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Vikram Nankani (Partner)

Service Tax and VAT on Builders / Developers


Bombay Chartered Accountants Society
22nd August, 2012
1

Finance Act, 2012 Key Highlights


Tax Rates Service Tax and Excise Duty raised from 10% to 12%

GST no definitive time-line for introduction Negative list approach to tax services introduced 17 categories of services covered in the negative list Provision of Service Rules / Place of Supply Rules introduced Harmonization of Service Tax and Excise Duty regimes Common Tax Code proposed GST Network to be operational from August, 2012
Settlement Commission provisions extended to Service Tax

cases Ordinary limitation period under Service Tax law increased to 18 months No change in the rate of CST
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Contents
Constitutional framework Applicability of VAT VAT on sale of flat, liable?
Judicial Precedents

Bombay High

Court Order in case of MCHI Circular issued basis decision of the High Court in MCHI
Payment

of VAT

For the

period 20.06.2006 to 31.03. 2010 For the period 1.4.2010 onwards

Applicability of Service tax Scheme of taxation prior to 1 July, 2012 Taxation under the Negative List Regime

Constitutional Framework...
Taxes levied by Central Government and State Government(s) Authority to levy a tax is derived from the Constitution of India Which allocates power to levy various taxes between the Centre and State Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law Article 246 of the Indian Constitution, distributes legislative

powers including taxation, between the Parliament of India and the State Legislature Schedule VII enumerates use of three lists;
List

- I Where the parliament is competent to make laws List - II Where only the state legislature can make laws List - III Where both the Parliament and the State Legislature can make laws upon concurrently
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...Constitutional Framework
Union List
Income Tax Custom Duty Excise Duty Corporation Tax Service tax Central Sales Tax Stamp duty in respect

State List
Taxes on lands and

Concurrent List
Stamp duties other

of bills of exchange, cheques, promissory notes, etc

buildings Excise duty on alcoholic liquor etc Entry tax Sales Tax Tolls Luxury Tax Stamp duty in respect of documents other than those specified in the provisions of List I

than duties or fees collected by means of judicial stamps, but not including rates of stamp duty

The constant blurring of taxing jurisdiction between the Centre and the States has necessitated multiple Constitutional challenges
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Constitutional Amendment Bill


Introduction of Article 246A in the Constitution:
Parliament and the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by that State respectively. Provided that Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

Duality of charge pre negative list


Goods Vs. Services

Lines between the taxation of Goods & Services is constantly blurring Duality of Charge
Activity Customs duty Central / State Excise duty Service tax VAT / CST

Sr. No. 1.

Intellectual Property Services Import of Designs, Technical Know etc.. Works Contract Construction Services Manufacture of Products liable to State Excise

2. 3. 4. 5.

Applicability of VAT to builders / developers

Scope of levy under MVAT


Taxable event for the levy of VAT / Sales Tax is sale.
Section 2(24) of the Maharashtra Value Added Tax, 2002 (MVAT), defines the

term sale to mean a sale of goods made within the State for cash or deferred payment or other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge; and the words "sell, "buy" and "purchase", with all their grammatical variations and cognate expressions, shall be construed accordingly.
Clause (b)(ii) of the Explanation to the above Section, while setting out transactions

that would qualify as sale, provides as under:

Prior to 20.6.2006:
(ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.

W.e.f. 20.6.2006:
(ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract including, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property; 9

Scope of levy under MVAT


Owing to the amendment to the definition of the term sale, operative w.e.f.

20.6.2006, the building and construction of an immovable property was brought within the ambit of MVAT.
On 7.02.2007, basis the decision of the Supreme Court on M/s. K. Raheja

Development Corporation [141STC 298 (SC)], a Trade Circular was issued by the Commissioner of Sales Tax to clarify that:

Any transfer of property after 20.6.2006, irrespective of whether an agreement was signed prior to that date, would be governed by the amended definition of sale. Tri-partite agreements between land-owners, developers and prospective buyers would be covered by the amended definition of sale. If the agreement is entered into after the flat or unit is already constructed, then there would be no works contract, but so long as an agreement is entered into before the construction is complete, it would constitute a works contract.

On 9.07.2010, the Government of Maharashtra provided for a composition scheme,

applicable to registered dealers who undertake construction of flats, dwellings, buildings or premises and transfer them in pursuance of an agreement along with land or interest underlying the land.

Composition amount prescribed at 1% of the agreement amount or the value specified for the purpose of Stamp Duty under the Bombay Stamp Act, 1958, whichever is higher. 10

VAT on sale of flats Judicial precedents


K. Raheja Development Corporation Vs. State of Karnataka [2006 (3)

STR 337 (SC)]

Arrangement

Specific arrangement to sell an undivided fractional share, right, title & interest in the land to the intended buyer Two separate contracts entered (i) sale of right in land (ii) construction of building the developer , not being the owners of the land, had lien over the land and building until the intended buyers pay the full consideration with regard to both land as well as construction activity

Held that,

the Appellants are undertaking to build as developers for the prospective purchaser on payment of a price. Therefore, it remains works contract as defined under the Act.
Also, if the agreement is entered into after the flat or unit is already constructed, then there would be no works contract, but so long as agreement is entered into before the construction is complete, it would be a Works Contract

Liable under VAT 11

VAT on sale of flats Judicial precedents


Assotech Realty Pvt. Ltd. vs. State of UP [2007 (7) STR 129 All.]

