BUILDER’S SERVICE TAX under new regime of taxation

1. BUILDER’S SERVICE TAX under new regime of taxation

2. All the services specified in the “Negative List” shall remain outside the scope of service tax net. All other services, except those specifically exempted by the Govt. by way of notification, would be chargeable to service tax. INTRODUCTION OF NEGATIVE LIST APPROACH TO TAXATION OF SERVICES

3. This new approach to service tax has been made effective from 01.07.2012 A detailed guidance note on its operationalisation has been placed on the website of service tax. The name of the booklet is “Service Tax Educational Guide” and contains 150 pages. INTRODUCTION OF NEGATIVE LIST APPROACH TO TAXATION OF SERVICES

4. In order to smoothly transform from old provisions to new provisions, New sections 65B, 66B, 66C, 66D, 66E & 66F have been introduced. The old sections are made non applicable from 01.07.2012, as the new sections have been made operational. INTRODUCTION OF NEGATIVE LIST APPROACH TO TAXATION OF SERVICES

5. There were previously 116 services under the service tax net. The government has now shifted from positive list to negative list approach. Let us see what is the total of all services under the proposed new “Regime” • Negative List of services – 17 nos • Declared Services - 09 nos • Exempted Services - 34 nos • Sub clauses under above- 80 nos • Total Services - 140 Nos BRIEF ABOUT SERVICES TAX AMENDMENTS

6. Section 65B contains all the definitions. Section 66B is the new charging section for service tax. Section 66C deals with the determination of place of provision of service. Section 66D contains the negative list of services. Section 66E lists the declared services. Section 66F list the principles of interpretation of specified descriptions of services or bundled services. NEW SECTIONS

7. Mentioning of proper accounting codes for various services is not relevant in the new regime of service tax w.e.f. 01.07.2012. All service tax hence forth will be paid on a single accounting code. Other important points

8. Service means any activity carried out by a person for another for consideration, and includes a declared service, but should not include: An activity of transfer of title in goods or immovable property, by way of sale, gift or in any other manner; Transaction in money or actionable claims; Service provided by an employee to his employer in the course of employment; Fees Taken in any Court or tribunal. Definition of “service”

9. Now it is settled law in terms of judgments of Courts that a works contract can be segregated into a contract of sale of goods and that of provision of service. This entry signifies that service portion in works contract shall be levied to service tax. Further clause (b) of Section 66E specifies separately for Complex definition Continued

10. “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit. The previous definition consists of 12 residential units is no more available to builders w.e.f 01.07.2012. Competent Authority for issue of completion certificate if now the local authority only. However, personal house constructed by Individuals with the help of contractor will still be out of the purview of service tax. New definition of complex

11. genuine problems being faced by Builders was delay in obtaining completion certificate from Government Authorities which makes them liable for service tax Service Tax( Removal of Difficulty) Order, 2010:certain professionals like Architect, Chartered Engineer and Licensed Surveyor were also made competent authority continue Service tax –completed complex or not (levy of tax)

12. This new provision shall result in genuine hardships by builders since it takes much of time to obtain completion certificate from Government Authorities This clause needs to be reconsidered in light of practical difficulties. Continued

13. Before 01.06.2007 when works contract service was introduced Construction industry was subject to different categories of service viz. Commercial or industrial construction service construction of complex service errection and commissioning & installation service etc. continue Wc-dispute minimised wef 1-7-12

14. Although these separate categories are still in effect but their practical utility was nullified on introduction of  works contract service as most of the service providers involved in composite contract used to classify themselves under works contract service. Even then many of clarifications were continued to be issued in respect of those separate service classification ignoring works contract service which has resulted into number of litigations, recent of them is deemed service tax on builders w.e.f. 01.07.2010. Continued page 1

15. But with introduction of negative list, all of such unnecessary and illogical disputes will be reduced. Under negative list concept all activities related to construction /real estate and respective abatements will be governed by single so called most famous word works contract which has been defined under new Section 65B(54) as under Continued page 2

16. Works Contract means a contract wherein transfer of property in goods involved in the execution of such contracts is leviable to tax as sale of goods and such contract is for the purpose of carrying out constructions, erections, commissioning, installations, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land. Definition of works contract

