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Applicability of Service Tax in Construction Industry

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

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Applicability of Service Tax in Construction Industry

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  1. Applicability of Service Tax in Construction Industry CA Ashok Batra Special Invitee, Indirect Taxes Committee

  2. 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

  3. Renting of Immovable Property Service: Negative List of services (Section 66D): (m) services by way of renting of residential dwelling for use as residence;

  4. EXEMPTIONS PROVIDED TO BUILDER/CONTRACTOR UNDER NOTIFICATION NO. 25/2012 DATED 20.06.2012

  5. Construction Service: Various Exemptions

  6. 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)]

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

  8. 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

  9. Impact of Negative List Regime • Construction for NGO/ Charitable Institutions made taxable • Renting for NGO/ Charitable Institutions made taxable • Services in relation to development of plots provided by builders made taxable • Changes in the definition of Residential Complex • Scope of entry no. 12 of Notification No. 25/2012 dated 20.06.2012

  10. CASE STUDIES

  11. 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?

  12. 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

  13. 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.

  14. 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.

  15. 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.

  16. 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.

  17. Case Study-6 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? 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.

  18. VALUATION ASPECTS IN RELATION TO CONSTRUCTION SERVICES

  19. 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.

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

  21. 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…….

  22. Valuation in respect of Builders’ Services • Percentage and Conditions for abatements • 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, • W.e.f 01.3.2013 • Abatement of 75 % • (i) For residential unit having carpet area upto 2000 square feet and where the amount charged is less than rupees one crore • Abatement of 70% • (ii) For other than (i) above • From 01.07.2012 to 28.02.2013 • Abatement of 75 % • CONDITIONS: 1. Value of Land included in Gross Amount Charged • 2. CENVAT Credit in respect of INPUTS NOT AVAILED

  23. Case Study-7 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? 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 withRule 5 of Service Tax (Determination of Value) Rules, 2006

  24. 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. A • Electrification work has been given to Mr. B • Plumbing & 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?

  25. 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.

  26. Case Study- 9 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.

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

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

  29. Case Study-10 For 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?

  30. 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.

  31. POINT OF TAXATION FOR CERTAIN RELEVANT TRANSACTIONS • Maintenance services • 2. Services provided by builders/developers to land owners under collaboration agreements • The said services are treated as Continuous Supply of Services as per Rule 2(c) of Point of Taxation Rules, 2011. • Proviso to Rule 3 of Point of Taxation Rules, 2011 provides for determination of point of taxation in such type of services • 3.Sale of buildings (shops/offices) of land owner by builders • Services provided by Land owner to buyers: Point of taxation shall be determined as per proviso to Rule 3 of Point of Taxation Rules, 2011. • Services Provided by Builder to Landowner: Point of taxation shall be determined as per Rule 3 of Point of Taxation Rules, 2011

  32. Thank Youyou CA. Ashok Batra Ph.: 45134430-38 Email Id : caashokbatra@gmail.com

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