Arrangement

Developer issued allotment letter, specifying that terms and conditions of allotment are subject to sale deed to be signed by parties in future Under the said terms, the allottee agreed that no right will accrue in his favour until the sale deed is executed Further agreed, the petitioner shall remain the owner and the construction thereon and no rights shall devolve upon the allottee by way of allotment even though any all payment has been received by petitioner

Held:

Developer continues to remain the owner of apartments including all construction till execution of the sale deed of such apartment, hence no works contract for construction The petitioner not carrying out construction activity for and on behalf of the allottee as the right ,title and interest in construction remained with petitioner at all times till execution of sale deed of apartment as a whole No liability to VAT 12

Distinguished K Raheja decision as the agreement in K Raheja provided that the developer will

construct for and on behalf of the person who agreed to purchase the flat.

VAT on sale of flats Judicial precedents


Larsen and Toubro Ltd & Anr. vs. State of Karnataka [2008-(SC2)-

GJX-2195-(SC)]

Held:

If the ratio of K. Rahejss case is accepted then there would be no difference between the works contract and a contract for sale of chattel as a chattel The case of K. Raheja Development needs re-consideration. Matter referred to Larger Bench

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VAT on sale of flats Judicial precedents


Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra and Ors [2012-VIL-35-BOM]
The constitutional validity of the amended definition of sale, the Trade Circular

dated 7.02.2007 and the 1% Composition Scheme introduced w.e.f. 9.07.2010, was challenged in a spate of writ petitions.
On behalf of the petitioners, it was contended as under:

The amendment was beyond the scope of the States power to tax under Sl. No. 54 of List II of the Seventh Schedule to the Constitution.
In order to attract the application of Article 366(29A)(b), a contract would have to inter alia involve a transfer of property in goods and immovable property does not constitute goods.

Consequent to the 46th Amendment to the Constitution, only a transfer of property in goods involved in the execution of a works contract is taxable and a contract for the sale of immovable property is not a works contract. A works contract involves only two elements viz. (i) the transfer of property in goods; and (ii) supply of labour and services. If a third element, the sale of immovable property, is involved in the contract it does not constitute a works contract and hence to such a contract, the legal fiction which is created by Article 366(29A) would not apply. 14

VAT on sale of flats Judicial precedents

Agreements contemplated to be brought within the purview of the amended definition of sale, per the Circular dated 07.02.2007, are simplicitor agreements for the sale of immovable property. Contracts governed by the Maharashtra Ownership Flats (Regulations of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) cannot be regarded as a works contract, being agreements for the purchase of immovable property. The MVAT ignores the concept of plurality of deemed sales. Where the developer is the owner of the land, the promoter is both the owner and developer. Alternately, a developer may enter into a development agreement with the owner of the land. When a promoter appoints a sub contractor and gets a building constructed, that contract is a works contract under Article 366(29A) and a transfer of the property in the goods involved in the execution of the works contract takes place to the developer. That would be the first deemed sale. When the developer enters into an agreement with a purchaser under the MOFA, a sale of goods is not involved since that would amount to a second deemed sale of the same goods which cannot be brought to tax. Once a promoter has appointed a sub contractor the property passes to him as a promoter owner or to the owner, as the case may be, where there is only a developer. Property has already passed on accretion and the same transaction of deemed sale cannot be taxed twice. An executory contract does not fit into the conception of a sale of goods within the meaning of Entry 54 of the State List to the Seventh Schedule. The amended definition of sale was beyond the scope of the States power to tax under Sl. No. 54 of List II of the Seventh Schedule to the Constitution. 15

VAT on sale of flats Judicial precedents


On behalf of the Revenue, it was contended as under:

An unduly restrictive or contrived meaning should not be given to the provisions of Article 366(29A) otherwise the object underlying the Constitutional amendment would be defeated. The purpose underlying the enactment of the deeming fiction in Article 366(29A) was to override the limited definition of the expression sale in the Sale of Goods Act, 1930 and to isolate the sale of goods element involved, inter alia, in a contract which is a works contract. The amended definition of sale falls within the compass of Article 366(29A). A works contract is a contract to execute works and encompasses a wide range of contracts; it is not restricted to building contracts having only two elements viz. the sale of material and goods and the supply of labour and services. The well settled connotation of the expression works contract is that a building contract may also involve in certain situations a sale of land. A works contract does not cease to be such merely because any other obligation exists. In an agreement which is governed by the MOFA, a conveyance of the interest in the flat or at any rate an interest therein is created at the stage of the execution of an agreement. The doctrine of accretion is always subject to a contract to the contrary. The provisions of the MOFA contain a statutory stipulation to the contrary where the accretion to the property enures to the benefit of the flat purchaser; and The Trade Circular and the deduction schemes are only clarificatory in nature. 16

VAT on sale of flats Judicial precedents


Held:

Works contracts have numerous variations and it is not possible to accept the contention either as a matter of first principle or as a matter of interpretation that a contract for work in the course of which title is transferred to the flat purchaser would cease to be a works contract. The effect of the amendment to Section 2(24) is to clarify the legislative intent that a transfer of property in goods involved in the execution of works contract including an agreement for building and construction of immovable property would fall within the description of a sale of goods within the meaning of the provision. The constitutional validity of the provisions of the MVAT Act, 2002, as amended, is not contingent upon any other statutory regulation of apartments under cognate legislation in the State of Maharashtra.

