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Service Tax, VAT and GST Real Estate Industry

Service Tax, VAT and GST Real Estate Industry. Bharat Raichandani Advocate Pune, 07.11.2015. UBR Legal Advocates. Powers of the State and Union. UBR Legal Advocates. Powers of the State and Union. ARTICLE 246: Subject-matter of laws made by the Parliament & State Legislature

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Service Tax, VAT and GST Real Estate Industry

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  1. Service Tax, VAT and GSTReal Estate Industry Bharat Raichandani Advocate Pune, 07.11.2015 UBR Legal Advocates

  2. Powers of the State and Union UBR Legal Advocates

  3. Powers of the State and Union ARTICLE 246: Subject-matter of laws made by the Parliament & State Legislature • VII Schedule • List I: Union List- sets out the areas on which only the parliament is competent to make laws • List II: State List- sets out the areas on which only the state legislature can make laws, and • List III: Concurrent List- lists out the areas on which both the Parliament and the State Legislature can make laws upon concurrently. UBR Legal Advocates

  4. List I: Duties/ Taxes levied by the Union SERVICE TAX • Entry 92C of List I [Amendment passed by the Parliament on 15.01.2004 , but not made effective yet] RESIDUARY ENTRIES • Entry 97 of List I • Any other matter not included in List II and List III of the VII Schedule UBR Legal Advocates

  5. List II: Duties/ Taxes levied by the State EXCISE DUTY • Entry 51 of List II • Excise duty on alcoholic liquors, opium and narcotics. SALES TAX • Entry 54 of List II • Tax on sale or purchase of goods other than newspapers, • Restrictions: subject to the provisions of Entry 92A. ENTRY TAX • Entry 52 of List II • Tax on entry of goods into a local area for consumption, use or sale therein. UBR Legal Advocates

  6. Part XII of the Constitution:Power to tax ARTICLE 265: Taxes not to be imposed save by authority of law • No tax shall be levied or collected except by authority of law. “Taxation” • Defined in Article 366 (28) as: “taxation” includes the imposition of tax or impost, whether general or local or special, and “tax” shall be construed accordingly. • Difference between tax and fee UBR Legal Advocates

  7. Background to the 46th Amendment-1982 State of Madras v. Gannon Dunkerley(1958) 9 STC 353 (SC) • Building contracts A. V. Meiyappan v. CCT (1967) 20 STC 115 (Mad. HC.) • Lease Associated Hotels of India (A.I.R. 1972 S.C. 1131) • Sale of food and drinks Northern India Caterers (India) v. Lt. Governer of Delhi (1980) 2 SCC 167 • Service in restaurants UBR Legal Advocates

  8. Article 366 (29A) (29A) tax on the sale or purchase of goods includes : (a) a tax on the transfer, otherwise than in pursuance of a contact, of property in any goods for cash, deferred payment or other valuable consideration; (b) a tax on the transfer of property in goods (whether as goods or in some other form) invoked in the execution of a works contract; (c) a tax on the delivery of goods on hire purchase or any system of payment by instalments; (d) tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; UBR Legal Advocates

  9. Article 366 (29A) (e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made; UBR Legal Advocates

  10. Mutual Exclusivity Sales Tax and Service Tax are mutually exclusive • Gujarat Ambuja Cements 2005 (274) ITR 194 (SC) • BSNL (2006) 145 STC 91 (SC) • Imagic Creative (2008) 12 STR 392 UBR Legal Advocates

  11. CONSTITUTIONAL VALIDITY • Renting of Immovable Property Service • Home Solutions Retail India Limited 2011 (24) STR 129 (Del) • Financial Leasing transactions • Association of Leasing & Financial Service Companies 2010 (20) STR 417 (SC) • Construction and sale of flats • MCHI 2012 (25) STR 305 (Bom) UBR Legal Advocates

  12. Legislative History

  13. POSITION OF WORKS CONTRACT UNDER SERVICE TAX • Construction Service was introduced with effect from 10.09.2004 • Rechristened as Commercial or industrial construction service with effect from 16.06.2005 • Works Contract service introduced with effect from 01.06.2007 • CBEC vide its letter No B1/16/2007 TRU, dated 22/05/2007 clarified that contracts which are treated as Works Contract for the purpose of levy of VAT / Sales tax shall also be treated as Works Contract for the purpose of levy of Service tax. UBR Legal Advocates

  14. POSITION OF WORKS CONTRACT UNDER SERVICE TAX(Contd…) • Works Contract service - insertion of new service? or already subjected to service tax prior to 01.06.2007? • Larsen & Toubro Limited (SC) • Rule 2A was inserted in the Service tax (Determination of Value) Rules 2006 allowing exclusion of value of goods and VAT as per VAT or Sales Tax Returns • As an alternative to the above, Works Contract (Composition scheme for payment of Service Tax) Rules, 2007 were introduced. • The Composition tax is to be paid on the entire contract value by the Service Provider (Previously2%, now 4%, + Ed.Cess) UBR Legal Advocates

