S tin constructionindustry

APPLICABILITY OF SERVICE TAX IN CONSTRUCTION

INDUSTRY

CA. Ashok Batra

Special Invitee, Indirect Taxes Committee

Services provided by a Developer/Contractors

(1) Services by way of Construction and Sale of flats/units in a complex.

(2) Services by way of Works Contracts

(3) Services by way of Renting of Immovable Property

(4) Services by way of maintenance of a Complex/Building

Entries of Declared List governing Construction/Builders Services (Section 66E)

(a) Renting of immovable property;

(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;

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

Charges collected by Builders and rate of Service Tax applicable on said charges

S.No

Charges Rate of Service tax

1. Basic Charges 3.09%/3.708%

2. Preferential Location Charges

12.36%

3. Club ChargesTowards cost of

constructionFor membership of clubProvision of Food/other

services

3.09%/3.708%

12.36%NIL/12.36%

4. Car Parking- open & covered

3.09%/3.708%

S.No Charges Rate of Service tax

5. EDC/IDCOn Actual Payment BasisOn Adhoc basis without

disclosing actual chargesActual Charges plus own

service charge

Not TaxableFull amount is Taxable

Only own service charges are taxable

6. External Electrification charges/ Electrical Installation Charges

3.09%/3.708%/4.944%

7. Administrative Charges for registration

12.36%

8. Interest Free Maintenance Security (IFMS)Refundable

Non Refundable

Non Taxable

Taxable @12.36%

S.No

Charges Rate of Service tax

9. Firefighting Equipment Installation charges

3.09%/3.708%/4.944%

10. Power Backup Charges (Towards cost of installation of DG Sets and substations)

3.09%/3.708%4.944%

11. Administrative/Transfer Charges (In case of sale of flat by original buyer, builder charge said charged for modifying its records i.e. entering the name of new buyer in its records)

12.36%

Maintenance Services provided by a Developer/Builder

Apart from construction Services developers/Builders also provide the services of maintenance of buildings/complexes constructed by it. For providing such services developer charges maintenance charges form the occupants of flats/offices. The nature of charges collected by builders and Rate of Tax applicable on the same has been summarised as under:

Mai Maintenance Charges

Charges Description Taxability

Maintenance Charges

Towards maintenance of building/complex

12.36%

Electricity Charges For supplying electricity in flats/shops (Charged on actual basis)

Non Taxable

Common Area Electricity Charges

Towards cost of electricity consumed in Common Area

12.36%

CASE STUDIES

Case Study-1

ABC ltd has entered into a contract for construction of road meant for general public. ABC ltd sub contracts the aforesaid work to three contractors namely:

DEF Ltd , the work of site formation for construction of road XYZ Ltd , laying the surface of road GHI Ltd , other physical activities in respect of such roads.

What will be the Service tax implication on the aforesaid transactions?

Services provided by way of construction of road meant for use by general public is Exempted from payment of Service Tax. Thus, any service which is used in the construction of said road shall be exempted from Service Tax as per Entry 13(a) of N/N 25/2012 dated 20.06.2012. Accordingly, all the aforesaid services in respect of roads are not exigible to Service Tax.

Further, as far as laying of surface is concerned same is also covered under definition of Works Contract as engrafted under Section 65B (54) of Finance Act, 1994. Since, main Contractor enjoys exemption, the sub contractor also continue to enjoy the exemption in respect of Works Contract Services - Entry 29(h) of N/N 25/2012 dated 20.06.2012

Case Study-2

M/s ABC Pvt Ltd is engaged in construction of hospitals and educational institutes. Whether M/s ABC Pvt Ltd. is required to pay Service Tax on the same?

If M/s ABC Ltd is constructing such structures for the government, a local authority or a governmental authority, in that case M/s ABC is not required to pay Service Tax on the same as per Entry 12 (a) of Notification No 25/2012.

However, if such structure are built for persons other than government, a local authority, governmental authority, M/s ABC Ltd is required to pay Service Tax on the same.

Case Study-3

M/s XYZ Pvt Ltd is engaged in maintenance & Repair of Ports. Whether M/s ABC Pvt Ltd. is liable to pay Service Tax on the same?

Yes, M/s XYZ Pvt Ltd is required to pay Service Tax on the same as vide Entry No 14 of Notification No 25/2012 dated 20.06.2012, exemption has been provided only to services in respect of Construction of Ports.

Case Study-4

M/s XYZ Pvt Ltd is Renting out its Immovable Property to an NGO. Whether M/s XYZ Pvt Ltd is required to pay Service Tax on the same?

Yes, M/s XYZ Pvt Ltd is required to pay Service Tax on the same as exemption has not been granted to such activity anywhere under Finance Act, 1994.

Case Study-5

Mr. A has rented a house to Mr. B, consisting of two floors. one floor of which is to be used as residence and the other for the purpose of running of a office? What shall be the Service Tax implications on the same?