Having regard to this statutory scheme, it is not possible to accept the submission that a contract involving an agreement to sell a flat within the purview of the MOFA is an agreement for sale of immovable property simplicitor.

The Constitutional validity of the amended definition of sale, the Trade Circular dated 7.02.2007 etc. upheld. Held Liable to VAT

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Position as on date
Trade circular No. 14T of 2012 dated 06.08.2012, issued by the

Commissioner of Sales Tax, Maharashtra


Issue

pursuant to the Decision of Honble Bom. High Court in MCHI case States that developers are liable to pay tax under the MVAT Act, w.e.f. 20.06. 2006 Provides for certain facilitation for obtaining registration, grant administrative relief for unregistered period, and filing of returns for the period from 20.06.2006 Issued FAQs on taxation of developers

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Position as on date
For the period 20.06.2006 to 31.3.2010 For payment of VAT, three options available

Composition Scheme under Section 42(3)


VAT payable @ 5% tax on the agreement value Land deduction is not available Input tax credit is available subject to the reduction of 4 per cent.

Actual Expense Method under Rule 58


the deduction of Labour and service charges is available on actual basis. Land deduction is also available

Set-off available subject to the condition u/r 53 and 54 Deduction of land cost will be allowed

Standard Deduction Method U/r 58

Thereafter 30% standard deduction from remaining amount as per proviso to sub-rule1 Set-off available subject to the condition u/r 53 and 54
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Position as on date
For the period after 01.04.2010 In addition to the three option discussed in the earlier slide the developer has one more option under Section 42(2A) read with Notification No. VAT 1510/CR-65/Taxation-1 dated 09.07.2010
All

agreements registered on or after 01.04.2010 covered VAT payable @ 1% tax on agreement value. No land deduction available No input tax credit is available.

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FAQs
Questions Answers

Whether Credit available of input tax paid Yes, input tax credit available, if the taxes u/r 58 on purchases of materials like cement, iron, or u/s 42 (3) i.e. except 1% scheme steel etc. what point of time the VAT would be Taxability arises on agreement. Tax is levied as payable and when the instalments become due and payable or are received, whichever is earlier.
The agreement to sell the flat was Yes. VAT will apply. It will be levied on value executed before 20.06.2006 and the received or receivable after 20th June, 2006 building was under construction and possession is given after 20.06.2006. Whether the VAT will apply in such case? If yes how the sale value will be determined for calculation of VAT? Whether the amount received prior to 20.06.2006 will be exempt from VAT The point of liability when advances are Tax will be levied from the date of the received and agreement is executed much agreement. The amount of advance, as and later. when it is adjusted towards the agreement amount, will be taxed. 21

FAQs
Questions Non-refundable deposits and other charges under the agreement such as electricity deposit, water charges, legal charges, development charges etc. will also form part of sale price for VAT? Whether VAT applicable be collected by raising a debit note or the same should be mentioned in the agreement itself? Whether VAT should be collected on each instalment or at one go upon execution of the agreement Answers No. The amounts which are received as deposits will be deducted to the extent such amounts are actually paid to other authorities.

Yes. It can be collected by raising a debit note. Specific mention in the agreement is a choice of the contracting parties. It should be collected as and when the instalment becomes due.

What will be VAT the implications where There is no tax liability. mere advances are received from buyers and agreement for sale is not executed with the buyer?
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Service tax- Erstwhile provisions

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Commercial or Industrial Construction


Commercial or Industrial Construction Services introduced

w.e.f. 10.09.2004
Taxable

Service defined under Section 65(105)(zzq)

means

any service provided or to be provided to any person by any person in relation to commercial or industrial construction

Explanation
The

Inserted w.e.f. 01.07.2010

construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorised by the 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 the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer
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Commercial or Industrial Construction


Commercial or industrial construction - defined under Section

65(25b) w.e.f. 16.06.2005


Construction

of a new building or a civil structure or a part; or Construction of pipeline or conduit; or Completion and finishing services
such as

glazing, plastering, painting, floor and wall tiling., construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

Repair,

alteration, renovation or restoration of, in relation to, building or civil structure, pipeline or conduit, Which is Used /

occupied / engaged, primarily in; Commerce or industry, or work intended for commerce or industry but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams
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Construction of Complex Service


Construction of Complex Service introduced w.e.f.16.05.2005 Taxable Service defined under Section 65(105)(zzzh)
Means

any service provided or to be provided to any person, by any other person, in relation to construction of complex

Explanation
The

inserted w.e.f. 01.07.2010

construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by the 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 the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer

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Construction of Complex Service


Construction of complex - defined under Section 65(30a) w.e.f.

