXX
|
D
|
Input Cenvat Credit
|
NIL
|
E
|
Net Service Tax payable (C-D)
|
XXXXX
|
Note: 1 Total amount charged for works contract means:
A
|
Gross amount charged for the works
contract
|
XXXX
|
B
|
Fair market value of all goods and
services supplied in or in relation to the execution of the works contract
(@)
|
XXXX
|
C
|
Less:
(i) the amount charged for such goods or
services, if any; and
(ii) the value added tax or sales tax, if
any, levied thereon
|
(XXXX)
|
D
|
Amount charged for the works contract
(A+B-C)
|
XXXXX
|
(@) Fair market value of goods and services
so supplied may be determined in accordance with the generally accepted
accounting principles.
Note 2: (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
Cenvat credit: Under above both options, provider of
taxable service shall not take CENVAT credit of duties or cess paid on any “inputs”,
used in or in relation to the said works contract. However, CENVAT Credit of
duties or cess paid on any “input service” or on any “capital goods” is allowed
under above all options.
Option 3: Valuation of service portion for construction
of complex, building, civil structure or part thereof: According to
notification no. 26/2012 dated 20-6-2012 & 2/2013 dated 1st
March, 2013, with effect from 1st March, 2013, in respect of
construction of complex, building, civil structure or a part thereof which is
intended for a sale to a buyer, wholly or partly, service tax is payable on the
following part of the amount charged by such service provider:
Description of taxable service
|
Tax to be levied on percentage of taxable value
|
Condition
|
Construction of a
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,-
(i) for
residential unit having carpet area upto 2000 square feet or where the amount
charged is less than rupees one crore
(ii) for other
than the (i) above
|
25%
30%
|
(i) CENVAT credit
on inputs used for providing the taxable service has not been taken under the
provisions of the CENVAT Credit Rules, 2004;
(ii) The value of
land is included in the amount charged from the service receiver
|
1.7. Point
of taxation for construction services:
As per rule 3 of the
Point of Taxation Rules,2011 , the service tax liability would be calculated on
the basis of the earliest of the following four dates, viz.
·
Date
on which service is provided
·
Date
on which service is to be provided
·
Date
of the invoice raised by the works contractor
·
Date
of receipt of the money
Accordingly, under
the Point of Taxation Rules, a service provider would be liable to pay on the
date he is to provide a service, despite that, he has not actually rendered the
service nor has he got paid for the services rendered/to be rendered. In the
case of construction contract, it is common in such contracts that certain
milestone are defined for triggering payment to be made by the service
recipient to the service provider. Accordingly, service tax has to be paid on
triggering of such milestones irrespective of whether invoice is raised or
payment is received. For e.g.
A realty
developer/builder enters into an agreement to construct, with his prospective
buyer/customer and agrees, as follows, for a construction value of, let's say,
Rs 100 lakhs
·
25%
of the amount to be paid on signing of the agreement on April 2, 2011
·
25%
of the amount to be paid on July 1, 2011, on completion of the laying of the
slabs
·
25%
to be amount to be paid on December 1, 2011, on completion of the basic
structure
·
Final
installment of 25% to be paid on March 31, 2012, on possession
However,
upto March 31, 2012, the developer/builder has not carried out any activity.
As per Point of
taxation rules, the said developer/builder would be liable to pay service tax
on July 1, 2011, December 1, 2011 and March 31, 2012, on the amounts of Rs 25
lakhs each, despite that the developer has not even commenced the construction
activity and has not received any amounts from the customer.
1.8. Liability
to pay service tax:
In following cases
who will be liable to pay service tax:
Particulars
|
Situation -1
|
Situation -2
|
Land owned by
|
Builder /
developer
|
CHS
|
Development work carried out by
|
Builder /
developer itself through various agencies
|
CHS by appointing
various agencies
|
Sale proceeds received by
|
Builder /
developer
|
CHS
|
Person liable for ST as builder
|
Builder /
developer
|
CHS
|
1.9. Clarification
from CBEC in Guidance note issued on 20th June, 2012:
·
Reconstruction of building by society: Land is owned by a society, comprising members of the society with each
member entitled to his share by way of an apartment. Society /individual flat
owners give ‘No Objection Certificate’ (NOC) or permission to the builder/developer,
for re-construction. The builder/developer makes new flats with same or
different carpet area for original owners of flats and additionally may also be
involved in one or more of the following: (i) construct some additional flats
for sale to others; (ii) arrange for rental accommodation or rent payments for
society members/original owners for stay during the period of reconstruction;
(iii) pay an additional amount to the original owners of flats in the society.
