Service tax on Works Contract (Post Negative List)


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This article briefly explains the basics of service tax on works contract after the negative list regime. Also covering some of the old disputed issues in the service tax regime. It also touches upon the basic aspects of Cenvat Credit moreso in an environment, where both taxable and exempt services are being rendered.

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Service tax on Works Contract (Post Negative List)

  1. 1. info@consultconstruction.comwww.consultconstruction.comIndirect Taxation of WorksContracts –Service Tax AspectsSubscribe to our e-bulletin Construction
  2. 2. info@consultconstruction.comwww.consultconstruction.comService Tax -NEGATIVE LIST2
  3. 3. info@consultconstruction.comwww.consultconstruction.comSECTIONS: OLD vis-à-vis NEW w.e.f. 01/07/2012Sr. No. Content of Section OLD Section NEW Section1 Section of Definition Section 65 Section 65B2 Classification of Services Section 65A Section 66F3 Charging Section Section 66 Section 66B4 Place of Provision Section 66A Section 66C5 Negative List (17 Services) - Section 66D6 Declared Service(Positive List – 9 Services)- Section 66E3
  4. 4.‘SERVICE’- DEFINED• Section 65B (44) defines ‘Services’ as:– any activity carried out by a person for another for consideration– and includes a declared service.• not to include:– Transfer in title of:• Goods – (Kone Elevators Issue)• Immovable Property (Sale of Plots)By way of sale/gift or in any manner– Transaction in Money or Actionable Claim– Employment service provided by an employee to employer– Fees payable to court/tribunal4
  5. 5. info@consultconstruction.comwww.consultconstruction.comNegative List of Service1.Services by Government or a local authority2.Trading of goods3.Any process amounting to manufacture orproduction of goods4.Transmission of electricity by an electricitytransmission utility.5.Service by way of access to a road or a bridge onpayment of toll charges;8.Betting, gambling or lottery5
  6. 6. info@consultconstruction.comwww.consultconstruction.comDefinitionPrior to Negative list Regime i.e. 01-07-2012,service tax on construction industry wasapplicable on the basis of definition ofservices as under:1) Commercial or Industrial Construction2) Construction of Residential Complex3) Works Contract Service4) Preferential Location Charges5) Maintenance or Repair Service6
  7. 7.‘Service’ and ‘Declared Service’• In Negative list Regime, definitions ofvarious services are done away with.• Instead, the term ‘SERVICE’ and ‘DECLAREDSERVICE’ has been defined.• Construction activity is covered in thedefinition of ‘Declared Service’.7
  8. 8. info@consultconstruction.comwww.consultconstruction.comDefinition of Declared ServiceWhy Services are Declared?.The following activities have been specified in section 66E as declared service:1. Construction of a complex, building, civil structure or a part thereof, including a complex orbuilding intended for sale to a buyer, wholly or partly, except where the entire considerationis received after issuance of certificate of completion by a competent authority;2. Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software;3. Service portion in execution of a works contract;4. Service portion in an activity wherein goods, being food or any other article of humanconsumption or any drink (whether or not intoxicating) is supplied in any manner as part ofthe activity.8
  9. 9. info@consultconstruction.comwww.consultconstruction.comMega Exemption9
  10. 10. info@consultconstruction.comwww.consultconstruction.comEXEMPTED SERVICES VIDE NOTIFICATION NO 25/2012-ST(w.e.f. 01-07-2012)Entry No. 12 - Services provided to the Government, a local authority or agovernmental 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 useother 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 andArchaeological 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 theiremployees or other persons specified in the Explanation 1 to clause 44 of section 65B of the said Act;Poser 9 (i) 10
  11. 11. info@consultconstruction.comwww.consultconstruction.comCritical Issues• Exemption only if services are provided toGovt / LA / GA• Civil Structure for commercial use notcovered• Use of Term “Pre-dominantly” vs Exclusivelyor Solely• Absence of Term “Pre-dominantly”• Canal, dam and Other Irrigation Works
  12. 12. info@consultconstruction.comwww.consultconstruction.comContd…Entry 13. Services provided by way of construction, erection, commissioning, installation, completion, fittingout, repair, maintenance, renovation, or alteration of,-• (a) a road, bridge, tunnel, or terminal for road transportation for use by general public; (Poser 10)• (b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru NationalUrban 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 of1961) 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• a structure meant for funeral, burial or cremation of deceased;• Entry 14. Services by way of construction, erection, commissioning, or installation of original workspertaining 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 bycompetent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by theMinistry of Housing and Urban Poverty Alleviation, Government of India;• (d) post- harvest storage infrastructure for agricultural produce including a cold storages for suchpurposes; or• (e) mechanised food grain handling system, machinery or equipment for units processing agriculturalproduce as food stuff excluding alcoholic beverages;12