16.6.2005
Construction

of a new residential complex or a part thereof; or Completion and finishing services in relation to a residential complex
such as

glazing, plastering, painting, .,construction of swimming pools, acoustic applications or fittings and other similar services; or

Repair,

alteration, renovation or restoration of., in relation to, residential complex

Section 65(91a) of the Act defines residential complex, to

mean any complex comprising ofA

building or buildings, having more than twelve residential units; A common area; and
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Construction of Complex Service


Any

one or more of facilities or services

such as

park, lift, parking space, community hall, common water supply or effluent treatment system,

Located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person
Explanation
personal use includes permitting the

complex for use as residence by another person on rent or without consideration residential unit means a single house or a single apartment intended for use as a place of residence
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Works Contract Services


Works Contract Services was introduced w.e.f. 01.06.2007 Taxable service defined under Section 65(105)(zzzza)

Means any service provided or to be provided to any person, by any other person in relation to the execution of works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams and the term service provider shall be construed accordingly Explanation Works Contract means a contract wherein,Transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and Such contract is for the purpose of carrying out,

Erection, commissioning or installation of plant, machinery Construction of a new building or a civil structure or a part therefof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or Construction of a new residential complex or a part thereof; or Completion and finishing services, repair, alteration, renovation or restoration of, or similar services Turnkey projects including engineering, procurement and construction or commissioning (EPC) projects 29

Service tax on sale of flats Judicial precedents


Magus Construction Pvt. Ltd. vs. Union of India [2008 (11) S.T.R. 225

(Gau.)]

when a builder, promoter or developer undertakes construction for its own self, in such cases, there would not be a question of providing taxable service by one person to another. The only transaction between the Petitioner and the prospective buyer is that on sale and purchase of flat. Any advance paid by the prospective buyer represents consideration received towards sale of flat to such prospective buyer and is not for obtaining service from the Petitioner Held Not liable to Service tax

M/s. G S Promoters vs. Union of India and another [2011 (21) S.T.R.

100 (P & H)]

There is element of service involved in a transaction of builder selling a flat, whether or not service is involved has to be seen not only from the point of view of builder but also from the point of view of service recipient Constitutional validity of levy upheld Held Liable to Service tax

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Service tax on sale of flats Judicial precedents


Maharashtra Chamber of Housing Industry Vs Union of India

[2012-VIL-15-BOM-ST]

Upheld the constitutional validity of the Explanations added to the taxing entries for construction of complex service and commercial or industrial construction service by the Finance Act, 2010. These Explanations brought to tax consideration received by a builder from a buyer under an agreement of sale if any part of the consideration was received prior to the issuance of the completion certificate. Held Liable to Service tax

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Payment of Service tax


Various options available for payment of Service tax Commercial or Industrial Construction Service / Construction of Complex Service
Particulars Rate of tax Option 1 3.399%of the Gross Amount charged (tax on 33% of amount charged) No credit available Option 2 Option 3 Option 4 10.3% of Gross Amount charged

2.575% of the Gross 10.3% of Gross Amount charged Amount less (Not available if cost value of goods of land separately recovered) (tax on 25% of amount charged) No credit available Capital Goods & input service available

Availability of Credit to Service provider

Full credit of Inputs, Capital Goods & Input Services


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Payment of Service tax

Works Contract Service

Options available to the contractors engaged by the Builders & Developers


Particulars Option 1 4.12% of (Gross Amount charged Less VAT/Sales tax) Available for Capital Goods & Input Services Option 2 10.3% of [(Gross amount Less VAT / Sales tax) Less value of goods] Available for Capital Goods & Input services

Rate of tax

Availability of Credit to Service provider

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New Scheme of Taxation

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Overview of the New Scheme


Paradigm shift Negative List approach of taxing adopted If an activity meets characteristics of service, it is taxable, unless:
-

Specified in negative list Exempted vide a Notification

New charging section 66B which levies taxes on all services other than those in the negative list, provided or agreed to be provided in the taxable territory by one person to another
Taxable
It

territory has been defined in Section 65B (52)

means the territory to which the provisions of Chapter V of the Finance Act, 1994 apply i.e. whole of India excluding the state of Jammu and Kashmir Non-taxable territory is defined in sub-section 35 ibid accordingly as the territory other than the taxable territory.

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Approach under the New scheme


The erstwhile Service tax regime, focused on a selective taxation of

services, by incremental additions to the list of taxable services


Negative list - Approach Defining what a service is, and Tax all services, except for some specifically defined services which would be kept outside the purview of the tax

Taxation of services would be comprehensive, with some limited exceptions Comprehensive taxation

Selective taxation Exempt/ Non-taxable services

Exempt services

Taxable services

Taxable services
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Change in provisions Finance Act


Old Provisions under Finance Act Following provisions will cease to exist from a date to be notified
Section 65 - Definitions

New Provisions under Finance Act Following provisions will come into force from a date to be notified
Section 65B - Definition Section 66B Charging Section Section 66C Place of Provision Section 66D Negative List Section 66E Declared Services

Section 66 Charging Section

Section 65A - Classification

Section 66F - Classification


Section 67A Rate and Value

Section 68 Payment of Service tax Section 66A Charging Section in case of import of services
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Section 66C Place of Provision

Charging Section
Old charging provision (Section New charging provision (Section

66) There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. of the value of taxable services referred to in subclauses [ ] of clause (105) of section 65 and collected in such manner as may be prescribed.