Under this model, the builder/developer receives consideration for the
construction service provided by him. Hence, 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 now.
·
Flats to land owner: When a
certain number of flats are given by the builder/developer to a land owner in a
collaborative agreement to construct, in lieu of the land or development rights
transferred, in such case transferee would be required to pay service tax on
further sale of flats to customers, if any consideration is received by him
from any person before the receipt of completion certificate.
·
Renovation: If the
renovation activity is done on contract basis, the same would be a taxable as
works contract even if such renovation makes conversion of any construction/
complex or part thereof into a building or civil structure to be used for
commerce or industry.
·
Build-operate-Transfer (BOT) project between
Government, concessionaire (who may be a developer/builder himself or may be
independent) and the users:
o At first level
Government transfers the right to use and/or develop the land, to the
concessionaire: Consideration for this service may be in the nature of upfront
lease amount or annual charges paid by the concessionaire to the Government.
Such services provided by the “Government’ would be in the negative list entry
contained in clause (a) of section 66D unless these services qualify as
‘support services provided to business entities’ under exception sub-clause
(iv) to clause (a) of section 66D. If the nature of concession amounts to
‘renting of immovable property service’ then the same would be taxable and the
tax is required to be paid by the government.
o Second level
concessionaire construct building: If concessionaire construct building by own
then concessionaire would not liable for service tax; but if concessionaire
appoints an independent contractor for construction then service tax is payable
service provided by contractor to concessionaire.
o Third level
concessionaire enters into agreement with several users for commercially
exploiting the building developed/constructed during the lease period: If the
user pays a rent or premium on the sub-lease for temporary use of immovable
property or part thereof, to the concessionaire then concessionaire would be
liable to service tax on such amount received from users.
·
Receive fixed
deposit instead of sale consideration: If the builder instead of receiving
consideration for the sale of an apartment receives a fixed deposit, which it
converts after the completion of the building into sales consideration, then it
would amount to receiving any amount before the completion of service and also
interest earned on such fixed deposit would be consider as gross amount charged
for service and same would be liable for service tax.
·
If requirement of
completion certificate is waived of for certain types of building: in such case 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.
·
Investment model: In this model,
before the commencement of the project, the same is on offer to investors.
Either a specified area of construction is earmarked or a flat of a specified
area is allotted to the investors and as it happens in some places,
additionally the investor may also be promised a fixed rate of interest. After
a certain specified period an investor has the option either to exit from the
project on receipt of the amount invested alongwith interest or he can re-sell
the said allotment to another buyer or retain the flat for his own use.
In this model,
investment amount shall be treated as consideration paid in advance for the
construction service to be provided by the builder/developer to the investor
and the said amount would be subject to service tax. If the investor decides to
exit from the project at a later date, either before or after the issuance of
completion certificate, the builder/developer would be entitled to take credit
under rule 6(3) of the Service Tax Rules, 1994( to the extent he has refunded
the original amount). If the builder/developer resells the flat before the
issuance of completion certificate, again tax liability would arise.
·
Joint Development Agreement Model: Under this model, land owner and builder/developer
join hands and may either create a new entity or otherwise operate as an
unincorporated association, on partnership /joint / collaboration basis, with
mutuality of interest and to share common risk/profit together. The new entity
undertakes construction on behalf of landowner and builder/developer. In such
cases, service tax will be payable.
1.10. Miscellaneous
FAQ
·
In
cities like Mumbai, building is being demolished and new building with better
amenities and additional floor space Index (FSI) are constructed. In such
cases, the existing owners of the flat are required to make some payment for
allotment of additional floor space in newly constructed building. Whether such
amount received will be taxable for builder?
Yes, amount
received by builder for allotment of additional floor space would be liable for
service tax.
·
What
if buyer of flat transfer before paying full installments and before completion
of building transfers, whether service tax would be applicable or not on such
transfer?
No, service tax
would not be liable on such transfer as such transfer does not fall in declared
service entry as the said person is not providing any construction service.
·
What
will happen if during the period of construction the prospective buyer has
cancel purchase of flat and the builder refunds the amount received?