  13. 13. info@consultconstruction.comwww.consultconstruction.comContd…• Entry 14. Services by way of construction, erection, commissioning, orinstallation 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 residentialcomplex;• (c) low- cost houses up to a carpet area of 60 square metres per house in ahousing project approved by competent authority empowered under the‘Scheme of Affordable Housing in Partnership’ framed by the Ministry ofHousing and Urban Poverty Alleviation, Government of India;• (d) post- harvest storage infrastructure for agricultural produce includinga cold storages for such purposes; or• (e) mechanised food grain handling system, machinery or equipment forunits processing agricultural produce as food stuff excluding alcoholicbeverages;Poser 9 (ii) 13
  14. 14. info@consultconstruction.comwww.consultconstruction.comCritical Issues• General Public defined in Explanation• Status of Service Recipient is immaterial• What are the activities that would fall underroad construction ? E.g. Soil Stabilisation• Charitable Trust – Religious Use• Pollution Control / Effluent Treatment –Part of Factory
  15. 15. info@consultconstruction.comwww.consultconstruction.comCritical Issues• Only Original Works – Completion, Fitting,Alteration, Renovation, Repair & MaintenanceNot covered.• Status of Service Recipient not material• Specified Infra Projects covered –Port/Airport/Rail• Single Residential Unit• Carpet Area• Non-Mechanised Food Grain Handling System
  16. 16. info@consultconstruction.comwww.consultconstruction.comContd…Entry 25. Services provided to Government, a local authority or agovernmental authority by way of -• (a) carrying out any activity in relation to any function ordinarily entrustedto a municipality in relation to water supply, public health, sanitationconservancy, solid waste management or slum improvementand upgradation; or• (b) repair or maintenance of a vessel or an aircraft;Entry 39. Services by a governmental authority by way of any activity inrelation to any function entrusted to a municipality under article 243 W ofthe Constitution.16
  17. 17. info@consultconstruction.comwww.consultconstruction.comWhat is Governmental Authority♦ set up by an act of the Parliament or a State Legislature;♦ established with 90% or more participation by way of equity or control by Government; and♦ carries out any of the functions entrusted to a municipality under article 243W of the Constitution.1. Urban planning including town planning.2. Regulation of land-use and construction of buildings.3. Planning for economic and social development.4. Roads and bridges.5. Water supply for domestic, industrial and commercial purposes.6. Public health, sanitation conservancy and solid waste management.7. Fire services.8. Urban forestry, protection of the environment and promotion of ecological aspects.9. Safeguarding the interests of weaker sections of society, including the handicapped and mentallyretarded.10. Slum improvement and upgradation.11. Urban poverty alleviation.12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.13. Promotion of cultural, educational and aesthetic aspects.14. Burials and burial grounds; cremations, cremation grounds; and electric crematoriums.15. Cattle pounds; prevention of cruelty to animals.16. Vital statistics including registration of births and deaths.17. Public amenities including street lighting, parking lots, bus stops and public conveniences.18. Regulation of slaughter houses and tanneries.
  18. 18. info@consultconstruction.comwww.consultconstruction.comContd…• Clause 29 h – Services by sub-contractorproviding services by way of Works Contractto another contractor providing workscontract service which are exempt18
  19. 19. info@consultconstruction.comwww.consultconstruction.comTaxability of Sub-contractors• VAT – Specific Provisions• Excise – Specific Provisions• Service Tax – No specific provisions as such
  20. 20.• Whether Sub-Contractors are liable to service tax?No service tax on sub-contracted services prior to23.8.2007[Sunil Hi-Tech Engineers Ltd v CCE 2010(17) STR 121 (Tri-Mum); See also CCE vs. Shivhare Roadlines (2009) 16 STR335 (Tri-Delhi); Urvi Construction vs. CST (2010) 17 STR302 (Tri-Ahmd.)]
  21. 21. info@consultconstruction.comwww.consultconstruction.comSubsequent view of department• In supercession of the earlier circulars, CBE&C,vide circular dated 23-8-2007 has clarified thata sub-contractor is also a taxable serviceprovider.• Builder engages a contractor for construction ,the contractor in his capacity as a taxableservice provider (to the builder / promoter /developer / any such person) shall be liable topay service tax.
  22. 22. info@consultconstruction.comwww.consultconstruction.comCircular in response to an application made by JaiprakashAssociates issued in May, 2011 + Circular 147/16/2011Issues :-a) Applicability of ST on sub-contracts of various nature , when maincontract is exempted /excluded from preview of services.b) Can a principal contractor take responsibility of tax payment and ask subcontractors not to charge ST ?Service tax is, therefore, leviable on any taxable services provided,whether or not the services are provided by a person in his capacity as asub-contractor and whether or not such services are used as inputservices.The fact that a given taxable service is intended for use as an inputservice by another service provider does not alter the taxability of theservice provided.Services to be independently classified
  23. 23. info@consultconstruction.comwww.consultconstruction.comPoser• M/s ABC has got a road contract of Rs. 100 Lacs from Govt of Goa. Thework is subletted to M/s CBA. M/s CBA does not charge service tax onthe presumption that work done by sub-contractor still continues to be‘road or bridge construction service’ and hence should be outside theservice tax net.• Service Tax department has levied service tax demand stating that therelationship between the contractor and that of sub-contractor iscommercial in nature.• Will Service tax be levied on the same?
