Real Estate Seminar 21-07-2012 CA Naresh Seth

PUNE BRANCH OF ICAI

Welcome Participants

Subject : Service Tax Implications – Real Estate & Construction

Business

Date : Saturday, July 21, 2012

N. K. SHETH & COMPANY 1

Venue : 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 : CA Naresh K. Sheth

Email ID : [email protected] / [email protected]

17/07/2012

� Abbreviations:

• The Act – Finance Act, 1994 (Service tax legislation)–amended till date

• The Rule – Service Tax Rules, 1994 – amended till date

� Purpose of presentation:

• Enlightening participants about service tax obligations in construction

and real estate sector

• Enlightening participants about recent amendments impacting the said

PREAMBLE


• 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

17/07/2012

POSITION OF BUILDERS / DEVELOPERS BEFORE 30.06.2012


DEVELOPERS BEFORE 30.06.2012

17/07/2012

� 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 – 2.575%

SERVICE TAX – POSITION TILL 30.06.2012


• Before 31.03.2012 – 2.575%

• On or after 01.04.2012 – 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

17/07/2012

� 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

IS SERVICE TAX PAYABLE ON SALE OF FLATS?


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

17/07/2012

• 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



• 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

17/07/2012

• 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)]

17/07/2012

� 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

17/07/2012

� 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

Industry’s case [2012-TIOL-78-HC-MUM-ST] also upheld the levy of

Service tax on sale of under construction flats / units

PRESENT STATUS OF LITIGATION


� 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?

17/07/2012

� 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

HIGH COURT ORDER / SLP – IMPLICATIONS


� 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

If levy is held unconstitutional, buyer will have to approach for refund.

Service tax not charged / Not collected

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

N. K. SHETH & COMPANY 1117/07/2012

Service tax charged, collected and not paid under the misconception that payable only when Supreme Court upholds constitutional validity.

a) Tax is to be paid

b) Interest is leviable

c) Chances of penalty can not be ruled out

Service tax collected as deposit against probable liability.

a) Tax is payable U/s.73A

b) Non-payment will attract interest and penalty

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

Filing of the return 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


Rs. 20,000/- per return under Rule 7C

Issue of invoices / bills:

a) in specified format containing prescribed particulars; and

b) Within 30 days from the date of completion of service

To be done

Non compliance may attract penalty of Rs. 10,000/- per invoice U/s 77

POSITION OF BUILDERS / DEVELOPERS

N. K. SHETH & COMPANY

POST FINANCE ACT, 2012

17/07/2012 13

� 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

TAXABILITY ON OR AFTER 01.07.2012


• 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

17/07/2012

� 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

TAXABILITY ON OR AFTER 01.07.2012


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

17/07/2012

COMPARISON OF SERVICE TAX IMPLICATIONS FOR BUILDERS – PRE and POST 01.07.2012

TransactionOn or after 01.07.2012

Before 01.07.2012

Sale of flats/units where any part of sale consideration is received before issuance of completion certificate

Taxable Taxable

Sale of flats/units where entire sale consideration is received after issuance of

Non-taxable Non-taxable


completion certificate

Sale of single residential unit otherwise than 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

Taxable Non-taxable

Sale of residential flats in building/complex having more than12 units

Taxable Taxable



Before 01.07.2012

Re-sale of flats/units Non-taxable Non-taxable

Building constructed for self-use Non-taxable Non-taxable

Building constructed for renting purpose Non-taxable Non-taxable

Sale of under construction units for Taxable Taxable


Sale of under construction units for commercial purpose (irrespective of number of units in a complex)

Taxable Taxable

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 Non-taxable Non-taxable



Before 01.07.2012

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 Taxable Non-taxable


Sale of units to charitable trusts for educational purposes

Taxable Non-taxable

Sale of units to charitable / NGO for hospitals, clinic etc.

Taxable Non-taxable

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 ServicePost Amendment

Position

Pre Amendment

PositionImpact

Sale of under construction flats/ units where any consideration is received before issuance of completion certificate

Taxable Value

Effective Tax

Taxable Value

Effective Tax

�


completion certificate provided value of land is included in consideration

�25 3.09 25 2.575

Cenvat availability of :

☺

Inputs (such as cement, steel etc) Not available Not available

Input Services (such as architect, contractor etc.)

Available Not available

Capital Goods (such asmachinery, equipment etc.)

Available Not available

1917/07/2012

� 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

SOME ISSUES


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:

• Development right

• FSI

• TDR

17/07/2012

� 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?

