PUNE BRANCH OF ICAI

Welcome Participants
Subject : Service Tax Implications Real Estate & Construction Business Date Venue : Saturday, July 21, 2012 : ICAI Bhawan, Plot no. 8, Parshwanath Nagar, CTS no. 333, Sr. no. 573, Munjeri, Opp. Kale Hospital, Near Mahavir Furniture, Bibawewadi, Pune 411 037 Faculty Email ID : CA Naresh K. Sheth : nksheth25@gmail.com / nksheth@vsnl.com

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PREAMBLE
Abbreviations: The Act Finance Act, 1994 (Service tax legislation)amended till date The Rule Service Tax Rules, 1994 amended till date Enlightening participants about service tax obligations in construction and real estate sector Enlightening participants about recent amendments impacting the said sector Scope of presentation restricted to: Real Estate / Construction Industry specific provisions Amendments by Finance Act, 2012 impacting the construction / real estate sector

Purpose of presentation:

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POSITION OF BUILDERS / DEVELOPERS BEFORE 30.06.2012

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SERVICE TAX POSITION TILL 30.06.2012

Sale of completed flats / units is a property transaction and hence, not liable to Service tax Legislation deemed sale of under construction flats / units to be Service provided by builder to prospective buyers w.e.f. 01.07.2010 Abatement of 75% is available and effective tax rate: Before 31.03.2012 On or after 01.04.2012 2.575% 3.09%

Builder / Developer were not entitled to Cenvat credit of input, input services and capital goods till 30.06.2012 Service tax levy on sale of under construction flats /units is highly litigative issue and matter is pending before Honorable Supreme Court

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IS SERVICE TAX PAYABLE ON SALE OF FLATS?

Subject matter of taxation: Sale of flat is a transfer of immovable property under Transfer of Property Act, 1882 In pith and substance, tax is levied on sale of immovable property Service tax is a tax on services Sale of flat, not being a service transaction, service tax cannot be levied on same Constitutional validity: Schedule VII to the Constitution lists out the subject matter of taxation by Central and State Governments: List I Union List List II State List List III Concurrent List
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IS SERVICE TAX PAYABLE ON SALE OF FLATS?

Entry 97 of Union list is a residuary entry which empowers Central Government to levy tax on items not appearing in State List or Concurrent List Central Government levy service tax under Residuary Entry 97 Taxation of Immovable property falls under State List of taxation It, therefore, can not fall under residuary Entry 97 of Union List Central Government is, therefore, constitutionally incompetent to levy tax on Sale of property under Residuary Entry 97 of Union List Honorable Supreme Court in the case of Bharat Sanchar Nigam Limited vs. Union of India [(2006) 2 STR 161 (SC)] held as under: Total value taxed under various legislation should not exceed the transaction value Double taxation arising out of overlapping jurisdiction of State and Central Government is not permissible
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IS SERVICE TAX PAYABLE ON SALE OF FLATS?

Levy of service tax on flat sale is not in consonance with law laid down by the Supreme Court as State Govt collects stamp duty & registration fees on sale of flat Central Government collects service tax on sale of flat Base value suffering tax much higher than actual transaction value Absence of valuation mechanism: Sale of flat / commercial unit is a composite deal for transfer of rights in land and structure Sale value consists of land value, material cost and service cost No mechanism provided under legislation to workout value of taxable service In absence of proper valuation mechanism, charging Section fails. - CIT vs. B.C. Srinivasa Shetty [(1981) 128 ITR 294 (SC)]
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IS SERVICE TAX PAYABLE ON SALE OF FLATS?

Substantial charge is created by way of insertion of explanation. It is litigative issue whether the scope of taxation can be increased significantly through an explanation Levy is arbitrary and discriminatory in nature. It discriminates between two classes of builders: Builder selling the property on booking basis Builder selling the property after completion

General / Reasonable View Builders / Developers should not be liable to Service tax as: They are the sellers of immovable property. They are not service providers

The Courts were flooded with litigation on this issue

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PRESENT STATUS OF LITIGATION

Honorable Punjab & Haryana High Court in M/s G S Promoters Vs Union of India [2010-TIOL-813] upheld constitutional validity of service tax levy on builders and developers Honorable Bombay High Court in Maharashtra Chamber of Housing Industrys case [2012-TIOL-78-HC-MUM-ST] also upheld the levy of Service tax on sale of under construction flats / units Honorable Supreme Court, on 30th March, 2012, admitted Special Leave Petition (SLP) challenging the above referred order of Bombay High Court Legal issues are still open whether: Sale of under construction flats amount to provision of Service? Levy of Service tax on sale of under-construction flats is constitutionally valid?
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HIGH COURT ORDER / SLP IMPLICATIONS