  24. 24.• Can the principles of L&T SC Judgement incase of goods be applied to services• Sec 66F – Reference to a service shall notinclude reference to service used inproviding the main service• Para 9.1 of Guidance Note – E.g. – Toll –Collection Agency / Transport – BookingAgent
  25. 25.• Services provided in SEZ by sub-contractor to main contractor• Issue relating to construction service provided sub-contractor in SEZ ismore complicated.• Exemption Notification No. 17/2011-ST dated 1-3-2011 (relating toSEZ) reads as follows –In exercise of the powers – the Central Government, - - , herebyexempts the taxable services specified in clause (105) of section 65 ofthe Finance Act, chargeable to tax under section 66 or section 66A ofthe Finance Act, received by a Unit located in a Special EconomicZone (hereinafter referred to as SEZ) or Developer of SEZ for theauthorised operations, from the whole of the service tax, educationcess and secondary and higher education cess leviable thereon.
  26. 26.• As per second proviso to rule 10 of SEZ Rules amendedw.e.f. 3-2-2009, the exemptions allowed to developer orco-developer will also be available to contractor or sub-contractor appointed by such developer or co-developer.• Thus, services provided to contractors for ultimate useof developer should also be exempt.• However, this proviso applies only in respect of SEZDeveloper and co-developer and not in respect of SEZunits manufacturing or providing services.
  27. 27. info@consultconstruction.comwww.consultconstruction.comMeaning of ‘received by SEZ Unit or SEZ Developer’• The notification does not use the words ‘directlyreceived by SEZ Unit or SEZ Developer’. Thus, even ifthe service is provided by sub-contractor, ultimatelyit is ‘received by SEZ Unit or SEZ Developer’.Only one deemed sale and one taxable event evenwhen work is done by sub-contractor• In Larsen & Toubro Ltd. v. State of Andhra Pradesh(2006) 148 STC 616 (AP HC DB)
  28. 28. info@consultconstruction.comwww.consultconstruction.comLets not take a chance• Rule 6(6A) of Cenvat Credit Rules, 2004• No input disallowance for input credit usedin giving services to SEZ• Retrospective effect from 2005
  29. 29. info@consultconstruction.comwww.consultconstruction.comExemptions under the current regime sought to be withdrawn- Negative Impact on existing exemptionsSr. No. Pre – Negative List Post – Negative List1 Site formation and clearance services were exemptunder Notification 17/2005 on service provided in thecourse of construction of roads, airports, railways,transport terminals, bridges, tunnels, dams, ports andother ports.All these services henceforth, except when provided to or byGovernment or local authority shall become taxable under servicetax regulations.2 Services in relation to Construction of Roads not liableto tax.Construction of private road for factory, residential complex andother private premises is taxable now.3 Under Airport services exemption was available to allworks contract services performed within airportpremises.All services provided in the airport which are not for or in relationto the original erection or construction of such airport willhenceforth be taxable.4 Construction of Residential Complex services providedfor "personal use" is presently exempt from Service Taxas exempted in the definition of ‘residential complex’.Under the new regulations, construction of residential complexservices for personal use shall be taxable other than forgovernment or local authority for its personal use and for MPs,MLAs, constitutional authorities etc.5 Services in relation to construction of less than 12Residential units are specifically exempt from Tax asper the definition of ‘residential complex’.It appears that even construction of less than 12 residential unitswill also get covered under the service tax ambit. Regardingexemption for single residential unit otherwise as a part of aresidential complex, no clarity is presently available, asconstruction of residential unit for self use also seems to becomingtaxable.