66B) There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. 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 manner as may be prescribed.
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Service
Means
- Any activity - Carried out by a person for another - For consideration

Includes
-Includes a declared service 1. Renting of immovable property 2. 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 consideration is received prior completion 3. Temporary transfer or permitting the use or enjoyment of any intellectual property right 4. Information technology software services 5. Obligation to refrain from an act, or to tolerate an act or a situation, or to do an act 6. Service in relation to lease or hire of goods and hire purchase transactions 7. Execution of Works Contracts 8. Service portion in the serving of foods or other article of human consumption

But shall not include


-any activity that constitutes merely a transfer in title of 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; - a transaction in money or actionable claim; - any service provided by an employee to an employer in the course of or in relation to his employment; - fees taken in any Court or a tribunal established under any law for the time being in force - by a Constitutional authority under the Indian Constitution or a member of an Indian Legislature or a local selfgovernment in that capacity
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Negative List of Services (indicative list)


Sr. No. 1 Description of services which are not liable to Service Tax Selling of space or time slots for advertisements other than advertisements broadcast by radio or television. Advertisement has been specifically defined. Service by way of access to a road or a bridge on payment of toll charges Services by way of renting of residential dwelling for use as residence. The term renting has been specifically defined. Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount or inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers
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2 3 4

Exempted Services... (indicative list)


Sr. No. 1 2 Description of service in respect of which exemption from payment of Service Tax is granted Services of- (a) renting of precincts of a religious place meant for general public; or (b) conduct of any religious ceremony. Services by way of erection or construction of original works pertaining to,(a) airport, port or railways; (b) single residential unit otherwise as a part of a residential complex; (c) 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; (d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or (e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;
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...Exempted Services (indicative list)


Sr. No. 3 Description of service in respect of which exemption from payment of Service Tax is granted Services provided to the Government or local authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of (a) a civil structure .. meant predominantly for a non-industrial or non-commercial use; (b) a historical monument, archaeological site or remains of national importance... (c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; (d) canal, dam or other irrigation works; (e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii)sewerage treatment or disposal; or (f) 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; Services provided by way of erection, construction, maintenance, repair, alteration, renovation or restoration of,(a) road, bridge, tunnel, or terminal for road transportation for use by general public; (b) building owned by an entity registered under section 12AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public; (c) pollution control or effluent treatment plant, except located as a part of a factory; or 42 (d) electric crematorium;

Construction of Complex
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 certificate of completion by a competent authority
Circular 51/2/2012-STdated 10.02.2012 bearing F.No.332/13/2011-

TRU as also the Education Guide issued by the Board clarified the taxability of the following arrangements in the context of existing taxable service:
1. 2. 3. 4. 5. 6.

Tripartite model, Redevelopment model, Investment model, Reconversion model, BOT projects and Joint development agreement model.
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Tripartite Business Model


Parties involved Landowner Builder/developer Contractor Transactions involved Sale of land by the landowner
Not

a taxable service

Construction

service provided by the builder/developer

Consideration received by

the builder/developer From landowners land/development rights Other buyers cash

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Tripartite Business Model


Applicability of Service tax to builder / developer
Period Prior to 01.7.2010 Post 01.7.2010 Liable to Service tax No Yes Comments Vide Board Circular No. 108/02/2009-ST dated 29.1.2009 If any part of the consideration is received before issuance of completion certificate

Valuation Consideration for providing services to landowners is value of land / developments rights
Value of land / development rights may not be ascertained Therefore, value of flats given to land owners shall be equal to those charged for similar flats by the builder/developer from other buyers Service tax payable by the builder / developer when possession or right in the property of the said flats is transferred to the landowner i.e. by entering into a conveyance deed or an allotment letter 45of In other cases viz sale to other buyers, value will be determined in terms Section 67

Redevelopment including SRA


Land owned by a society comprising of members Each member entitled to his share by way of an apartment Society / its members will give NOC for re-construction

The builder / developer makes new flats with same or different

carpet area for original flat owners


Additionally,

builder / developer may also be involved in

Construction of additional flats

for sale to other buyers Arranging rental accommodation or rent payments for society members for stay during the period of reconstruction Payment of additional amount to the original owners of flats

In such case builder / developer receives


consideration from members

of the society for land development rights including the permission for additional number of flats Consideration from other buyers in cash
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Redevelopment including SRA


Taxability
Activity Taxability Comments

Reconstruction undertaken by society by directly engaging a builder/developer


Construction of additional flats undertaken as part of the reconstruction for non-members of society prior

No

Meant for personal use of the members


Not taxable during the period prior to 01.07.2010 For the period post 01.07.2010

No Yes

Valuation determined in accordance with Section 67(1)(i) Flats given to other buyers
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Investment Model
Project is offered to investor before commencement by

earmarking a specified area of construction / flat of a specified area is allotted to the investors;
Investor

may be promised a fixed rate of interest

Options to investor Exit on receipt of the amount invested along with interest; or Re-sell the said allotment to another buyer; or Retain the flat for his own use Taxability Investment amount shall be treated as consideration paid in advance for construction services by builder / developer
Liable to service tax
48