Till SLP reaches finality, the order of the Honorable Mumbai High Court is binding on assessees in the jurisdiction of said High Court Honorable Supreme Court has not stayed: Applicability of impugned provisions Recovery or payment of Service tax

Liability to pay Service tax under existing provisions is alive Assessment shall proceed in accordance with law Service tax authorities are not barred from taking action for recovery of tax during pendency of SLP

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FALL OUT OF COURT ORDER

Service tax charged, collected and paid Service tax not charged / Not collected If levy is held unconstitutional, buyer will have to approach for refund. a) Service provider is liable for tax payment b) Tax along with interest to be borne by builder c) Department is entitled to recover Service tax during pendency of SLP Service tax charged, collected and not paid under the misconception that payable only when Supreme Court upholds constitutional validity. Service tax collected as deposit against probable liability. a) Tax is to be paid b) Interest is leviable c) Chances of penalty can not be ruled out

a) Tax is payable U/s.73A b) Non-payment will attract interest and penalty

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FALL OUT OF COURT ORDER

Registration Registration is required as Court clarified that assessment should proceed according to law. Non-registration may attract penalty U/s 77 higher of a) Rs. 10,000/b) Rs. 200 per day of delay in registration Returns are to be filed along with appropriate disclosures. Delayed / non-filing may attract late payment fees upto Rs. 20,000/- per return under Rule 7C To be done Non compliance may attract penalty of Rs. 10,000/- per invoice U/s 77

Filing of the return

Issue of invoices / bills: a) in specified format containing prescribed particulars; and b) Within 30 days from the date of completion of service
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POSITION OF BUILDERS / DEVELOPERS POST FINANCE ACT, 2012

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TAXABILITY ON OR AFTER 01.07.2012

Service means [Section 65B(44) of the Act]: Any activity Carried out by a person for another person For consideration

It includes declared service (Section 66E of the Act) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority It does not include: An activity which constitutes merely, a transfer of title in goods or immovable property, by way of sale, gift or in any other manner
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TAXABILITY ON OR AFTER 01.07.2012

Sale of under construction flats/units is declared as Service under Section 66E of the Act Definition of Service specifically excludes transfer of title in immovable property A strong view is prevalent that builders / developers transfer title in immovable property to buyer and hence transaction is not that of Service Old issue still remains, whether builder is: Seller of property; or Provider of service

Presentation proceeds with the presumption that builders / developers are liable to Service tax

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COMPARISON OF SERVICE TAX IMPLICATIONS FOR BUILDERS PRE and POST 01.07.2012
Transaction Sale of flats/units where any part of sale consideration is received before issuance of completion certificate Sale of flats/units where entire sale consideration is received after issuance of completion certificate On or after 01.07.2012 Taxable Before 01.07.2012 Taxable

Non-taxable

Non-taxable

Sale of single residential unit otherwise than Non-taxable as a part of a residential complex Sale of residential flats in building/complex having more than 1 unit but not more than 12 units Sale of residential flats in building/complex having more than12 units
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Non-taxable Non-taxable

Taxable

Taxable

Taxable

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COMPARISON OF SERVICE TAX IMPLICATIONS FOR BUILDERS PRE and POST 01.07.2012
Transaction Re-sale of flats/units Building constructed for self-use Building constructed for renting purpose On or after 01.07.2012 Non-taxable Non-taxable Non-taxable Before 01.07.2012 Non-taxable Non-taxable Non-taxable Taxable

Sale of under construction units for Taxable commercial purpose (irrespective of number of units in a complex) Sale of under construction units to Government Sale of residential unit pre-dominantly meant for employees of Government, MP, MLA etc Sale of flats/units under JNNURM or RAY
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Non-taxable Non-taxable

Non-taxable Non-taxable

Non-taxable

Non-taxable
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COMPARISON OF SERVICE TAX IMPLICATIONS FOR BUILDERS PRE and POST 01.07.2012
Transaction Sale of under construction flats/units to entity registered under Sec 12AA of Income tax Act, 1961 and to be used by general public for religious purpose Sale of units to charitable trusts for educational purposes Sale of units to charitable / NGO for hospitals, clinic etc. On or after 01.07.2012 Non-taxable Before 01.07.2012 Non-taxable