  30. 30. info@consultconstruction.comwww.consultconstruction.com6 Under works contract provisionsconstruction in respect of Dam is generallyexempt. Construction of Canal is exemptexcept for the ones primarily used in thecommerce or industry.Henceforth, construction for or by any non-government entity / person of any Dam or canalirrespective of its end use would be a taxable event.This may likely to impact industrial townships andlarge plants where canals are required to transportfresh water, liquids or sewage to and from thefactory / township premises.7 Notification No. 11/2011 & 10/2011 providesfor exemption of works contract specificservices provided within the port & allservices in airport.All works which are non-original in nature performedwithin the airport or port shall henceforth becometaxable.8 Presently Works contract ser vices receiverwas not required to pay service tax underthe reverse charge mechanismThe new regulations would have a major implicationon business entities which engage contract servicesfrom individuals, firms, HUF etc as now suchbusiness entities would also be liable for service taxcompliance.9 Construction of Non commercial BuildingsHospitals and Educational Institutes for anyone whether government or private wasexempt from service taxIf the construction of such structures if for personsother than for the government or local authority, thenservice tax shall be levied irrespective of the enduse of the structure
  31. 31. info@consultconstruction.comwww.consultconstruction.comExisting Abatements Scheme as per Notification no 01/2006-STTAXABLE SERVICES Abatement TaxableErection, Commissioning and Installation 67% 33%Commercial or Industrial Services 67% 33%Commercial or Industrial Services (incl. Land Cost) 75% 25%Outdoor Catering Services 50% 50%Construction of Residential Complex Service 67% 33%Construction of Residential Complex Service (incl. Land Cost) 75% 25%Construction of Complex Service (incl. Land Cost) – Carpet Area 2000 sq ft and 1 cr 70% 30%Poser - 831
  32. 32. info@consultconstruction.comwww.consultconstruction.comNew Reverse Charge MechanismDescription of a Service ServiceproviderServiceReceiverService provided by an insurance agent to any person carrying oninsurance businessNIL 100%Service provided by a goods transport agency in respect of transportationof goods by roadNIL 100%Service provided by way of sponsorship NIL 100%Service provided by an arbitral tribunal NIL 100%Service provided by an individual advocate NIL 100%Service provided by way of support service NIL 100%Service provided by way of renting or hiring any motor vehicle designed tocarry passenger on abated valueNIL 100%Service provided by way of renting or hiring any motor vehicle designedto carry passenger on non abated value60% 40%Service provided by way of supply of manpower for any purpose 25% 75%Service provided by way of works contract 50% 50%Service provided by any person who is located in a non-taxable territoryany received by any person who is located in a taxable territoryNIL 100%32
  33. 33. info@consultconstruction.comwww.consultconstruction.comReverse Charge Mechanism ExpandedNature of Service Liability ofServiceProviderLiability ofServiceReceiverRenting or hiring any motor vehicle for passengers 60% 40%(for Non-abated value)Supply of manpower for any service 25% 75%Works contract service by an individual/HUF/ proprietary firm/partnershipfirm/association of persons (whether registered or not) to company orbody corporate located in the taxable territory.50% 50%Issues :-If the service provider does not charge any service tax in his invoice ashe is unregistered although he is required to under the turnover criteria.Even if he is registered what if Service Tax is not reimbursible as per thecontract. The question is in a single works contract if the contractee andcontractor choose different schemes for payment of service tax then howthe ratio of 50% will be determined?What about 10 Lacs exemption limit?Photocopying and Printing Contracts?Pure Labour services not coveredTransitional Issues? – Advisable to book before 30-06-2012
  34. 34. info@consultconstruction.comwww.consultconstruction.comWorks Contracts Redefined
  35. 35. info@consultconstruction.comwww.consultconstruction.comWork Contract Composition SchemeA new valuation rule is being introduced :-• As at present, first determination will be the value of service being thetotal amount charged for the contract reduced by the value of propertytransferred in goods for State VAT purpose;• If value of goods is not intimated to State VAT, the assessees can stillcalculate the actual value of goods and the same will be relevant todeduce the value of the service involved in the works contract;• If the value is not so deduced as per above, the value shall be specifiedpercentage of the total value as follows:• Poser 2
  36. 36. info@consultconstruction.comwww.consultconstruction.comDebatable• Actually rule 2A(ii) uses the words wherethe value has not been determined and notwhere value cannot be determined
  37. 37. info@consultconstruction.comwww.consultconstruction.comIssue• If the declaration give by the dealer is notaccepted by the VAT department in thecourse of assessment proceedings anddepartment asks the dealer to pay VAT on ahigher value, will he be allowed to claimrefund of excess service tax paid on thecontract?
  38. 38.• If my value of Works Contract is Rs.1000 (Material 400 + Labour600). Can we pay service tax on total Rs.1000 and claim excisecredit of input goods or is it compulsory to follow valuationrules - 2a
  39. 39. info@consultconstruction.comwww.consultconstruction.comValuation of WCS – w.e.f. 01-07-2012Where works contract is for Value of the service portion shall beA) Execution of Original Works 40% of the total amount charged forthe works contract.B) Maintenance or repair or reconditioning orrestoration or servicing of any goods70% of the total amountcharged including such gross amount.C) In case of other works contract notcovered by (A) and (B), includingmaintenance, repair, completion and finishingservices such as glazing, plastering, floor andwall tiling, installation of electrical fittings ofan immovable property60% the total amount charged for theworks contract.39
  40. 40. info@consultconstruction.comwww.consultconstruction.comValuation of WCS – w.e.f. 01-07-2012• "Original works" meansi. all new constructionsii. all types of additions and alternations to abandonedor damaged structures on land that are required tomake them workableiii. erection, commissioning or installation of plant,machinery or equipment or structures, whether pre-fabricated or otherwise.40
  41. 41. info@consultconstruction.comwww.consultconstruction.comValuation of WCS – w.e.f. 01-07-2012• Where the value of goods or services supplied free of costis not ascertainable, the same shall be determined on thebasis of fair market value of the goods or services thathave closely available resemblance. – Format of Invoice• No CENVAT Credit in respect of duties or cess paid oninputs used in or in relation to the works contract shall beavailed.• In other words, Cenvat Credit of Duty paid on Capitalgoods and Service tax paid on Input services is eligible.41
  42. 42. info@consultconstruction.comwww.consultconstruction.comSr.NoContent of Section Taxable%Up to 30-06-2012Effectiveratew.e.f 01-07-2012Effectiverate1 Only Labour NIL 12.36% 12.36%2 Works Contract 40% 4.944% 4.944%3 Maintenance Service withoutmaterialNIL 12.36% 12.36%4 Maintenance Service with material 70% 12.36% 8.65%5 Completion and finishing services 60% 12.36% 7.42%6 Preferential Location Charges, Legalcharges and other chargesNIL 12.36% 3.09% (ifbundled)Rate Difference w.e.f. 01-07-201242
  43. 43. info@consultconstruction.comwww.consultconstruction.comStructuring of Contracts• Supply & Installation• Supply, Erection & CommissioningWhat is the best way to go ?
