Effect of Budget (Central & State), 2015 on Construction/Project Sector

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Impact of Budgetary changes on construction sector for
2015-16

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Advice on the applicability and levy of Service Tax, CST and State VAT on
Contracts entered into or proposed to be entered into by the company.
Assistance in the structuring of transactions and agreements in relation
to inter-state and intra-state sales to optimise the tax incidence
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State - VAT implications on the operations,
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• VAT and Service Tax updates for the construction / Project sector
companies.
• Legislative changes and major case laws under the State VAT Laws
and under Service Tax law affecting the construction /Project Sector.
• In addition our brief analysis and comments on the various
developments.

• Discussion on two aspects –
1. Impact of Union Budget
2. Impact of Multi-State Budget

Let us start with Union Budget

Increase in Service tax and Excise rates
 Budget disappointed real estate sector with proposal to increase service
tax from 12% to 14% from a notified date.
 Further proposal to increase to 16% (Swacch Bharat) for selected services.
 Excise duty already stands increased to 12.50% from 12%
Particulars Old Rate To be revised rate
Construction of residential complex <
2000 sq ft
3.09% 3.50%
Construction of other Complex >
2000 sq ft
3.71% 4.20%
Original Works Contract 4.94% 5.6%

Removal of Major exemptions
Entry 12 - 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; - Huge Impact
(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;

Removal of Major exemptions
Entry 12 - 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 -
(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;
- Housing Projects for Government employees now taxable

Entry 14 -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;
Removal of Major Exemptions

What happens to running projects
• Whether the exemption stands withdrawn for running
projects ?
• If yes, then from which effective date
• What about the work done and billed till the effective date if
the payment is received thereafter ?
• What happens to projects which are complete, however only
retention is pending to be received ?

Goods Transport Agency
 Goods transport agency service provided for transport of
export goods by road from the place of removal
• To an inland container depot,
• a container freight station,
• a port or airport
is exempt from Service Tax vide notification No. 31/12-ST dated
20.6.2012.
 Scope of this exemption is being widened to exempt such
services when provided for transport of export goods by road
from the place of removal to a land customs station (LCS).

Amendment in GTA Abatement
 At present, service tax is payable on –
(i) 30% of the value of rail transport for goods and passengers,
(ii) 25% of the value of goods transport by road by a goods transport agency and
(iii) 40% for goods transport by vessels.
The conditions prescribed also vary.
 A uniform abatement is now being prescribed for transport by rail, road and vessel.
 Service Tax shall be payable on 30% of the value of such service
 Service tax on GTA thus stands increased to 3.71% w.e.f 1-4-2015
and to 4.2% w.e.f notified date
Subject to a uniform condition of non-availment of Cenvat Credit on inputs, capital goods and input
services.
However credit of GTA paid can be taken.

Reverse Charge Mechanism
 Manpower supply and security services when provided by an
individual, HUF, or partnership firm to a body corporate are being
brought to full reverse charge
 Presently, these are taxed under partial reverse charge
mechanism – 75:25

Taxability of support services
 Presently, services provided by Government or a local authority, excluding
certain services specified under clause (a) of section 66D, are covered by
the Negative List.
 Service Tax applies on the “support service” provided by the Government
or local authority to a business entity.
 An enabling provision is being made, by amending section 66D(a)(iv), to
exclude all services provided by the Government or local authority to a
business entity from the Negative List.
 Consequently, the definition of “support service” [section 65 B (49)] is
being omitted.
 Accordingly, all services provided by the Government or local authority to
a business entity, except the services that are specifically exempted, or
covered by any another entry in the Negative List, shall be liable to
service tax from the enactment of the budget.

Amendment in CENVAT credit Rules
 Rule 4(7) is being amended to allow Cenvat Credit of Service Tax paid under partial
reverse charge by the service receiver without linking it to the payment to the service
provider.
 In 2014 via Notification 21/2014, the restriction under Rule 4(7) was added –
“Provided that in respect of input service where whole of the service tax is liable to be paid
by the recipient of service, credit shall be allowed after the service tax is paid
 The period for taking Cenvat Credit is being extended from six months from the date of
invoice to one year from the date of invoice.
 Will extending period of claiming credit help in case of Retention monies ?
 Can we say that practically the same has no impact for regular return filers ?

Service includes reimbursed expense too
• In Section 67, it is being prescribed specifically that consideration for
a taxable service shall include:
(a) all reimbursable expenditure or cost incurred and charged
by the service provider.
• The intention has always been to include it in the value of taxable
service.
• However, in some cases courts have taken a contrary view.

