S ERVICE T AX AS APPLICABLE TO R EAL E STATE INCLUDING J OINT CHARGE & R EVERSE CHARGE By CA Sudhir V S.

SERVICE TAX AS APPLICABLE TO REAL ESTATE INCLUDING JOINT CHARGE & REVERSE CHARGE

By CA Sudhir V S

COVERAGE THIS NOON

Services applicable to builders and its changes upto 30.06. 2012

Position from 01.07.2012 Comparison per and post 01.07.2012 Reverse charge and joint charge Q & A

POSITION PRIOR TO 30TH JUNE 2012

MILE STONE OF SERVICES

Dates Event

07.07.1997 Consulting Engineer

01.07.2003 Erection Commissioning & Installation

2003 Daelim Industrial Co. Ltd. vs Commissioner of C. Ex., Vadodara 2003 (155) ELT 0457 Tri.-De – vivisection

10.09.2004 Industrial & Commercial Construction Service

MILE STONE OF SERVICESDates Event

05.05.2005 K. Raheja Development Corporation vs State of Karnataka 2006 (003) STR 0337 S.C – Sales Tax Case

16.06.2005 Construction of Complex Service

01.08.2006 Circular F. No. 332/35/2006-TRU, dated 1-8-2006 Clarifying Builder/Real Estate Developers Not Liable

01.06.2007 Works Contract Service with 2.06% composition

MILE STONE OF SERVICESDate Event

04.01.2008 Circular No. 98/1/2008-S.T., dated 4-1-2008 - Baring change of classification

01.03.2008 Composition Rate increased to 4.12% from 2.06%

15.05.2008 Magus Construction Pvt. Ltd. vs Union of India 2008 (011) STR 0225 Gau – Builder not liable

29.01.2009 Circular No. 108/2/2009-S.T., dated 29-1-2009 – Personal use not liable

MILE STONE OF SERVICESDate Event

01.07.2010 Explanation added creating deeming fiction for the Developer for Complex service and not Works Contract Service & Builder’s Special Service

19.08.2010 A.P. Ravi v. Union of India - 2010 (20) S.T.R. J119 (Mad.) – Stay on the Explanation

01.12.2010 G.S. Promoters vs Union of India 2011 (021) STR 0100 P&H. – Upheld the constitutional validity of the circular.

30.03.2012 SLP admitted by SC on the decision of the HC

01.07.2012 New Service Tax Law

INDUSTRIAL AND COMMERCIAL CONSTRUCTION Const of New Buildings or civil structures Completion and finishing of building or civil

structures Repairs of bldg, civil structures or pipelines Used for Commerce or Industry Other than roads, airports, railways,

transport terminals, bridges, tunnel, and dams.

Phrase “Service” deleted w. e. f 01.07.2010

CONSTRUCTION OF COMPLEX SERVICE

Construction of complex, part there of Completion of complex alone and not part

there of Repair of complex 12 units; common area & facility; layout

approved Personal use exempt

PERSONAL USE ISSUES

Circular 108 validity? Rathan Melting wire SC Contracts liability? After Explanation? Still Valid Litigation chance – 90%, Success chance??? Tribunal stay in various issues – Mothisham

Builders Period of this provision from 16.06.2005 till

date

EARLIER OPTIONS FOR PAYMENT OF SERVICE TAX

Commercial Complex Pay ST @ Full rate (10.3) take CENVAT on Steel

and Cement. Excluding Land Residential Complex

Option I: 2.575% on full consideration including Land

Option II: 3.40% on Consideration Excluding Land (Value of Land can be as agreed also)

Option III: 4.12% less CENVAT on input Service Capital Goods

CRITERIA FOR CHOOSING EARLIER OPTIONS

Option I : For people having less land valuation and no sub-contractors and outside consultants

Option II For Builders having higher land valuation and no sub-contractors and outside consultants

Option III: For Builders with Higher Land Value and having Sub-contract

RELEVANT

PROVISIONS – ON OR

AFTER 01.07.2012

"service" means -

any activity

carried out

by a person

for another (person)

for consideration,

includes a declared service,

but shall not include ……………………..