  44. 44. info@consultconstruction.comwww.consultconstruction.comNotification 12/2003-STis proposed for deletion• Under the negative list scheme, transactions that involvetransfer of title in goods are excluded. If goods are beingsold by a service provider under a separate contract thensale of such goods is excluded from the definition ofservice.• If it is a ‘composite contract’ and dominant nature of thecontract is that of provision of service then value of goodscannot be excluded and if the dominant nature is sale ofgoods then the contract is not taxable as service.
  45. 45. info@consultconstruction.comwww.consultconstruction.comTransfer of Right to use• Transfer of good without transfer of right touse– Whether Mutual exclusivity would be possible• AP High Court – GS Lamba
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  49. 49. info@consultconstruction.comwww.consultconstruction.comRetrospective Amendments• Rule 6(6A) of the Cenvat Credit rules, introduced last year isbeing given effect from February 10, 2006. This will neutralizethe investigations or demands for reversal of credits in respectof services provided to SEZs for the past.• Repair of roads had been exempted from service tax by Notification24/2009-ST dated 27th July, 2009. By section 97, exemption relating toroads is extended for the earlier period commencing from June16, 2005;• Service tax exemption has also been granted with retrospectiveeffect on management, maintenance or repair service in relationto non-commercial Government buildings from 16th June, 2005.
  50. 50.…4/29/2013 50Service tax onBuilders
  51. 51. info@consultconstruction.comwww.consultconstruction.comConstruction of complex services
  52. 52. info@consultconstruction.comwww.consultconstruction.comChronology of Happenings before the leviability• Karnataka High Court - K Raheja - 2006• Allahabad HC - Assotech Reality – 2008 (Set Aside by SC)• Advance Ruling – Hare Krishna - 2008• Guwahati HC – Magus Construction Pvt Ltd – 2008• CBEC Circular Dated 29.1.2009
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  54. 54. info@consultconstruction.comwww.consultconstruction.comConstruction of Complex…• There is no bifurcation between residential orcommercial complex.• Non-taxability for 12 or less than 12 residentialunits is done away with.• Non-taxability for residential units for personaluse is done away with. – Police Hsg CaseHence, construction of each and every unit whetherresidential or commercial is taxable.54
  55. 55. info@consultconstruction.comwww.consultconstruction.comRecent Circular No. 151/2/2012 – Dt 10-2-2012Two broad business models in the construction ofresidential complex :-• The undivided share of land (UDS) or the UDS along with a semi finishedstructure would first be sold to the flat buyer, which is a transaction ofsale of immovable property. Further, a construction agreement would beentered to construct the flat of specified description between the builderand purchaser.• An agreement to sell the flat will be entered into and the considerationwould be received in instalments. After completion of construction, theflat would be sold and registered in the name of the purchaser.
  56. 56. info@consultconstruction.comwww.consultconstruction.comDischarge of Land Cost through Allotment of Flats to Landowners:Transaction Issue AnalysisIn some agreements, theconsideration towardsland is discharged by wayof allotment of flats to theland owners.Is service taxapplicable on suchallotment? If yes,then how to quantifythe consideration?Yes, Applicable. Valuation Ruleswould apply and cost ofconstruction + Profit would bethe consideration.Point of Taxation clarificationbeneficial for builders ?
  57. 57. info@consultconstruction.comwww.consultconstruction.comRedevelopment ProjectsTransaction Issue AnalysisThe builder/developermakes new flats with sameor different carpet area fororiginal owners of flatsand additionally may alsobe involved in one or moreof the following:(i) construct someadditional flats for sale toothers;(ii) arrange for rentalaccommodation or rentpayments for societymembers/original ownersfor stay during the periodof re-construction;Under this model,thebuilder/developerreceivesconsideration Firstfrom society, whotransferdevelopment rightsover the land Thesecond categoryconsist of buyers offlats other than thesociety/members.Generally, they payby cash.For the period after01/07/2012, constructionservice provided by thebuilder/developer to both firstsecond category of servicereceivers is taxable in case anypayment is made to the builder/developer before the issuance ofcompletion certificate.