Transparency in Real Estate
 For curbing domestic black money, a new and more
comprehensive Benami Transactions (Prohibition) Bill will be
introduced shortly.
 This will encourage transparency in Real Estate Sector
 Known for being the most complicated sector, real estate and
construction sector will get more reliable

 No person shall accept ‘any specified sum’ from or repay to any
person ‘any specified advance’ in excess of Rs. 20,000/-
otherwise than by an account payee cheque or account payee
bank draft or online transfer through a bank account, in relation
to transfer of any immovable property whether or not the
transfer finally takes place
 A fair and white system will further enhance transparency and
less litigations
Transparency in Real Estate

Boosting Import of technical expertise
 Rate of tax u/s. 115A on payment made towards royalty and
Fees for technical services is proposed to be reduced from
25% to 10%.
 Import of engineering services will become cheaper

GST TO BE INTRODUCED IN 2016
 GST will commence from the next financial year and service tax
and central excise duty has been increased as a preparatory
measure.
 This preparatory measure will reduce the transitional issues of
major fluctuations in liability on long term on-going contracts
 Introduction of GST will finally provide an end to long standing
assessments in works contract sector
 Simplification in terms of procedural and valuation provisions is
much awaited
 Cost will reduce as cross credit system is expected from GST

SPEEDY APPROVALS
 Delays in getting clearances lead to construction delays, which
increase cost and dampen investor sentiment.
 Finance minister's announcement of an expert committee for
making pre-existing regulations for expediting approvals is a
welcome move.
 It is a step towards a single-window clearance system. The
industry is in dire need of single window clearance mechanism to
reduce construction delays,"

NO MORE WEALTH TAX
 Scrapping wealth tax, the finance minister has introduced
a surcharge of 2% on the super rich with income of Rs 1
crore and above.
 This means that a majority of Indians will no longer pay
any tax on property ownership and only super-luxury
homes will be taxed. This is a big relief for the Indian
middle class

Other Demand Boosting measures
 The announcement for establishing a National Infra Fund of Rs 20,000 crore
 Connecting each of the 1,78,000 unconnected habitations by all-weather
roads will require completing 1,00,000 km roads that are currently under
construction plus sanctioning and building of another 1,00,000 km roads.
 Development of 100 smart cities has increased expected future demand in
construction
 FDI investment in realty relaxed –Land Area / Capital / Floor Area

Now, let us continue with State Budget impacts

• Amendment of section 2 of Mah. IX of 2005
(1) in clause (20), after Explanation I, the following Explanation shall be inserted, namely
:—
“Explanation—IA.—Purchase price shall not include the amount of service tax levied or
leviable under the Finance Act, 1994 (32 of 1994) and collected separately by the seller.”;
(2) in clause (25), after Explanation I, the following Explanation shall be inserted, namely
:—
“Explanation—IA.—Sale price shall not include the amount of service tax levied or leviable
under the Finance Act, 1994 (32 of 1994) and collected separately from the purchaser.”.

 VAT cannot be levied on Service tax Amount
• If Service Tax is included in the turnover of Sales and purchases, then for the purpose of
turnover of MVAT, service tax will not be included in it; i.e. VAT is not levied on Service
Tax.
• A sigh of relief as cascading effect of tax has been removed
 Stringent provisions that may affect the builders
• The Government has brought same provisions of Assessment in VAT, like in Income Tax.
Now, Department can issue notice of Assessment if he has “Reason to Believe” that the
Dealer has evaded Tax or he has paid less Tax.
• The department can go back upto 6 years.

• Works contract relating to sizing of yarn will be exempted from the present levy of VAT.
• Input Tax Credit reversal imposed at the rate of 3 per cent on the inter-state sale of goods as per
proviso to section 19(2) (v) of Tamil Nadu Value Added Tax Act 2006, will be withdrawn
henceforth
• Clause (c) under Section 19(5) of TNVAT Act, 2006 will henceforth be withdrawn to enable the
dealers to claim Input Tax Credit on the inter-State sale of goods without ‘C’ form.
Above measure will eliminate additional burden on the dealers effecting inter-State sale of goods
without ‘C’ form and will be cost effective for contractors in inter-state works contract.
• Reduction of VAT on LED lamps of all kinds from 14.5% to 5%.
• Reduction on VAT on air compressors, pump sets up to 10 hp and their parts thereof will be
reduced from the present levy of 14.5% to 5%.

Changes –
 Increase in VAT rate of Schedule V(Residual entry) to 14.50% from 14%.
• Insertion of entry in Rule 22A (GDC deduction list) - Notwithstanding anything
contained in this rule, the taxable turnover for levying Vat on works contract,
may be determined by deducting from the gross value of the contract, in so far
as the amounts relating to the deductions pertaining to the said works contract
“bb. Value on which tax has been paid by the sub-contractor”

Inter-scheme Restrictions –
• Option A - There is no restriction, however the contractor
will be liable to pay tax at schedule rates on goods
purchased from outside the state.
• Option B - There is no restriction
Relaxation and flexibility in exemption fee scheme is a
welcome move