17. But there may be one issue in question that nowhere in the definition any reference of residential complex has been made. One can take a stand that construction of complex is not covered under the definition although complex is also in the nature of works contract. For sake of clarity if legislative intent is to include the same in definition of works contract it would be   beneficial to specifically mention the same as is present in earlier/present definition so as to be on safer side. Wc- No changes,but scope enhanced

18. Section 66B There shall be levied a tax at the rate of twelve percent on the value of all services other than those services specified in the negative list provided or agreed to be provided in the taxable territory by one person to another and collected in such a manner as may be prescribed. It was later clarified that Education Cess will continue. The new charging section

19. Notification no. 30 & 45 Lists the following services, the service tax on which will be paid by the service receiver: Works Contract Services (New) Any service imported from outside India. Services of directors other than under employer employee relationship like sitting fees, commission, remuneration etc. OTHER IMPORTANT NOTIFICATIONS

20. Rule 2A of Service Tax Valuation Rules calculate the value of transfer of property in goods involved in the execution of works contract (either taking the value as considered for VAT purpose or ascertaining on actual basis) and deduct the same from Gross amount charged for works contract If above is not acertained, then value as per following table Value of services

21. Value of taxable service for real estate industry

22. (i) Total amount =  Gross Amount + Value of all goods supplied free of cost (ii) No credit of excise duty paid on any goods which are transferred  shall be allowed, Service Tax Liablility

23. Service tax under reverse mechanism Con’td… Business Entity means any person ordinarily carrying out any activity relating to industry, commerce or any other business. (vide scope and covers all persons) OTHER IMPORTANT NOTIFICATIONS

24. Except for the services mentioned below, in all other services, the service receiver will pay 100% of the service tax. OTHER IMPORTANT NOTIFICATIONS

25. Notification no. 43 dated 02.07.2012 No sooner has the Government implemented the service tax under the new regime, notification for extending the levy of service tax on certain services have been published. OTHER IMPORTANT NOTIFICATIONS

26. Prior to 01.07.2012, service providers paying service tax after availing the abatement provisions were not allowed to avail any CENVAT credit. w.e.f 01.07.2012, the CENVAT credit rules have been amended and service providers covered under works contract and builders services would be allowed to avail CENVAT credit on input services and capital goods. (Notification no. 26/2012-ST dt. 20.06.12) CENVAT TO WC AND BUILDERS WEF 1-7-2012

27. In negative list regime, activity undertaken by developers after including in declared service in clause (b) of section 66E of Finance Act, 1994. Relevant abatement scheme as given in Sr. 12 of table given in Notification No. 26/2012 dated 20.06.2012 is as under: 25% Scheme with cenvat.WEF 1-7-2012. benefit to builders to reduce cost

29. Prior to 01.07.2012 also, rate of abatement was same i.e. 75% and taxable portion was 25% of gross amount (including land cost). However, earlier there was absolute bar on availment of CENVAT Credit.  However, now, CENVAT Credit in respect of capital goods and input services (as defined under rule 2 of CENVAT Credit Rules, 2004) has been allowed w. e. f. 01.07.2012. (CENVAT credit in respect of inputs shall not be allowed). Continue Benefit in the form of CENVAT Credit:

30. CENVAT Credit in respect of capital goods and input services (as defined under rule 2 of CENVAT Credit Rules, 2004)has been allowed. But,CENVAT credit in respect of inputs shall not be allowed)  Usually, developers get the construction done from a construction contractor who charges service tax from developers in respect of construction services provided to developers. Continue CONTINUED

31. Now, CENVAT Credit in respect of capital goods and input services (including construction service received which is a substantial expenditure) shall be allowed.  Now, developer shall continue to charge service tax from their customers, however, they will now avail CENVAT Credit and deposit lesser amount CONTINUED

32. Criteria for availing CENVAT credit in respect of input services w.e.f 01.04.2011 Immediate credit on receipt of invoice, Payment of invoice to be made within a period of three months from the date of issue. Reversal of credit if payment is not made within the stipulated period. Credit can be taken again for such cases on the basis of actual payment. In cases of service tax paid on reverse charge basis, credit can be taken on the date of payment. Other important points

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