  58. 58. info@consultconstruction.comwww.consultconstruction.comInvestment ModelTransaction Issue AnalysisBefore commencement ofthe project, the same is onoffer to investors. Either aspecified area ofconstruction is earmarkedor a flat of a specified areais allotted to the investors.After a specified period theinvestor has an option toexit with specified interestincome or he can resell thesaid allottment to anotherbuyer or retain flat for ownuse.What is the nature ofreceipt?Investment shall be treated as anadvance on which service tax ispayable . If investor exits thanthe builer would be entitled totake credit under rule 6(3) ofservice tax rules. If builder sellsthe flat before issuance ofcompletion certificate, again taxliability would arise.
  59. 59. info@consultconstruction.comwww.consultconstruction.comService Tax on Registration & Stamp Duty Charges:Transaction Issue AnalysisRegistration and StampDuty (RSD) is paid to therevenue authorities, thebuilder only passesthrough the same to therevenue authorities.Whether service tax ischargeable on RSD sopassed through to therevenue authorities?As per provisions ofRule 5(2) of theValuation Rules, RSDwould not be included inthe value ofconsideration as it isonly a pass through cost.
  60. 60. info@consultconstruction.comwww.consultconstruction.comService Tax on GEB, Legal & Other charges:Transaction Issue AnalysisGEB, legal and othercharges are collected fromcustomers. These arementioned in the saledeed. Legal work is doneby in house team oflawyers. Further, GEB andLegal charges arerecognized as revenue inthe books.Whether service tax isapplicable on these items?Liable to tax if notcollected on actual basis
  61. 61. info@consultconstruction.comwww.consultconstruction.comPoint of Taxation for buildersDeemed service of Sale of Flat– agreement to sale – paymentdefined based upon constructionactivityWould qualify as CSS. Date of advancereceived or date of invoice (demand letter)from date of event specified – e.g.completion of first slab..Issuance of Invoice mandatoryDeemed service of sale of flat– payment defined based uponfixed datesWould qualify as CSS. Date of advance or dateof payment milestone in agreement inabsence of invoice raised in 30 days.Construction Contract Would qualify as CSS. Date of RA bill if issuedwithin 30 days from date of completion ofservices.Poser – 7a4/29/2013 SKJ 61
  62. 62. info@consultconstruction.comwww.consultconstruction.comAllowability of Cenvat Credit• As per new abatement scheme, unlike theerstwhile notification no. 01/2006-ST, CenvatCredit of input services is allowed in most ofthe output services covered in the abatementnotification.• Accordingly, if abatement of 75% is fixed forconstruction of complex, previously no cenvatcredit was allowed; however, now input isbeing allowed against the abated value ofconstruction of complex.62
  63. 63. info@consultconstruction.comwww.consultconstruction.comIllustration• Mr. C is purchaser of a Residential unit worth Rs.1.25 Crore.• Mr. B is Builder/Developer providing Constructionservices to Mr. C and charges service tax @ 3.09%on Rs. 1.25 Cr.• Mr. A is Contractor providing original workscontract service to Mr. B worth Rs. 75 Lacs andcharge service tax @ 4.944% on Rs. 75 Lacs.63
  64. 64. info@consultconstruction.comwww.consultconstruction.comContd…Sr.No.Situation Before 01-07-2012 W.E.F 01-07-20121 Mr. A chargingservice tax @4.944% on Rs. 75Lacs from Mr. B i.e.Rs. 3,70,800Mr. A will collect Rs.3,70,800 of service tax,utilize cenvat credit oftax and duties paid oninput services andcapital goodsMr. A will collect Rs.3,70,800 of service tax,utilize cenvat credit oftax and duties paid oninput services andcapital goods2 Mr. B will chargeservice tax @ 3.09%on Rs. 1.25 Cr fromMr. C i.e. Rs. 3,86,250Mr. B will payRs. 3,86,250/- S. Tax(-) --- CreditRs. 3,86,250/- pay incashMr. B will payRs. 3,86,250/- S. Tax(-) Rs. 3,70,800/- CreditRs. 15,450/- pay incash64
  65. 65. info@consultconstruction.comwww.consultconstruction.comCancellation of Unit – adjustment of taxes• Rule 6(3) – Excess tax is paid in respect of services notprovided either partially or wholly.• Service tax on Liquidated Damages deducted in suchcases??4/29/2013 SKJ 65
  66. 66. info@consultconstruction.comwww.consultconstruction.comIX – Challenging the constitutional Validity• Bombay HC in the case of Maharashtra Chamber ofHousing Industry and Punjab & Haryana HC in GSPromoters v. UOI have upheld the validity of the“Explanation”
  67. 67. info@consultconstruction.comwww.consultconstruction.comWhy no service tax to be imposed onsale of complex• In BSNL v. UOI [2006] 3 STT 245- SC noted that the sellerand buyer have to be ad idem as to subject matter of saleand purchase• Court need to see what was the intention of the parties• If the contract is for sale of immovable property then howactivity to build the same can take a different colour fromthat of the end product• In majority of the cases the buyer has no role in decidingthe design / structure / other parameters related to house• Lets wait and watch the judicial scrutiny by the apex court.