Change – Existing exemption Notification is substituted by Notification No. SO 270 dated
9-March-2015 and the changes are-
 Option A –
• Works contract where the cost of material doesn’t exceed 5% of the total contract
amount - 0.10%
• Works Contract relating to construction and repair of roads, runways, bridges, dams,
drains excluding sewerage system, tunnels, canals, channels, barrages, railway tracks,
causeways, sub ways, diversion, spill ways, boundary walls, buildings and water
harvesting system - 0.75%
• Works contract awarded by Rajasthan Vidhyut Prasaran Nigam Ltd., Jaipur Vidhyut
Vitaran Nigam Ltd., Ajmer Vidhyut Vitaran Nigam Ltd., Jodhpur Vidhyut Vitaran Nigam
Ltd. - 0.75%
• Any other kind of works contract not covered by item number 1 to 3 above - 2%

 Option B –
• Works contract where the cost of goods involved in execution of works contract
does not exceed five percent of the total contract amount - 0.70%
• Works contract relating to construction and repair of roads, runways, bridges,
dams, tunnels, canals, channels, barrages, railway tracks, causeways, sub ways,
diversion, spill ways, drains excluding sewerage system - 4%
• Works contract related to construction and repair of buildings, boundary walls,
sewerage system, sewerage treatment plant, water supply works and water
harvesting structures - 5%
• Works contract awarded by Rajasthan Vidhyut Prasaran Nigam Ltd., Jaipur
Vidhyut Vitran Nigam Ltd., Ajmer Vidhyut Vitran Nigam Ltd., Jodhput Vidhyut
Vitran Nigam Ltd. - 3.50%
• Works contract related to setting up of new enterprise or expansion of existing
enterprise manufacturing fertilizer within the State with minimum investment of
Rs.2500 Crore -1%
• Any other kind of works contract not covered by item number 1 to 5 above - 6%

 Change – Substitution of Composition scheme for builders –
(Notification No.-SO 265 dated 9-March-2015)
 Registered dealers, commonly known as developers/ builders who, as work contractors,
undertake the construction of flats, dwellings or buildings or premises and transfer them
along with goods (whether as goods or in some other form) and land or interest underlying
the land in
 As per above provision, builder can opts for any one scheme from the two schemes
mentioned above.
 Scheme 1 - Rs. 1300 for every Rs. 2 Lacs of consideration or part there of (including land
value)
 Conditions - Dealer has to pay tax on normal rates on goods purchased out of Rajasthan
 Scheme 2 - Rs. 8000 for every Rs. 2 Lacs of consideration or part there of. (including land
value)
 ITC is restricted for a dealer opting for Composition Scheme.

• VAT rate on LED lights, pipe-fittings and prefabricated steel
structures to 5 percent
• Reduction in VAT rate is a good news for works contractor

• Goods mentioned in schedule II of MP Vat Act, 2002 - rate of
vat 13% increased to 14%.
• Tendency of states to increase tax rates are causing short
term inflation
• But with a object to keep the rates in line with GST it is
helpful in long term as additional liability on transition will
get covered

• VAT registration limit has been increased to 10 lacs from 5
lacs.
• Threshold limit of annual turnover for payment of VAT
enhanced from Rs. 5 Lakhs to Rs. 10 Lakhs;
• Threshold annual turnover limit for submitting VAT Audit
Report enhanced from Rs. 5 Crs to Rs. 10 Crs

• Increase in registration limit from 7.5 lakhs of annual
turnover to Rs. 10 lakhs
• Tax reduction from 14.5% to 5.5% on Industrial cables
namely XLPE Cables, Jelly Filled Cable, Optical Fibre Cable
and PVC Cable

• Withdrawal of disallowance of ITC in case of inter-State
sales of goods made out of locally bought/manufactured
goods.

• “Any dealer who desires to import goods from other States
or Union Territories or any dealer who desires to send
goods to outside the State, shall electronically generate the
way bill, through the official website of the Commercial
Taxes Department or the Government of Andhra Pradesh.
• Such electronically generated waybill shall accompany the
goods along with sale invoice or delivery note and shall be
tendered by the person in-charge of the goods vehicle to
the officer in-charge of the check post through which the
goods vehicle first enters into the State or exits the State,
as the case may be.”

• Reduction of vat rate of imitation jewellery from 5% to 1% only.
• Oral contraceptive pills used for the family planning are made exempt
fully from VAT.
• Vat rate on aviation turbine fuel has been reduced from 30% ( for duty
paid ATF ) and 38% ( for bonded ATF) to 5% when sold from the cities
other than Ahmedabad and Vadodara for scheduled commercial
airlines service flights.
• Isabgul and Isabgul hulk has been made fully exempt.
• There was good move in Gujarat budget to give tax refund on tax paid
on cotton roving used in manufacture of Khadi cloth.
• There is new levy of tax on technical textile. The vat rate will be 5%
including additional vat rate 1%.

Effect of Budget (Central & State), 2015 on Construction/Project Sector

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