Investment Model
If

investor exits, before / after issuance of completion certificate


Builder /

Developer entitled to take credit under Rule 6(3) of the Service Tax Rules, 1994, to the extent it has refunded the original amount

If

the builder/developer resells the flat before the issuance of completion certificate
Liable to service tax

49

Conversion Model
Conversion of any hitherto untaxed construction / complex / part

thereof into a building or civil structure to be used for commerce or industry, after lapse of a period of time
Mere change in use of the building does not involve any taxable

service, unless conversion falls within the meaning of commercial or industrial construction service

50

Build-Operate-Transfer (BOT) Projects


Parties involved Government or its agency Concessionaire (Builder / Developer himself or independent) Users Transactions involved At first level, Government or its agency transfers the right to use and / or right to develop to the Concessionaire
specified period usually 30 years For construction of a building or furtherance of business or commerce Consideration paid to Government Upfront lease amount Annual charges Government or its agency provides renting of immovable property service Liable to service tax 51
For a

Build Operate Transfer (BOT) Projects


Under such arrangement, Concessionaire is not

a service provider since such construction has been undertaken by him on his own account and he remains the owner of the building during the concession period. No Service tax on the Concessioner

At

second level, Concessionaire may engage a contractor


payable by the contractor on the construction service provided by the Contractor to the Concessionaire No Service tax is payable if the activity is specifically excluded

Service tax

At

third level, Concessionaire enters into agreement with several users for commercial exploitation of the building
Concessionaire is the service provider

providing taxable services Renting of immovable property service, business support service, management, maintenance or repair service etc Liable to service tax
52

Joint Development Agreement Model


Landowner and builder / developer join hands

Create a new entity / SPV; or Operate as an unincorporated association on partnership / joint / collaboration basis
Mutuality of interest Common risk / profit

New entity undertakes construction on behalf of landowner and

builder / developer Circular 148/17/2011-ST dated 13/12/2011 shall apply mutatis mutandis, particularly paragraphs 7,8 and 9(Clarification on levy of service tax on distributors/sub-distributors of films & exhibitors of movie)

Where a distributor enters into an arrangement with an exhibitor to share revenue / profits and not provide the service on P2P basis, a new entity emerges, distinct from its constituents and therefore such activities would be taxable Service tax payable under the Joint Development arrangement 53

Non-requirement of Completion Certificate


Requirement of completion certificates waived /required in

certain States for certain specified types of buildings


Taxability
Equivalent

of completion certificate used as the dividing line between service and sale
Authority competent to issue completion certificate includes an

architect or chartered engineer or licensed surveyor Service Tax (Removal of Difficulty) Order, 2010, dated 22/06/2010

54

Taxability of Arrangements / Models


Model Tripartite Business Model Taxability No
Yes

Conditions Prior to 01.07.2010 - Vide Board Circular No. 108/02/2009-ST dated 29.1.2009
If any part of the consideration is received before issuance of completion certificate

Redevelopment including SRA

No

Reconstruction undertaken by society by directly engaging a builder / developer-Meant for personal use of the members Construction of additional flats undertaken as part of the reconstruction for non-members of society during the period prior to 01.07.2010 Construction service provided by the builder / developer for non-members of society for the period post 01.07.2010 If investment amount treated as consideration paid in advance If builder / developer resells the flat before the issuance of completion certificate
55

No

Yes

Investment Model

Yes Yes

Taxability of Arrangements / Models


Model Conversion Model Taxability No Conditions Mere change in use of the building does not involve any taxable service, unless conversion falls within the meaning of commercial or industrial construction service If the equivalent of completion certificate (used as the dividing line between service and sale) indicates as such Government or its agency provides renting of immovable property service / right to use Construction service provided by the Contractor to the Concessionaire if specifically excluded Clarification on levy of service tax on distributors/sub-distributors of films & exhibitors of movie applicable mutatis mutandis

Non-requirement of Completion Certificate BOT Project Model

Yes

Yes No

Joint Development Agreement Model

Yes

56

Payment of Service tax


Notification 26/2012-ST dated 20.06.2012
Taxable Service ST payable on Percentage value 25% Conditions

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

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii)The value of land is included in the amount charged from the service receiver.

57

Taxability during transition of law

Prior to 01.07.2010 Post 01.07.2010 - Payment Taxability x Comments Taxable event is the construction - Agreement to sell - Complete Construction - Completion certificate (certificate) received

- Agreement to sell - Complete Construction - -

- Certificate received - Payment before certificate received - Complete Construction - Certificate received - Payment after certificate - Complete Construction - Payment prior to receipt of certificate - Balance 40% construction - Payment for 40% construction prior to receipt of certificate

Taxable event is the construction Payment post receipt of certificate -

- -

- 60% construction complete - Payment for 60% construction made

Service tax would be payable on the payment for the balance 40% construction completed after 01.07.2010 58

Taxability during transition of law


Prior to 01.07.2010 - 60% construction complete Post 01.07.2010 - Balance 40% construction - Payment for 100% construction after receipt of certificate
- Balance 40% construction - Payment for 100% construction prior to receipt of certificate

Taxability x -

Comments

- 60% construction complete

- Agreement to sell - 60% construction complete - Payment for 60% construction made

- Balance 40% construction - Payment for 40% construction after receipt of certificate

No clarity has been provided in circumstances where balance payment for construction post 01.07.2010 is made after certificate received.