  68. 68. info@consultconstruction.comwww.consultconstruction.comCenvat Credit Related Issues• Definition of Input Service• “Input service” means any service, -– Used for providing an output service / manufacture of final product– and includes services used in relation to modernisation, renovationor repairs of a factory, premises of provider of output service and……….• but excludes services, -– used for- (a) construction of a building or a civil structure or a part thereof; or (b)laying of foundation or making of structures for support of capital goods, except forthe provision of one or more of the specified services; or– services are used primarily for personal use or consumption of any employee.– Poser 5
  69. 69. info@consultconstruction.comwww.consultconstruction.com3.1 Services specifically excluded under clause (A)• If used for construction of a building or a civil structure or a part thereof, orlaying of foundation or making of structures for support of capital goods• * Architect Services [Section 65(105)(p)]• * Port Services [Section 65(105)(zn)]• * Other Port Services [Section 65(105)(zzl)]• * Airport Services [Section 65(105)(zzm)]• * Commercial or Industrial Construction [Section 65(105)(zzq)]• * Construction of Residential Complex [Section 65(105)(zzzh)]• * Works Contract Service [Section 65(105)(zzzza)]These ‘specified services’ will be eligible for Cenvat credit only if used for anyof these ‘Specified Services’. e.g. Architect Service will be eligible as inputservice if used for Port Service or Construction Service or Works ContractService.Poser 4
  70. 70. info@consultconstruction.comwww.consultconstruction.comIn such cases, the manufacturer/service provider has following four optionsw.e.f. 1-4-2011 –• (a) Maintain separate inventory and accounts of receipt and use of inputs andinput services – Rule 6(2) of Cenvat Credit Rules .• (b) Pay amount equal to 6% of value of exempted goods/services – Rule6(3)(i).• (c) Pay an ‘amount’ equal to proportionate Cenvat credit attributable toexempted goods / services as per Rule 6(3A) – Rule 6(3)(ii)• (d) Maintain separate accounts for inputs and pay ‘amount’ as determinedunder rule 6(3A) in respect of input services - – Rule 6(3)(iii) -Giving both taxable and exempt services –
  71. 71.• Option has to be exercised in respect of all exempted goodsmanufactured and all exempted output services provided.The option once exercised shall not be changed inremaining part of financial year – Explanation I to Rule 6(3)- reiterated in para 2 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.
  72. 72. info@consultconstruction.comwww.consultconstruction.comMeaning of ‘exempted services’• As per rule 2(e) of Cenvat Credit Rules, “exempted services” means– taxable services which are exempt from the whole of the service tax leviablethereon, and– includes services on which no service tax is leviable under section 66 of Finance Actand– taxable services whose part of value is exempted on the condition that no credit ofinputs and input services, used for providing such taxable service, shall be taken.Explanation – For removal of doubts, it is hereby clarified that ‘exempted services’includes trading [Words in italics inserted w.e.f. 1-4-2011]• Services on which no tax is payable are also ‘exempt services’ unlikegoods.• It has been clarified that export of service will not be treated asexempted service - para 6 of CBE&C Circular No. 868/6/2008-CX dated9-5-2008.
  73. 73.• Calculation of value for purposes of rule 6(3) and 6(3A)(a) in the case of a taxable service, when the option available under theWorks Contract (Composition Scheme for payment of Service Tax)Rules, 2007 has been availed, shall be the value ……………(b) in case of trading, shall be the difference between the sale price andthe purchase price of the goods traded or 10% of CGOS which is higher.
  74. 74. info@consultconstruction.comwww.consultconstruction.comTotal amount of Cenvat credit attributable to exempted goods and exemptedservices for the financial year• Cenvat on Inputs used for exempted final products• Cenvat Credit on Inputs used for exempted services (On proportionate basis, based onactual ratio of financial year)• Cenvat Credit on input services used for exempted final products and exempted services(On proportionate basis based on actual ratio of financial year).• Cenvat credit on services specified in rule 6(5), which are exclusively used for exemptedgoods or exempted services= Total amount attributable to exempted final products and exempted servicesPoser 6a
  75. 75. info@consultconstruction.comwww.consultconstruction.comPayment of ‘amount’ or reversal of Cenvat credit is not requiredin case the taxable service is provided to SEZ Unit or SEZdeveloper for their authorised operations. These are overridingprovisions irrespective of any provision in rule 6(1), 6(2), 6(3)and 6(4) [Rule 6(6A) of Cenvat Credit Rules inserted w.e.f. 1-4-2011].