Rule 6(3) of service
tax rules provides for adjustment of excess service tax paid, provided the
service provider has refunded the value of taxable service and the service tax
thereon to the person from whom it was received.
·
Whether
refund of service tax paid by prospective buyer can be claimed, if the builder
having collected the money from prospective buyer is not in a position to
construct the property for various reasons for a long time?
There are no
provisions for refund of tax paid. The prospective buyer has no right to claim
any refund of the tax paid by him to builder.
·
Whether
refund of service tax paid by prospective buyer can be claimed, if the builder,
for some reason does not carry out any construction activities, drop the
project and informs the government?
In such case
refunding the tax to builder will amount to unjust enrichment. Accordingly, the
buyer will not be able to get any refund of tax paid.
·
In
majority of cases completion certificate are not issued for a long period of
time. However, meanwhile, the buyer takes possession of the flat and after
taking possession but before getting completion certificate, it is sold to
another person. Whether service tax is required to pay on second sale?
No. Service tax is not
required to be paid on the second saleTo join google group regular updates or
query on service tax send mail to handbookonservicetax@gmail.com
Very informative blog regarding service tax.
ReplyDeleteVat consultants in Noida
Excellent work. very useful
ReplyDeleteVery useful blog on service tax relevant to construction activity.
ReplyDeleteCA Satish Kothule
i had to make this ppt on service tax and almost all the material i got from your site... grt job
ReplyDeletei had to make this ppt on service tax and almost all the material i got from your site... grt job
ReplyDeleteOurs is a big residential complex maintained by the Developer.
ReplyDeleteHe is charging service tax on our monthly charges of around Rs 3000-4000.
Is he right in charging service tax?
Is he expected to inform us under which account he is remitting the amount to Government?
Kindly clarify both points.
This is really nice. Your information about constructions is really interesting. Thanks for sharing this article
ReplyDeleteArchitects Chennai
Very informative
ReplyDeleteBuilder in Chennai
Very informative
ReplyDeleteBuilder in Chennai
really an informative post on construction activity.You may also like to know about best construction company ghana
ReplyDelete
ReplyDeleteThat's interesting! Can you please share more about it? Thank you.
Home Renovation Services
ts a valuable content shared,would like to know more about it.
ReplyDeleteFactory Cleaning Service in Mumbai
Thanks for sharing this list with us. Wardha IT Park is one of the best IT park India. Which Provides commercial office for lease for Your office.
ReplyDeleteExcellent blog posted here. If you are looking for steel fibres for concrete then you can contact Precision Drawell. Thanks for sharing.
ReplyDeleteThanks for providing such a nice post. Construction Contractors In Delhi
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteThanks for sharing good information for construction services.
ReplyDeleteHi this is good to see that you are providing such great service and you giveing it for free. I love type of blogs that understand the value of providing a quality information. Thanks for sharing it very useful for Help Adya Free ad Posting Websites www.helpadya.com
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteWell and informative content provided about service tax on construction Activity. Thanks for given this information here about this blog.Aluminium Scaffolding Manufacturer in chennai
ReplyDeleteI like content very much. Clean and true hints. Thanks
ReplyDeleteOffice build out in new York
Awesome information included in this blogpost. Thanks for sharing
ReplyDeleteVisit This Website
Thanks...
ReplyDeleteCo working space in Bangalore Furnished office space in central Bangalore
synmac tax consultant in Delhi
ReplyDeletedoing company registration in Delhi,GST registration in Delhi,Tax consultant in Delhi...
if you have any requirement GST,ITR
click the below link...
company register
company register in Delhi
GST register in Delhi
tax consultant in Delhi
best wardrobes design The use of the cupboard that is identical between its external appearance and its internal division, as it will provide you with two services, the first of which is the elegant modern shape, and the second is the great practicality provided by that symmetry in the design, where you will be able to divide the cupboard between you and those who share the room with you very evenly, and you can divide it between you and your things in a way Creative coordination, especially if the closet is open without doors.
ReplyDeleteAt Kingsbury Creations we have taken two well-loved stories and transformed them into exciting school musicals, perfect for junior schools and musical
ReplyDeletetheatre groups. Over the years these shows have proved so adaptable, they have been successful in a huge variety of productions all over the world from
KS2 primary school musicals to professional adult performances.
wind in the willows musical