59

Works Contract
In terms of Article 366 (29A) of the Constitution of India transfer of property

in goods involved in execution of works contract is deemed to be a sale of such goods.


A works contract can be segregated into a contract of sale of goods and

contract of provision of service.

Supreme Court decision in BSNLs case [2006(2) STR 161 (SC)]

Service portion in execution of a works contract included in declared list of

services

Works contract has been defined in section 65B of the Act as a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, 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. Value of service portion in works contracts will be determined in terms of the Service Tax (Determination of Value) Rules, 2006 (Valuation Rules).
60

Works Contract
Gross amount includes Labour charges for execution of the works Amount paid to a sub-contractor for labour and services Charges for planning, designing and architects fees Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract Cost of consumables such as water, electricity, fuel, used in the execution of the works contract
Cost of establishment of the contractor relatable to supply of labour and services and other similar expenses relatable to supply of labour and services

Gross amount does not include Value of transfer of property in goods involved in the execution of the said works contract. Note: Where Value Added Tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract.

Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract

Profit earned by the service provider relatable to supply of labour and services 61

Works Contract
Is there any simplified scheme for determining the value of

service portion in a works contract?


Yes.

The scheme is contained in the revised Rule 2A of the Valuation Rules.


As per

this scheme the value of the service portion, where value has not been determined in the manner as explained in earlier slide, shall be determined in the manner explained in the table below Value of the service portion shall be forty percent of the total amount charged for the works contract sixty percent of the total amount charged for the works contract

Where works contract is for (i) execution of original works (iii) works contracts, other than contracts for execution of original works, including contracts for completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings (iii) Works contract for maintenance or repair or reconditioning or restoration or servicing of any goods

seventy percent of the total amount charged for the works contract 62

Works Contract
total amount means the sum total of the gross amount charged

for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting(i) the amount charged for such goods or services, if any; and (ii) the value added tax or sales tax, if any, levied thereon:
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;

63

Works Contract
Person liable to pay Service tax
Vide Notification 30/2012-S.T. dated 20.06.2012 (applicable w.e.f. 01.07.2012), in respect of Works Contract service:

Both the service provider and service recipient are required to discharge 50% of the Service tax liability Applicable only where the service provider is individual or HUF or partnership firm or LLP or AOP and the service recipient is a body corporate In other cases, service provider is required to apply and recover tax

64

Works Contract
Issues Whether contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under works contract?
if such contracts involve provision of materials as well How is the value of goods or services supplied free of cost be determined to arrive at the total amount charged for a works contract? If the value of goods and services supplied free of cost for use in or in relation to execution of a works contract is not ascertainable, the same shall be determined on the basis of the fair market value of the goods or services that have close resemblance to goods made available
Yes,

65

Works Contract
Is duty paid on any goods, property in which is transferred (whether

as goods or in some other form) in the execution of works contract, available as Cenvat Credit? No. Such Cenvat Credit is not available, irrespective of the fact that the value of service portion is determined in the manner explained above, since such goods are not inputs for the service provided. However, the goods not forming part of such transfer will be eligible for input tax credit subject to the provisions of the Cenvat Credit Rules, 2004 including the provisions relating to reversal of credits contained in rule 6 of the said rules.

66

Works Contract
Duality of taxes (Works Contract / Construction services) Differing schemes of abatements under VAT Laws and Service Tax law

Original Works, Contract value = Rs. 100/Service Tax @12.36% on Rs. 40/- (abatement of 60%) VAT @ 14.5% on Rs. 75/- (abatement of 25% under VAT Laws) Effective value of contract subjected to Indirect Taxes is Rs.115/- as against an actual realization of Rs. 100/Taxing impact further aggravated for other than Original Works on account of the Service tax abatement being only 40%, therefore effective value of contract subject to Indirect Taxes is Rs.135/Credits of Excise Duty paid on goods not available on account of conditions of the abatement scheme

Results in increasing the tax cost Manner of applying VAT - Levy of VAT on the Service tax portion in the transaction

Service tax paid or payable forms part of sale value and hence liable to Service tax - DDQ-11-2007/Adm-3/16/B-1 dated 20.10.2012 This position seems incorrect. The intention of legislature would not be to levy tax on tax 67

Service tax- Renting of immovable property

68

Renting of Immovable Property


Renting of Immovable Property introduced w.e.f.16.05.2005 Taxable service defined under Section 65(105)(zzzz)
Means any

service provided or to be provided to any person, by any other person, by renting of immovable property or any other service in relation to such renting, for use in the course of or, for furtherance of, business or commerce

Explanation

1 Immovable Property includes

Building and

a part of a building, and the land appurtenant thereto; Land incidental to the use of such building or part of a building; The common or shared areas and facilities relating thereto; In case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate, and Vacant land, given on lease or license for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce
69