Such renting for two different purposes is not naturally bundled in the ordinary course of business. Therefore if a single rent deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of Service Tax. In this case renting for use as residence is a Negative List Service while renting for non-residence use is chargeable to tax. Since, the latter category attracts highest liability of Service Tax amongst the two services bundled together, the entire bundle would be treated as renting of commercial property.

Case Study-6

This will be a case of Bundled Services where a number of services have been provided in lieu of a Single Consideration. Accordingly, taxability of the same shall be determined as per Section 66F of Finance Act, 1994. As per said Section, if services are considered Naturally Bundled in the ordinary Course of business, it shall be considered as the provision of said service which provide essential character to it. In this case, Renting of Immovable Property is the essence of aforesaid activity. Further, Renting of property for residential purposes is not exigible to Service Tax. Thus, said activity of Renting by Mr. A shall not be exigible to Service Tax.

Mr. A has let out a house to Mr. B for Residential purposes. Further, along with such house Mr. A has also provided various amenities such as furniture, refrigerator, air conditioners etc. What shall be Service tax implications of the same?

VALUATION ASPECTS IN RELATION TO CONSTRUCTION SERVICES

Valuation in respect of Works Contract Services

SERVICE TAX (DETERMINATION OF VALUE), RULES, 2006:

RULE 2A, Determination of value of service portion in the execution of a works contract :

Clause(i): Taxable Value shall be Gross Amount Charged [excluding VAT/Sales Tax paid / payable on transfer of property in goods involved in execution of works contract] for the works contract service less the value of transfer of property in goods involved in the execution of the said works contract. As per said Rule labour charges, amount paid to sub-contractors, charges for planning, designing etc, cost of consumables, cost of establishment of the contractor, and other similar expenses in relation to supply of labour are required to be included in the Gross Amount Charged.

(ii) In case the value cannot be determined under clause (i) above, then taxable value shall be determined as follows:

S.No.

PURPOSE OF WORK CONTRACT

PROPORTION OF THE TOTAL AMOUNT ON

WHICH SEVICE TAX IS PAYABLE

1. For execution of original works 40%

2. works contracts, including maintenance, repair, completion and finishing services of an immovable property

60%

3. Maintenance or repair or reconditioning or restoration or servicing of any goods

70%

Valuation in respect of Builders’ Services

LABOUR CONTRACTS for Construction of a complex, building, civil structure or a part thereof

Value of Service = Gross Amount Charged (Rate of Service Tax : 12.36%)

Contract for Construction of complex or building intended for sale to a buyer, wherein consideration is received from buyer partly or wholly prior to Issuance of Completion Certificate by a Competent Authority

Value of Service = Gross Amount Charged * 25%/30%

(Rate of Service Tax : 3.09% / 3.708%)

(N/N.- 26/2012 dated 20.06.2012 s amended vide N/N-2/2013 dated 01.03.2013 and N/N-9/2013 dated 08.05.2013)

Continued…….

Valuation in respect of Builders’ Services

Percentage and Conditions for abatementsConstruction 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,W.e.f 01.3.2013Abatement of 75 %(i) For residential unit having carpet area upto 2000 square feet and where the amount charged is less than rupees one croreAbatement of 70%(ii) For other than (i) above

From 01.07.2012 to 28.02.2013Abatement of 75 %

CONDITIONS: 1. Value of Land included in Gross Amount Charged

2. CENVAT Credit in respect of INPUTS NOT AVAILED

Apart from adopting methods prescribed by Rule 2A, the person providing Works Contac service provider has an option to valued its service as per the provisions contained in Section 67 read with Rule 5 of Service Tax (Determination of Value) Rules, 2006

Now the moot question arises whether a person providing Works Contract Services is mandatorily required to discharge its Service Tax Liability as per aforesaid Rule 2A or can avail any other method of valuation?

Case Study-7

Case Study- 8

A builder engages three sub-contracts in order to execute the construction work (including material) of a new building. The said Sub-Contractors have been awarded the work as follows:

Civil work has been given to Mr. AElectrification work has been given to Mr. BPlumbing & Fire fighting work has been given to Mr. C

Whether all aforesaid contracts fall under the ambit of term original works as defined under Rule 2A of Service Tax (Determination of Value) Rules, 2006?

The scope of term “Construction” can not be restricted to merely putting up walls, roof and floor etc. In different words, completion and finishing services [such as glazing, plastering, floor and wall tiling, installation of electrical fittings, plumbing works etc.] also fall within the ambit of term “Construction” which itself gets covered under the definition of term “Original Works”.

Therefore, all above contracts are eligible to discharge service tax liability on the 40% of the total amount charged for the works contract.

What are the options available to a Builder for discharging its Service Tax Liability?

In addition to discharging Service Tax liability after availing abatement as per Notification No 26/2012 dated 20.06.2012, the builder can also discharge its Service Tax Liability as per Rule 2A of Service Tax (Determination of Value), Rules, 2006 provided it entered into a separate agreement with the allottee for the sale of land. The same has been explained with the help of following illustration.