  15. POSITION OF WORKS CONTRACT UNDER SERVICE TAX(Contd…) • Explanation inserted in commercial or industrial service and construction of complex service but the same was not inserted in work contact service. • Explanation inserted –for the purpose of this sub clause , construction of a complex which is intended for sale, wholly or partly ,by a builder or any person authorized by the a builder before during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorized by the builder before the grant of completion certificate under any law for the time being in force) shall be deemed to be service provider by the builder to the buyer - with effect from 01.07.2010? • Is Explanation constitutionally valid? • Maharashtra Chamber of Housing Industry V/s UOI – 2012 (25) STR 305 (Bom) • Is the Explanation retrospective? UBR Legal Advocates

  16. SERVICE-DEFINED • Section 65B(44) defines ‘Service’ as: • any activity carried out by a person for another for consideration • And includes Declared Services • Not to include: • Mere Transfer of title in: • Goods or Immovable property • By way of sale/gift or in any other manner • "such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution.” UBR Legal Advocates

  17. The L&T Case

  18. Background • Any agreement entered into by the Builder/Promoter before the completion of construction tantamounts to works contracts and hence, liable to Value Added Tax (VAT)/Sales Tax • K Raheja Development Corporation 2005 (5) SCC 162 UBR Legal Advocates

  19. Analysis Summary of the observations contained in Para 101 of the judgment: (i) For sustaining the levy of tax on the goods deemed to have been sold in execution of a works contract, three conditions must be fulfilled: (one) there must be a works contract, (two) the goods should have been involved in the execution of a works contract and (three) the property in those goods must be transferred to a third party either as goods or in some other form. UBR Legal Advocates

  20. Analysis • For the purposes of Article 366(29-A)(b), in a building contract or any contract to do construction, if the developer has received or is entitled to receive valuable consideration, the above three things are fully met. It is so because in the performance of a contract for construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are intended to be incorporated in the structure and even though they lost their identity as goods but this factor does not prevent them from being goods. UBR Legal Advocates

  21. Analysis • Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract. The term “works contract” in Article 366 (29-A)(b) takes within its fold all genre of works contract and is not restricted to one specie of contract to provide for labour and services alone. Nothing in Article 366(29-A)(b) limits the term “works contract”. • Building contracts are species of the works contract. UBR Legal Advocates

  22. Analysis • A contract may involve both a contract of work and labour and a contract for sale. In such composite contract, the distinction between contract for sale of goods and contract for work (or service) is virtually diminished. • (vi) The dominant nature test has no application and the traditional decisions which have held that the substance of the contract must be seen have lost their significance where transactions are of the nature contemplated in Article 366(29-A). Even if the dominant intention of the contract is not to transfer the property in goods and rather it is rendering of service or the ultimate transaction is transfer of immovable property, then also it is open to the States to levy sales tax on the materials used in such contract if such contract otherwise has elements of works contract. The enforceability test is also not determinative. UBR Legal Advocates

  23. Analysis (vii) A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a sale of the goods involved in the execution of a works contract by the person making the transfer and the purchase of those goods by the person to whom such transfer is made. (viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution of the works contract. Such a deemed sale has all the incidents of the sale of goods involved in the execution of a works contract where the contract is divisible into one for the sale of goods and the other for supply of labour and services. In other words, the single and indivisible contract, now by Forty-sixth Amendment has been brought on par with a contract containing two separate agreements and States have now power to levy sales tax on the value of the material in the execution of works contract. UBR Legal Advocates

  24. Analysis (ix) The expression “tax on the sale or purchase of goods” in Entry 54 in List II of Seventh Schedule when read with the definition clause 29-A of Article 366 includes a tax on the transfer of property in goods whether as goods or in the form other than goods involved in the execution of works contract. (x) Article 366(29-A)(b) serves to bring transactions where essential ingredients of ‘sale’ defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or purchase for the purposes of levy of sales tax. In other words, transfer of movable property in a works contract is deemed to be sale even though it may not be sale within the meaning of the Sale of Goods Act. UBR Legal Advocates

  25. Analysis (xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read with Entry 54 List II is permissible even after incorporation of goods provided tax is directed to the value of goods and does not purport to tax the transfer of immovable property. The value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works even though property passes as between the developer and the flat purchaser after incorporation of goods. UBR Legal Advocates

  26. Valuation

  27. VALUATION UBR Legal Advocates

  28. VALUATION : RULE 2A • With effect from July 1, 2012 • Works Contract Service • Rule 2A substituted • Value of service = Gross amount charged less actual value of goods transferred in execution • Actual value of goods for VAT purposes to be considered for determining material value UBR Legal Advocates

  29. VALUATION: RULE 2A • Where value is not determined then: • Service value shall be computed as : • Original work – 40% of total amount charged • Contract for maintenance or repair, renovation or restoration of any goods – 70% • Other works – 70% • Original works means: • All new constructions • All types of additions and alterations to abandoned or damaged structures on land that are required to make them workable • Erection, commissioning or installation of plant, machinery or equipment or structures UBR Legal Advocates