Renting of Immovable Property


But does not include
solely used for agriculture, .; Vacant land, whether or not having facilities clearly incidental to the use of such vacant land; Land used for educational, sports parking purposes; and Building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels .
Vacant land

Explanation

2 Immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be
deemed to be

immovable property for use in the course or furtherance of business or commerce

70

Renting of Immovable Property


Renting of immovable property is defined under Section 65(90a) Includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course or furtherance of business or commerce Does not include
Renting of

immovable property by a religious body; or Renting of immovable property to an educational body ;

Explanation 1 for use in the course or furtherance of business or commerce includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings Explanation 2 renting of immovable property includes allowing or permitting the use of space in an immovable property, irrespective of the transfer of possession or control of the said immovable property
71

Service tax on renting of immovable property position in proceedings


Home Solutions Retail India Ltd vs. UOI [2009 20 STT 129 (Delhi)] Levy held unconstitutional - Renting of immovable property itself does not entail any value addition

Special leave petition filed in the Supreme Court pending

Finance Act 2010, with retrospective effect, amended the definition of

taxable service to explicitly provide that renting per se is a taxable service

The said amendment was challenged by a writ in Home Solutions Retail India Ltd. vs. UOI [2010 26 STT 418 (Delhi)]

Stay granted from recovery of Service tax To be decided after instructions from Supreme Court

Similar challenge in other High Courts including Bombay

Shubh Timb Steels Ltd. vs. UOI [2010 (20) S.T.R. 737 (P & H)] Upheld the constitutional validity and retrospective levy Very recently Delhi HC in Home Solution(2) continued the stay granted

earlier

Taxing entry contained the word services to be provided, whereas in Home solution(1) it has been concluded that renting does not constitute a service 72 Considered the P&H HC order

Service tax on renting of immovable property - position in proceedings


Delhi High Court in the case of Home Solutions Retail Vs UOI while

examining the issue of constitutionality observed

On the question of penalty due to non-payment of tax, it is open to the Government to examine whether any waiver or exemption can be granted Subsequently, in the matter of Retailers Assn. of India Vs Union of India, the Honble Apex court, had ruled on October 14, 2011, that litigants should pay 50% of the arrears within six months in three equated instalments

For the balance, solvent surety should be furnished

Proposed that penalty may be waived who pay the service tax due on

renting of immovable property service (as on the sixth day of March, 2012), in full along with interest within six months

Section 80A is being introduced for this purpose Those who fail to avail the benefit will be treated as if this section did not exist
73

Renting of immovable property - Taxability under the New Scheme

74

Renting of immovable property


Renting has been defined in section 65B as allowing, permitting or granting access, entry, occupation, usage or any such facility, wholly or partly, in an immovable property with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property Immovable property has not been defined in the Act definition of immovable property in the General Clauses Act, 1897 will be applicable which defines immovable property to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

75

Renting of immovable property


Renting of certain kinds of property not liable to Service tax Covered under the negative list
renting of vacant land, with or without a structure incidental to its use, relating to agriculture renting of residential dwelling for use as residence renting out of any property by Reserve Bank of India renting out of any property by a Government or a local authority to all non-business entity.

Exemptions in respect of renting of immovable property Threshold level exemption up to Rs. 10 lakh. Renting of precincts of a religious place meant for general public 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 is exempt
76

Renting of immovable property


Applicability of Service tax on certain activities of renting
Sl. No. 1. 2. Nature of Activity Renting of property to educational body Renting of vacant land for animal husbandry or floriculture Permitting use of immoveable property for placing vending/dispensing machines Allowing erection of communication tower on a building for consideration Renting of land or building for entertainment or sports Renting of theatres by owners to film distributors Taxability Chargeable to service tax; no exemption Not chargeable to service tax as it is covered in the negative list entry relating to agriculture Chargeable to service tax as permitting usage of space is covered in the definition of renting Chargeable to service tax as permitting usage of space is covered in the definition of renting Chargeable to service tax as there is no specific exemption Chargeable to service tax as the arrangement amounts to renting of immovable property. 77

3.

4.

5. 6.

Mumbai
1502, A Wing, Dalamal Towers, Nariman Point, Mumbai 400 021 Phone: + 91 22 6636 7000, Fax: + 91 22 6636 7172, Email: mumbai@elp-in.com

Delhi
405-406, 4th Floor, World Trade Centre, Barakhamba Lane, New Delhi 110 001 Phone: + 91 11 4152 8400, Fax: + 91 11 4152 8404, Email: delhi@elp-in.com

Ahmedabad
801, Abhijeet III, Mithakali Six Roads, Ellisbridge, Ahmedabad-380 006 Phone: +91 79 6605 4480 / 8, Fax: +91 79 6605 4482, Email: Ahmedabad@elp-in.com

Pune
Suyog Fusion, 7th Floor, No.1, 97 Dhole Patil Road, Nr. Ruby Hall Clinic, Pune 411 001 Tel:+91 20 4146 7400 / 02 Fax:+91 20 4146 7499 Email: pune@elp-in.com

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