Case Study- 9

A builder ABC Ltd. construct and sold the building. Costs incurred by him for constructing the building & other relevant details are as under:

S.No Particulars Amount(Rs.)

1. Total Gross Amount Charged 1,00,000

2. Cost of Land 60,0003. Value of Material used 22,0004. Cost of Labour Services 4,0005. CENVAT Credit on Input 1200

6. CENVAT Credit on Inputs services 412

7. CENVAT Credit on Capital Goods (Total CENVAT is RS. 400. 50% of the has been availed)

200

PARTICULARS Valuation Methods

  Option A Option B Option C Option D

Relevant Notification/provision No.

26/2012

Separate Land Agreement is required to be made

Rule 2A (i)Rule 2A

(ii) Section 67

Gross Amount Charged Rs. 1,00,000Rs.

1,00,000Rs.

1,00,000Rs. 1,00,000

Less : - Exemption of 75% (Rs. 75,000) NIL NIL NIL

Less :- Cost of Land NIL(Rs.

60,000)(Rs.

60,000) (Rs. 60,000)

Less :- Value of Material NIL(Rs.

22,000) NIL NIL

Taxable Value Rs. 25,000 Rs. 18,000Rs.

40,000 Rs.40,000

Service Tax thereon (12.36%) Rs. 3,090 Rs. 2,225Rs. 1978 (@4.944

%)Rs. 4,944

Less :- CENVAT Credit on Input NIL NIL NIL 1200

Less :- CENVAT Credit on Input Services

412 412 412 412

Less :- CENVAT Credit on Capital Goods

200 200 200 200

Service Tax to be paid in cash Rs. 2,478 Rs. 1,613 Rs. 1,366 Rs. 3,132

Value for Reversal under Rule 6 (3) of CENVAT Credit Rules, 2004

Case Study-10For Instance: Value of flats sold by M/s ABC Ltd = Rs 1,00,00,000/- (Taxable Service)

Service Tax discharged = As per Rule 2A(ii) of Service Tax (determination of Value) Rules, 2006, i.e. on 40% of aforesaid value. Gross Amount Charged for construction of Road = Rs 1,00,00,000(Exempted Service Entry No 13 of Notification No 25/2012 dated 20.06.2012). Further, ABC Ltd has availed CENVAT Credit of Rs 40,00,000 in respect of aforesaid services.

What will be the amount which ABC Pvt Ltd is liable to pay as per Rule 6 (3) of CENVAT Credit Rules, 2004?

Amount required to be paid as per Rule 6 (3) (i) of CENVAT Credit Rules, 2004 = 6% of Exempted Services

= 6% of Rs 1,00,00,000 = Rs 6,00,000

Amount required to be paid as per Rule 6 (3) (ii) of CENVAT Credit Rules, 2004 =

40,00,000 * 1,00,00,000 2,00,00,000

= Rs 20,00,000

To Conclude: The value should be taken for the purpose of aforesaid Rule shall be Gross Amount Charged not the amount on which Service Tax has been paid.

EXEMPTIONS PROVIDED TO BUILDER/CONTRACTOR UNDER

NOTIFICATION NO. 25/2012 DATED 20.06.2012

Construction Service: Various Exemptions

Services provided to Government/ Local

Authority/ Governmental Authority (Entry No 12)

Services provided to any Person (Entry No 13)

Services by way of Construction, Completion, Fitting out, repair, maintenance, renovation, alteration in respect of:

Services by way of Construction, Completion, Fitting out, repair, maintenance, renovation, alteration in respect of

Civil Structure for Non-Commercial Purpose.

Historical Monument etc. Structure for use as clinical,

educational, or cultural establishment

Canal, Dam Etc. Pipeline, Conduit Etc. Residential Complex for self of

employees of above

Road, Bridge, Tunnel etc.Civil Structure under Jawaharlal Nehru National Urban Mission or Rajiv Awaas YojanaA building owned by entity registered under Section 12AA of Income Tax Act, 1961A pollution Control plantStructure for burial, funeral etc.

Services provided to any person by way of construction, erection, commissioning or installation pertaining to

(Entry No 14):

Airport, port & railways (including monorail & metro) Single residential unit otherwise as a part of residential complex Low-cost houses up to a carpet area of 60 sq metres. Post-harvest storage infrastructure for agriculture produce Mechanised food grain handling system, machinery, or equipments

for units processing agricultural produce.

Services of Works Contract provided by a Sub-Contractor to another contractor providing Works Contract services which are Exempt from Service Tax [Entry No 29 (h)]

Renting of Immovable Property Service:

Negative List of services (Section 66D):

(m) services by way of renting of residential dwelling for use as residence;

Renting of precincts of a religious place meant for general public (Entry No 5).

Renting of a premises for the conduct of Religious Ceremony (Entry No 5).

Renting of Immovable Property to an Educational Institution providing education which is exempted from Service Tax (Entry No 9).

Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent (Entry No 18).

Exemptions available to Renting of Immovable Property Service vide Notification No 25/2012 dated 20.06.2012

Thank You you