DEFINITION OF “SERVICE” – SEC 65B(44)

Activity which constitutes merely -

◦ transfer of title in goods or immovable property by

way of sale, gift or in any other manner;

◦ transaction of deemed sale;

◦ Transaction in money and actionable claim;

Provision of service by employee to employer

in course of or in relation to his employment ;

Fees taken in any court or tribunal established;

SERVICE EXCLUDES

(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.

the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure;

(h) service portion in the execution of a works contract;

RELATED DECLARED SERVICE 66E

"competent authority" means the Government or any authority authorised 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 (20 of 1972.) (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;

COMPETENT AUTHORITY

WORKS CONTRACT IN GENERAL

Any contract undertaken for execution of work Professional contracts are not works contract Service contracts are not works contract Sales Tax laws defines it – Gujarat State - Any agreement for execution of works relating

to civil works, construction, manufacture,

processing, fabrication, erection, Installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property for cash/deferred payment or other valuable consideration is a works contract.

AP VAT – Inclusive Definition

CAN WORKS CONTRACT BE DIVIDED

If terms divides it for sale and service separately, it can be. If it is not so, then it cannot be divided. – Gannon Dunkerly & Co., - [1993] 88-STC-204

However in terms of the amendments to the constitution, the state is given powers to divide it notionally for the purpose of levying sales tax

Daelim Industrial Co. Ltd. vs Commissioner of C. Ex., Vadodara 2003 (155) ELT 0457 Tri.-De – vivisection

WORKS CONTRACT – DEFINITION – SEC. 65B(54)

Transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods.

Contracts are for the purposes of carrying out-construction, erection, commissioning,

installation, completion, fitting out, repair, maintenance, renovation, alteration of

any moveable or immovable property or for carrying out any other similar activity or a

part thereof in relation to such movable or immovable

property

VALUATION

METHODS

In case of only labour works service tax on full value.

In case of contracts which are not covered within the meaning of works contract though involves material, - service tax on full value.

In case of works contact as per the definition – service tax is on service portion of the contract – arrived as per valuation rules.

METHODS Service portion in execution of WC -> Gross

Amount Charged Less Value of property in goods trfd. Less VAT/Sales Tax on such value of property.

Value of property in goods trfd. how to determine -Where VAT is paid on turnover arrived based on

records by deducting labour and other charges – Value for Service Tax is Balance Amount

Where VAT is paid on composition– Value of goods transferred to be determined based on records and deducted to arrive at taxable value

Where VAT is paid ad-hoc basis – Since it is said not possible to ascertain value of goods next option.

METHODS TO COMPUTE VALUE

If not as per above – (compulsory)For original works – 40% of the total amount If repair, maintenance or servicing of goods -

70% of the total amount Other contracts including maintenance, repair,

completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property – 60% of the total amount

OTHER ASPECTS OF VALUATION

Original Works means – All New Constructions; Additions and alterations – to abandoned or damaged

structures to make them workable erection, commissioning or installation of plant,

machinery or equipment or structures, whether pre-fabricated or otherwise

Total Amount = Gross Amount (+) FMV of all goods and services supplied (by the service receiver) (–) any amount charged for such supply (-) VAT.

Input Service and Capital goods Credit is available

Inputs Credit is not available.

EXEMPTIONS – SL. NO. 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 civil structure or any other original works meant

predominantly for a non-industrial or non-commercial use;

a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

EXEMPTIONS – SL. NO. 12

canal, dam or other irrigation works; pipeline, conduit or plant for (i) drinking water

supply (ii) water treatment (iii)sewerage treatment or disposal; or

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 Finance Act;

EXEMPTIONS – SL. NO. 14 Services by way of erection or construction of

original works pertaining to,- (does not cover repair, alteration etc) airport, port or railways; single residential unit otherwise as a part of a residential

complex; low- cost houses up to a carpet area of 60 square metres

per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;

RESIDENTIAL COMPLEX "residential complex" means any complex

comprising of a building or buildings, having more than one single residential unit

"single residential unit" means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family;

EXEMPTIONS – SL. NO. 29 (H)

Sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt.

Available only for WORKS CONTRACT sub-contract which is EXEMPTED.

If only labour portion is sub-contracted, exemption not available.

However if the activity is covered under any other entry it is possible to claim that exemption.

ABATEMENT – NOT. 26/2012-ST

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)

Abatement is 75% Conditions –

Inputs credit is not taken Value of land is included in the amount charged

from the service receiver

SERVICE TAX IMPLICATION PRE &

POST 1.7.2012

TRANSACTION 1.7.2012 ONWARDS

PRIOR TO 1.7.2012

Sale of flats/units where any part of sale consideration is received before issuance of completion certificate

Taxable Taxable

Sale of flats/units where entire sale consideration isreceived after issuance of completion certificate

Non-Taxable Non-Taxable

Sale of single residential unit otherwise than as a part ofa residential complex

Exempt Non-Taxable

Sale of residential flats in building/complex havingmore than 1 unit but not more than 12 units

Taxable Non-Taxable

Sale of residential flats in building/complex having morethan12 units

Taxable Taxable

TRANSACTION 1.7.2012 ONWARDS

PRIOR TO 1.7.2012

Re-sale of flats/units Non-Taxable Non-Taxable

Sale of Entire Building ( having more than 12 units) under construction to a company meant for use of its employees as staff quarters.