Taxable Taxable

Non-taxable Non-taxable

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EFFECTIVE TAX RATE FOR SALE OF UNDER CONSTRUCTION FLATS / UNITS w.e.f. 01.07.2012
Notification No 26/2012 dt 20.07.2012 has notified changes in abatement
Taxable Service
Sale of under construction flats/ units where any consideration is received before issuance of completion certificate provided value of land is included in consideration Cenvat availability of: Inputs (such as cement, steel etc) Input Services (such as architect, contractor etc.) Capital Goods (such as machinery, equipment etc.)
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Post Amendment Position Taxable Value Effective Tax

Pre Amendment Position Taxable Value Effective Tax

Impact

25

3.09

25

2.575

Not available Available Available

Not available Not available Not available

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SOME ISSUES
Whether abatement of 75% can be claimed where builder recovers value of land separately? If not, then on what is the value liable to Service tax? What will be the Service tax implications of amount charged for preferential location, floor rise or development charges of complex etc? Is it taxable at 12.36% or 4.94% ? Whether builder is entitled to full Cenvat credit of input services / capital goods even though 75% of value of flat is exempted by abatement notification? Whether builder will have to reverse proportionate Cenvat relatable to sale of completed flats on which no Service tax is payable? Whether purchase of following are liable to Service tax:
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Development right FSI TDR

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SOME ISSUES
Builder started construction of Residential complex having 10 units in 2011. Whether progress payments due on or after 01.07.2012 liable to tax? Builder commenced commercial construction of charitable hospital in 2011. Whether progress payments due on or after 01.07.2012 liable to tax? Whether builder can claim Cenvat in respect of input services bills prior to 30.06.2012? What is the applicable Service tax rate in following situations: Progress payment installment was due from customer before 30.06.2012, but payment is received after 01.07.2012 Advance received before 30.06.2012 but corresponding work was done after 01.07.2012

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POSITION OF CONTRACTORS / INFRASTRUCTURE PROJECTS POST FINANCE ACT, 2012

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COMPARISON OF SERVICE TAX IMPLICATIONS FOR GOVERNMENT JOBS PRE and POST 01.07.2012
Transaction Services provided to Government, local authority or Governmental authority by way of construction of: (i) Civil structure / Original works for use other than commerce, industry or any other business or profession (iii) Structure predominantly for educational, clinical, art or cultural establishment (iv) Canal, dam or other irrigation works (v) Pipeline, conduit or plant for water supply, water treatment, sewerage treatment/disposal (vi) Residential complex predominantly for its employees, MP, MLA etc
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On or after 01.07.2012

Before 01.07.2012

Non-taxable

Non-taxable Non-taxable Non-taxable Non-taxable Ambiguity as to taxability Non-taxable

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(ii) Historical monuments / archeological site Non-taxable Non-taxable Non-taxable Non-taxable

Non-taxable

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COMPARISON OF SERVICE TAX IMPLICATIONS FOR GOVERNMENT JOBS PRE and POST 01.07.2012
Transaction (vii) By way of erection, commissioning, installation, completion, fitting out, repair, maintenance,, renovation or alteration of all the above All above services to Government for commerce, industry or for any other business or profession (for example construction of warehouse, industrial units etc. for sale) On or after 01.07.2012 Non-taxable Before 01.07.2012 Ambiguity as to taxability

Taxable

Taxable

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COMPARISON OF SERVICE TAX IMPLICATIONS FOR INFRASTRUCTURE PROJECTS PRE and POST 01.07.2012
Transaction Services provided to any person by way of construction of: (i) Road On or after 01.07.2012 Before 01.07.2012

Non-taxable if for general public use Non-taxable if for general public use Non-taxable if for general public use Non-taxable if for general public use Non-taxable

Non-taxable even if for private use Non-taxable even if for private use Non-taxable even if for private use Non-taxable even if for private use Non-taxable

