Tuesday, April 1, 2014

service tax on construction Activity

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
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  4. Ours is a big residential complex maintained by the Developer.
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    Kindly clarify both points.

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