Taxable Non-Taxable

Sale of under construction units for commercial purpose (irrespective of number of units in a complex)

Taxable Taxable

Sale of under construction units to Government

Exempt Non-Taxable

Sale of residential unit pre-dominantly meant for employees of Government, MP, MLA etc

Exempt Non-Taxable

Sale of unauthorized / unapproved flats Taxable Non-Taxable

TRANSACTION 1.7.2012 ONWARDS

PRIOR TO 1.7.2012

Sale of under construction flats/units to entity registered under Sec 12AA of Income tax Act, 1961 and to be used by general public for religious purpose

Non-Taxable Non-Taxable

Sale of units to charitable trusts for educational / hospital / clinic etc.

Taxable Non-Taxable

Notification No 26/2012 dt 20.07.2012 notified changes in abatement:PARTICULARS POST 1.7.2012 PRE 1.7.2012

Sale of under construction flats/units where any consideration isreceived before issuance ofcompletion certificate provided value of land is included inconsideration

TaxableValue

25%

EffectiveTax

3.09%

TaxableValue

25%

EffectiveTax

2.575%

Cenvat Availability

Inputs (such as cement, steel etc)

Not available Not available

Input Services (such as architect,contractor etc.)

Available Not available

Capital Goods (such as machinery,equipment etc.)

Available Not available

Reverse Charge Meaning & Reasons for Introduction

Service tax - payable by the service provider of taxable service – “GENERALLY”

When there is a tax-shift and service recipient has to pay Service tax such a mechanism of tax collection is known as Reverse Charge.

Reasons: Administrative Convenience Increase the tax coverage viz.

Unorganized sectors Curb Tax evasion

S.NO. Description of Service %ST

SP SR

1. Insurance Agent to a person carrying Insurance business

NIL 100%

2. Goods Transportation Agency NIL 100%

3. Sponsorship Services NIL 100%

4. Advocate or firm of advocates 2 NIL 100%

5. Support Services by Govt. except Renting , Posts, transportation of goods or passengers 2

NIL 100%

6. Manpower/Security services1 25% 75%

7. Service portion in Works Contract1 50% 50%

8. Hiring of Vehicles (Abated value)1 NIL 100%

9. Hiring of Vehicles (Non-Abated)1 60% 40%

10. Import of services NIL 100%

11. Directors Remuneration( incl. Sitting Fees)

NIL 100%

Reverse Charge-Joint Charge

1 SP= Individual, Hindu Undivided Family or partnership firm and SR=Body Corporate

2 SP= Advocate/Firm of Advocate &Government/Local authority as the case maybe

SR=Business Entity

Business Entity defined under Section 65B(17) as –-person ordinarily carrying out -any activity relating to -industry, commerce or any other business or profession

ISSUES???

What happens to continuing works where service tax was being on 33% without credit prior to 01.07.2012?

What happens to continuing works where service tax was being paid under works contract composition prior to 01.07.2012?

What happens to continuing works of construction of residential houses less than 12 units but more than 1?

Whether Service Tax can be paid on full value and take credit of duty paid in inputs in full in new law?

ISSUES ???

Whether developer is liable to pay service tax under works contract?

In case of joint development with land owner, whether developer is liable for share given to land owner?

If liable on what value and when it is to be paid? Whether the land value claimed by the

developer is in case of joint development, where land is registered directly by the land owner to buyer, is eligible for exclusion from scope service definition?

Whether the profit/gross amount charged by the developer on land is liable for service tax

ISSUES ???

Whether the sub-contractor is liable to pay service tax when main contractor has paid tax/exempted?

Whether flooring work, plastering, painting, glazing, carpentry, plumbing, interiors etc., done during the course of construction can be considered as original works for valuation purposes and pay tax on 40%?

Whether construction includes the above said activities?

ISSUES ???

Whether scope of entry 14 in exemption is restrictive in its scope as it covers only erection or construction of original work only?

Whether the said activities in relation to single residential unit can be claimed exemption?

Whether compensation received for transfer of buying right is liable for service tax?

Whether the amounts forfeited for non-payment of installments is liable for service tax? If yes whether it is applicable on full value or as per valuation rules?

e-mail: [email protected]: 9908 11 3787