(ii) Bridge

(iii) Tunnel

(iv) Road transport terminal

(v) Civil structure or original works under JNNURM or RAY

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COMPARISON OF SERVICE TAX IMPLICATIONS FOR INFRASTRUCTURE PROJECTS PRE and POST 01.07.2012
Transaction (vi) Building owned by a entity registered under Sec 12AA of Income tax Act, 1961 and to be used by general public for religious purpose (vii) Construction/Erection of pollution control or effluent treatment plant (other than as a part of factory) (viii) Construction/Erection of structure meant for funeral, burial or cremation Repair, renovation, commissioning, installation, completion, fitting out, maintenance, or alteration of all the above Construction of hospital, educational institutions such as schools, colleges, etc by charitable trusts or NGOs
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On or after 01.07.2012 Non-taxable

Before 01.07.2012 Non-taxable

Non-taxable

Ambiguity as to taxability Non-taxable Ambiguity as to taxability Non-taxable

Non-taxable Non-taxable

Taxable

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COMPARISON OF SERVICE TAX IMPLICATIONS FOR INFRASTRUCTURE PROJECTS PRE and POST 01.07.2012
Transaction Services provided to any person by way of construction, erection, commissioning or installation of: (i) Airport (ii) Port (iii) Railway, including monorail or metro (iv) Single residential unit otherwise than as a part of residential complex (v) Low cost houses in approved housing projects upto a carpet area of 60 square meters per house (vi) post-harvest storage infrastructure for agricultural produce including a cold storage
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On or after 01.07.2012

Before 01.07.2012

Non-taxable Non-taxable Non-taxable Non-taxable Non-taxable

Non-taxable Non-taxable Non-taxable Non-taxable No specific exemption Exempt by Notification

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Non-taxable

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COMPARISON OF SERVICE TAX IMPLICATIONS FOR INFRASTRUCTURE PROJECTS PRE and POST 01.07.2012
Transaction (vii) Mechanized food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages Repair, maintenance, alteration, renovation etc of all above items On or after 01.07.2012 Non-taxable Before 01.07.2012 Exempt by Notification

Taxable

Ambiguity as to taxability

Retrospective exemption granted for Management, Maintenance or repair services during the period 16.06.2005 to 26.07.2009 in respect of: Road Non-Commercial Government Buildings Service provider entitled to claim refund of such tax within 6 months from 28.05.2012 (enactment date)
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TAXABILITY OF SUB-CONTRACTORS
Sub-contractors are independent assessees liable to Service tax, wherever applicable Merely main contractor or builder pays Service tax, sub-contractor is not automatically exempted from paying Service tax Clause 29(h) of Mega exemption Notification No 25/2012-ST dated 20.06.2012 provides for exemption to sub-contractor providing: works contract services to main contractor providing exempt works contract services

Sub-contractor providing labor services (other than works contract services) will not be entitled to above referred exemption Pre-amendment, sub-contractor was entitled to such exemption in respect of works contract services and labor contract services
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WORKS CONTRACT SERVICE w.e.f. 01.07.2012

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WORKS CONTRACT SERVICE

Works contract service means: Contract involving transfer of goods in execution of such contract such transfer of goods is leviable to tax as sale of goods; and such contract is for carrying out:
Construction Completion Alteration Erection Fitting out Renovation Commissioning Repair Installation Maintenance

Other similar activity

of / in respect of movable or immovable property Prior to 01/07/2012, works contract meant works contract in respect of immovable property. Now it may include works contract in respect of goods / movable property

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VALUATION OF WORKS CONTRACT w.e.f. 01.07.2012

Original work means: all new constructions all types of additions and alteration to abandoned / damage structures on land that are required to make them workable Erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise Other works means other than original works including maintenance, repair, installation of electrical fittings of an immovable property: Earlier, Assessee had a choice of working out specific value of Services under Rule 2A of Valuation Rules or under Composition Scheme The composition scheme is withdrawn w.e.f. 01.07.2012 and Rule 2A has been revised

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VALUATION OF WORKS CONTRACT w.e.f. 01.07.2012

The revised Rule 2A of Valuation Rules prescribes the value of service to be: Specific value when value of goods is declared for VAT purpose
Contract Value (less) VAT / Sales tax (less) value of goods for State VAT purpose Taxable Value Tax payable would be 12.36% of D A B C D = (A B C)

If value of the goods is not declared to State VAT, service provider can still calculate actual value of goods to workout service value If value of service is not deduced as above, value of the service would be specified percentage of contract value [Refer Slide No. 34]

Service provider is entitled to Cenvat of input services and capital goods in all the above options. He is not entitled to Cenvat of inputs. VAT / Sales Tax to be excluded from gross amount charged in all methods Controversy about material supplied by the client
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WORKS CONTRACT PRESUMPTIVE VALUATION w.e.f. 01.07.2012