  30. VALUATION: RULE 2A • ‘Total amount’ means: • Gross amount charged • Plus • FMV of all goods and services supplied in or in relation to the contract whether or not supplied under the same contract • Less • The amount charged for such goods and services, and • Less • VAT or sales tax levied thereon Specific bar inserted for availing excise duty credit in respect of inputs used in works contract services UBR Legal Advocates

  31. REVERSE CHARGE • Whether service provider to charge full rate of tax? • Payment of entire tax by service provider: - Service recipient absolved? • Different options be exercised by provider and receiver? UBR Legal Advocates

  32. Some ISSUES • Land Value? • Construction pre July, 2010 – Sale After 2010? • Electricity charges? • Reimbursements? • Security deposits – maintenance or repair service - Pre formation of society? • Input service credit- taxable as well as non taxable supplies? UBR Legal Advocates

  33. Some Issues • Stamp Duty? • Redevelopment rights? • Option contracts? • 99 year lease? UBR Legal Advocates

  34. VAT

  35. VAT in Real Estate • What is Real Estate ? • Immovable property • - Land • - Sale of Flats/Dwellings/Bungalows/Buildings /premises/ tenements • Other Contracts incidental or ancillary to above ; • - Under Construction Contracts by Builders and Developers • - Civil Contracts • - Construction Contracts • - Other Contracts • Are all contracts “Works Contracts” ?? UBR Legal Advocates

  36. Kone Elevators (2014-TIOL-57-SC) [2005] 140 STC 22, the Supreme Court held that contract was for sale of goods as opposed to a works contract – claim of deduction on account of labour was rejected: -The execution of the contract had two major components – the work of preparation of the site and the supply of the lift -Skill and labour involved in converting the main components into end product was merely incidental Overruled by Full Bench – by 4:1 majority – held works contract UBR Legal Advocates

  37. Larsen and Toubro 146 STC 616 (SC) • Affirms Andhra Pradesh High Court judgment • Sub-contractor – Supply of main contractor or customer? UBR Legal Advocates

  38. Global Practices

  39. Global practices • UK • Canada • Australia • New Zealand • Singapore • Malaysia UBR Legal Advocates

  40. Constitution Amendment Bill

  41. Salient Features • 122nd Amendment Bill introduced in LS on 19.12.2014 • Key Features • Concurrent jurisdiction for levy of GST by the Centre and the States –proposed Article 246A • Authority for Centre to levy & collection of IGST on supplies in the course of inter-State trade or commerce including imports – proposed Article 269A • Authority for Centre to levy non-vatable Additional Tax – to be retained by originating State • GST defined as any tax on supply of goods or services or both other than on alcohol for human consumption – proposed Article 366(12A) UBR Legal Advocates

  42. Salient Features • Goods includes all materials, commodities & articles – Article 366 (12) • Services means anything other than goods – proposed Article 366 (26A) • Goods and Services Tax Council (GSTC) - proposed Article 279A • To be constituted by the President within 60 days from the coming into force of the Constitutional Amendments • Consists of Union FM & Union MOS (Rev) • Consists of all State Ministers of Finance • Quorum is 50% of total members • Decisions by majority of 75% of weighted votes of members present & voting • 1/3rd weighted votes for Centre & 2/3rd for all States together UBR Legal Advocates

  43. Article 246A • Notwithstanding anything contained in Article 246 and 254 – “non obstante clause” • No corresponding entry in any of the lists in the Seventh Schedule ? • GST – not included in the Concurrent List ? • “Trade and commerce” – Meaning ? Does not use the term “economic activity” UBR Legal Advocates

  44. Article 269A • GST on inter-state trade or commerce • Place of supply Rules • “and” when a supply of goods or services takes place in the course of inter-state trade or commerce ? UBR Legal Advocates

  45. Article 366(12A) • “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption • “the” appears twice – poor grammar • “any” tax – meaning ? “a” tax or “the” tax ? • “supply” not defined ? • Is self supply taxable ? Is it restricted to commercial transactions only? • Does it include “sale” ? Or concept of “sale” has become irrelevant ? • Would it include “transfer of property” – would we go back to the pre 46th Amendment Era ? UBR Legal Advocates

  46. Article 366(26A) • “Services” means anything other than goods • “services” – why not “service” ? • Works contracts ? • Licensing of intangibles ? • Software ? • Is Article 366 (29A) relevant ? Should it be omitted? • Is the dispute between “goods” V/s “service” over? • Threshold exemptions ? • Category based exemptions? UBR Legal Advocates

  47. Thank You Bharat Raichandani Advocate Partner UBR Legal Advocates Chambers: 59, Swastik Plaza, Next to Kalaniketan, JVPD Scheme, Vile Parle (West), Mumbai 400049 T: +91 22 26113635 * F: +91 22 26101358 * M: 9820875305 * E: ubrlegal@yahoo.in UBR Legal Advocates

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