  76. 76. info@consultconstruction.comwww.consultconstruction.comCenvat credit on capital goods – If capital goods are partlyused for exempted goods and party for dutiable finalproducts, entire Cenvat credit of duty paid on capital goods isavailable. Cenvat credit of duty on capital goods is not allowableonly when it is exclusively used for manufacture of finalproducts [rule 6(4)]
  77. 77.• Computation of additional liability ifabatement is rejected– Contract Value –• Lets say is Rs. 10 Lacs• Out of which Value of own Material used is Rs. 5 Lacs• Value of FOC is Rs. 10 Lacs– Can 12/2003 be resorted to in such a case if it isfavourable?
  78. 78.• In following cases CESTAT has allowed benefit ofNotification 12/2003 when abatement was denied– Intertouch Metal v. CST – Chennai CESTAT– Sobha Developers Ltd v. CCE 5 ST – Bangalore CESTAT
  79. 79. info@consultconstruction.comwww.consultconstruction.comReverse Effect – 12/2003M/s VPR Mining Infrastructure Pvt Ltd Vs CCE, Hyderabad(Dated: March 29, 2011) :BANGALORE CESTAT.• Service Tax – Value of diesel and explosives supplied free ofcost to service provider is includible in taxable value forpayment of service tax.• Benefit of Notification No. 12/2003-ST also not available asthere is no ingredient of sale of goods by service providerto service recipient – Pre-deposit of Rs. 10 crores
  80. 80.• If abatement is taken under Notifications 1/2006, whetherthe assessee is required to adopt the same formula in allthe contracts?• Whether in case of contract where abatement is taken,whether Cenvat credit from services availed in othercontract where abatement is not taken can be utilised?
  81. 81.• Held Yes, in favour of assessee• In the case of Mumbai CESTAT – BHEL v.CCE, Nagpur – 2012 35 STT 137
  82. 82.• To claim deduction under 12/2003 is itnecessary to indicate the material portionon the face of invoice?
  83. 83.• To claim deduction under 12/2003, the requirement is that invoiceshould indicate value of material. However, even if not shown, stillservice tax is not payable on value of material• In Bharat Sanchar Nigam Ltd. v. UOI (2006) it has been clearly held thatprice of goods cannot be included in value of services.‘The aspect theory would not apply to enable the value of service to beincluded in the sale of goods or the price of goods in the value ofservice’.• In Imagic Creative Pvt. Ltd v. CCT (2008) 2 SCC 614 = 12 STT 392 = 12VST 371 (SC), it has been held that service tax and Vat (sales tax) aremutually exclusive. In case of a composite contract, Vat cannot beimposed on portion relating to value of service. As an obviouscorollary, service tax cannot be imposed on value of material.
  84. 84.• Evolution of Earth• Philosopher• Doctor• Engineer• Tax Consultants
  85. 85.• What will happen to Retention Monies?• Is there any way out to prevent payment ofservice tax on the same?
  86. 86. info@consultconstruction.comwww.consultconstruction.comNon-receipt of Payment• X Pvt Ltd completed the services to the client on 30th Sept,2011. Final RA bill of Rs.50 Lacs has been raised. Due tosome dispute, payment of only Rs. 10 Lacs was made. Thechances of getting the balance amount is very less.
  87. 87. info@consultconstruction.comwww.consultconstruction.comBad Debts• Letter No. 341/34/2011 dt. 31st March, 2011 categoricallystates that bad debts can-not be claimed as adjustments.• “If the invoice is renegotiated due to deficient provision oras per change in terms, the tax will be payable on revisedamount. However no concession is available for bad debts”• Rule 6(3) of Service Tax Rules.
  88. 88. info@consultconstruction.comwww.consultconstruction.comAmnesty scheme under Service Tax• Scheme applicable for persons who have pending tax dues for tax period October 2007 toDecember 2012, as on 1 March 2013, in respect of which no notice has been issued evenfor the prior period• Benefit would not be available to the assessee who failed to pay taxes after declaring hisliability in the return• Person opting for this scheme would be required to make a declaration of tax dues todesignated authority by 31st December 2013 and pay at least 50% of tax dues by thatdate and balance by 30 June 2014• In case amount is not paid by 30 June 2014, it can be paid upto 31 December 2014 withinterest computed w.e.f. 1 July 2013• Proceedings covered by the period of declaration shall not be reopened before anyauthority/court• In case of failure to pay tax dues by specified date or substantially false declaration, thebenefit under the scheme shall not be available and tax dues will be recoverable from theassessee as if the scheme doesn‟t exist
  89. 89.“They are deciding, what to pay – VAT or ServiceTax”
  90. 90. info@consultconstruction.comwww.consultconstruction.comConsult us for better optimisation of yourIndirect Tax Structures