Works Contract
Original Works i.e. new constructions, additions or alterations, erections or installation Rebate 60% Maintenance, repairs, restoration, reconditioning or servicing of goods Others such as repairs, completion, finishing services in respect of immovable property

Rebate 30%

Rebate 40%

Taxable portion 40% Effective tax rate 4.94%

Taxable portion 70% Effective tax rate 8.65%

Taxable portion 60% Effective tax rate 7.42%

*Service provider is entitled to Cenvat of Input services and capital goods

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WORKS CONTRACT SOME ISSUES

What will be the applicable rate of Service tax in respect of following finishing and completion contracts for new construction: Plastering Tilling Painting Electrical Plumbing

Whether site formation and clearance contractor can charge Service tax claiming rebate for new constructions?

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REVERSE CHARGE MECHANISM w.e.f. 01.07.2012

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REVERSE CHARGE MECHANISM

W.e.f 01.07.2012, service receiver (builder/developer) is obliged to discharge tax liability under reverse charge mechanism for following services availed:
Nature of Service GTA services Service provider Goods transport agent Any person Service recipient Specified persons paying freight Any body corporate or partnership firm located in taxable territory Business entity located in taxable territory Business entity located in taxable territory
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Liability of Liability of Service Service Provider Receiver Nil 100%

Sponsorship Services Arbitration services Legal services

Nil

100%

Arbitral tribunal Individual advocate/firm of advocates

Nil

100%

Nil

100%

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REVERSE CHARGE MECHANISM

Nature of Service Service provider Service recipient Business entity located in taxable territory Liability of Liability of Service Service Provider Receiver Nil 100%

Government Specified support services or local authority Rent-a-cab * (abatement availed) Rent-a-cab * (abatement not availed) Supply of manpower for any purpose Works Contract

Non-corporate Business entity entity registered as a body corporate Non-corporate Business entity entity registered as a body corporate Non-corporate Business entity entity registered as a body corporate Non-corporate Business entity entity registered as a body corporate
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Nil

100%

60%

40%

25%

75%

50%

50%

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REVERSE CHARGE MECHANISM

Nature of Service Any service (popularly known - Import of service) Service provider Person in non-taxable territory Service recipient Person in taxable territory Liability of Liability of Service Service Provider Receiver Nil 100%

* Rent-a-cab services to be provided to any person not engaged in the similar line of business Non-corporate entity means any Individual, HUF or partnership firm, whether registered or not, including association of persons

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REVERSE CHARGE MECHANISM ISSUES

Whether Service provider (contractor) is obliged to disclose total service tax payable in his Invoice? Where Service provider (contractor) is within threshold exemption limit, whether Service receiver (builder) liable to discharge the tax obligation? If yes, whether full tax or part of tax is to be paid by him? Whether Service receiver (builder) is obliged to pay Service tax under Reverse Charge mechanism in respect of Invoice issued by Service provider (contractor) before 30.06.2012 charging Service tax? Where Service provider (contractor) does not discharge his obligation, whether full tax can be recovered from Service receiver (builder)? Whether Service receiver (builder) can choose valuation method (especially in case of works contract service) different than that of Service provider (contractor)?
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REVERSE CHARGE MECHANISM ISSUES

Whether Service provider (contractor) is entitled to refund in case where Cenvat exceeds his tax liability? Whether Service receiver (builder) is entitled to Cenvat in respect of tax paid by him under Reverse Charge Mechanism? Whether Service receiver (builder) can discharge Service tax liability under Reverse charge mechanism from accumulated Cenvat balance? Whether Service provider (contractor) and Service receiver (builder) have to discharge their respective service tax liability on the same point of time? Whether phrase Manpower Supply for any purpose is wide enough to cover security, house keeping, retainership services etc.? Whether Service provider (contractor discharging partial liability) entitled to claim full Cenvat? Whether Service receiver (builder) can avail threshold exemption in respect of services on which tax to be paid under Reverse Charge mechanism?
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Words of Caution
Views expressed are the personal views of faculty based on his interpretation of law Application/implications of various provisions will vary on facts of the case and law prevailing on relevant time Contents of this presentation should not be construed as legal or professional advice This is an educational meeting arranged with clear understanding that Faculty will not be responsible for any error, omission, commission and result of any action taken by participant or anyone on the basis of this presentation

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THANK YOU

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