SOME ISSUES


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

17/07/2012

POSITION OF CONTRACTORS / INFRASTRUCTURE PROJECTS


INFRASTRUCTURE PROJECTS

POST FINANCE ACT, 2012

17/07/2012 22

COMPARISON OF SERVICE TAX IMPLICATIONS FOR GOVERNMENT JOBS– PRE and POST 01.07.2012


Before 01.07.2012

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



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

(iii) Structure predominantly for educational, clinical, art or cultural establishment


(iv) Canal, dam or other irrigation works Non-taxable Non-taxable

(v) Pipeline, conduit or plant for water supply, water treatment, sewerage treatment/disposal

Non-taxable Ambiguity as to taxability

(vi) Residential complex predominantly for its employees, MP, MLA etc


COMPARISON OF SERVICE TAX IMPLICATIONS FOR GOVERNMENT JOBS– PRE and POST 01.07.2012


Before 01.07.2012

(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

Taxable Taxable


commerce, industry or for any other business or profession(for example – construction of warehouse, industrial units etc. for sale)

COMPARISON OF SERVICE TAX IMPLICATIONS FOR INFRASTRUCTURE PROJECTS – PRE and POST 01.07.2012


Before 01.07.2012

Services provided to any person by way of construction of:(i) Road Non-taxable if for

general public useNon-taxable even if for private use

(ii) Bridge Non-taxable if for genera l public use

Non-taxable even if for private use


genera l public use if for private use

(iii) Tunnel Non-taxable if for general public use

Non-taxable even if for private use

(iv) Road transport terminal Non-taxable if for general public use

Non-taxable evenif for private use

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




Before 01.07.2012

(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 pollutioncontrol or effluent treatment plant (other



control or effluent treatment plant (other than as a part of factory)

taxability

(viii) Construction/Erection of structuremeant 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 NGO’s

Taxable Non-taxable



Before 01.07.2012

Services provided to any person by way of construction, erection, commissioning or installation of:(i) Airport Non-taxable Non-taxable

(ii) Port Non-taxable Non-taxable


(iii) Railway, including monorail or metro Non-taxable Non-taxable

(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

Non-taxable No specific exemption

(vi) post-harvest storage infrastructure for agricultural produce including a cold storage

Non-taxable Exempt by Notification



Before 01.07.2012

(vii) Mechanized food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages

Non-taxable Exempt by Notification

Repair, maintenance, alteration, renovation etc of all above items

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)

17/07/2012

renovation etc of all above items taxability

� 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:

TAXABILITY OF SUB -CONTRACTORS


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

17/07/2012

WORKS CONTRACT SERVICE


w.e.f. 01.07.2012

17/07/2012

� 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:

WORKS CONTRACT SERVICE

Construction Erection Commissioning Installation

Completion Fitting out Repair Maintenance

Alteration Renovation 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

17/07/2012

Alteration Renovation Other similar activity

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,


� “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

17/07/2012 32

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 A

(less) VAT / Sales tax B

(less) value of goods for State VAT purpose C

Taxable Value D = (A – B – C)

Tax payable would be 12.36% of D


• 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

17/07/2012 33

WORKS CONTRACT – PRESUMPTIVE VALUATION w.e.f. 01.07.2012

Works Contract

Original Works i.e. new constructions,

additions or alterations, erections

or installation

Maintenance, repairs, restoration,

reconditioning or servicing of goods

Others such as repairs, completion, finishing services in respect of immovable property


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

17/07/2012

Taxable portion – 40% Taxable portion – 70% Taxable portion – 60%

Effective tax rate – 4.94%



Rebate – 60% Rebate – 40%Rebate – 30%

� 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

WORKS CONTRACT – SOME ISSUES


• Plumbing

� Whether site formation and clearance contractor can charge Service tax

claiming rebate for new constructions?

17/07/2012

REVERSE CHARGE MECHANISM


w.e.f. 01.07.2012

17/07/2012

� 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

Service provider

Service recipientLiability of

Service Provider

Liability of Service

Receiver

GTA services Goodstransport agent

Specified persons paying freight

Nil 100%


agent

Sponsorship Services

Any person Any body corporate or partnership firm located in taxable territory

Nil 100%

Arbitration services

Arbitraltribunal

Business entity located in taxable territory

Nil 100%

Legal services Individualadvocate/firm of advocates


Nil 100%


Nature of Service

Service provider


Service Provider


Receiver

Specifiedsupport services

Governmentor local authority


Nil 100%

Rent-a-cab * (abatement availed)

Non-corporateentity

Business entity registered as a body corporate

Nil 100%


availed) corporate

Rent-a-cab * (abatement not availed)

Non-corporateentity


60% 40%

Supply of manpower for any purpose

Non-corporate entity


25% 75%

Works Contract Non-corporateentity


50% 50%


Nature of Service

Service provider


Service Provider


Receiver

Any service (popularlyknown - Import of service)

Person in non-taxable territory

Person in taxable territory

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

17/07/2012

� 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 – ISSUES


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)?

17/07/2012

� 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

REVERSE CHARGE MECHANISM – ISSUES


� 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?

17/07/2012

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


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

17/07/2012 42

THANK YOU


THANK YOU

17/07/2012 43

Documents

Real Estate Seminar 21-07-2012 CA Naresh Seth