SERVICE TAX ON REAL

ESTATE TRANSACTIONS

CA. Brijesh C. Verma, Agra

+91 98970 57757 brijeshvermaca@gmail.com

Facebook Page: CABrijeshVerma.ServiceTax

Background.

Construction Service.

Works Contract Service.

Peculiar issues for tax planning

purposes

2

CONTENTS

ENTRIES OF DECLARED LIST GOVERNING

REAL ESTATE

( Section 66E )

• 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;

• Service portion in execution of Works Contract.

3

CONSTRUCTION SERVICE

• First time introduced in the year 2004 w.e.f.

10.09.2004.

• Construction services.

• Circular No. 80/10/2004 dated 17.09.2004 Para

13.2.

• Consequently levy was restricted to only

Commercial complexes.

A HISTORICAL SEE THROUGH

• The 1.7.10 effect –

– Deemed service

– To/by

– Completion

• Effect of the change on:

– Service provided earlier

– Amount Received earlier.

Construction Services..... Contd….

• Commercial Construction

– Nature of services

– Coverage of charitable

– Coverage of government constructions.

Construction Services..... Contd….

• 16.06.2005 – birth of residential complex

construction service.

• Now 65(25b) related to commercial construction

and 65(30a) related to residential construction.

• K Raheja Havoc.

• Magus construction etc.

• Hare Krishna Developers (AAR).

Construction Services..... Contd….

• Valuation Principle (1-7-10 to 30-6-12)

– Option 1 – Full tax + Full Cenvat Credit.

– Option 2 – Abatement 75% (No Cenvat Credit, Land cost

included).

– Option 3 – Abatement 67% (No Cenvat Credit, Land cost

not included).

– Option 4 – Full tax on service portion by using 12/2003.

Construction Services..... Contd….

• Coverage –

– Negative list concept

– Not “IMAGE”

– Declared Service u/s 66E(b)

• Definition-

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.

CONSTRUCTION SERVICE (w.e.f. 01-07-

2012)

• Points for discussion-

– What is taxable

– Under what circumstances

– “Inclusive portion” – Relevance !!!

– Competent Authority – The practical problems and

misunderstanding

CONSTRUCTION SERVICE (w.e.f. 01-07-

2012)

– Tri-partite Model – (a) Land Owner (b) Builder/Developer (c)

Contractor

• Land owner – He sells land which is not a taxable service

and hence no service tax is payable by him on such

transaction.

• Builder/ Developer – receives two types of considerations

viz. Land rights (from land owner) and Cash from real

buyers.

• Contractors – Taxable as before (w.e.f. 10-09-2004). VA

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Construction Service (w.e.f. 01-07-2012)

SOME PRACTICAL

ISSUES……… Circular No. 151/2/2012-ST Dated 10.02.2012

Construction Service (w.e.f. 01-07-2012)

SOME PRACTICAL

ISSUES………

– BOT Projects (Build-Operate-Transfer)

• Govt. gives land to concessionaire – Lease is taxable (RC

Doesn’t apply)

• Concessionaire involves a contractor for construction –

construction service applies

• Concessionaire commercially exploits the constructed

complex – renting, space or time etc.

– Investor model.

– Re-development model.

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Circular No. 151/2/2012-ST Dated 10.02.2012

TAXABLE VALUE

Abatement @ 75%.

Conditions. The 67% abatement

???

What if we want to exclude land???

Applicability of Rule 2A

CENVAT CREDIT FACILITY

W.e.f. 01.07.2012

Input services &

Capital Goods

Definition of Exempt Services – Rule 2(e)

{the paradox}

Notification No. 26/2012

Inclusion of Free

Material.

Tax payable at the time of booking according to POT.

When cancelled, take use of 6(3) of STR 94 and take credit. [practical difficulty in disclosure].

6(1A), (4A) not to be used for this purpose.

CANCELLATION OF BOOKING

WORKS CONTRACT

SERVICE

WORKS CONTRACT SERVICE

• Section 66E(h).

• The name of this declared service is “Service Portion in

execution of a works contract”.

• Principally, only service portion is taxable .

• Ref 65B(44) exclusions.

• WC = a contract wherein transfer of property attracts sales

tax and contract is for construction, ECI, Completion, fitting

out, repair, mainetenance or renovation/ alteration of any

movable/ immovable property or any other similar activity.

– Section 67 (supreme)

– Rule 2A of ST(DOV)R 2007

This is subject to Section 67)

– 2A(i) – Value = Gross Amount less value of property

• Explanation

a) GA shall not include VAT

b) Value of WC shall include – labour, sub-contractor, architect,

Machine/tools hire, consumables, Cost of establishment of

labour, profit on labour and services.

c) If VAT is paid on actual basis then value adopted in VAT shall

be taken as Value of goods transferred.

VALUE OF WORKS

CONTRACT

Rule 2A(ii) – to be applied if 2A(i) is not applied.

Taxable Value

WC relating to Immovable Properties

1.

Original Works

=40% of Total Amount Charged

2.

Other Works = 60% of Total Amount

Charged

WC Relating to Movable Properties

3.

70% of Total Amount Charged

VALUE OF WORKS

CONTRACT

Amendment vide Union Budget 2014-2015 in Rule 2A of Service Tax (Determination of Value) Rules, 2006

Categories 2 and 3 have been merged into a single category with

percentage of service portion as 70%. This Change will come into effect

from 1st October, 2014.

Taxable Value

1. WC relating to Immovable Properties

Original Works

=40% of Total Amount Charged

2. WC Other than relating to 1 above

70% of Total Amount Charged

VALUE OF WORKS

CONTRACT

• Original Works –

– All new Constructions.

– Addition/Alterations to ABANDONED or DAMAGED

structures – to make them workable.

– ECI of P&M, whether pre-fabricated or otherwise.

• Total Amount –

– Gross Amount + FMV of goods and service supplied (FOC

by SP).

WORKS CONTRACT :OTHER ASPECTS

WORKS CONTRACT: CENVAT CREDIT

AVAILABILITY

Explanation 2: Prohibits CC of INPUTS

CC on Input Services as well as capital goods can

be taken

WORKS CONTRACT: REVERSE CHARGE

LIABILITY

• Under Notification 30/2012 RC applies to Work Contract

Services

• Conditions:

S.

No.

Service Provider

Category

Service

Receiver

Category

Whether

RC

Applies

% Payable

by SP

%

Payable

by SR

1. Ind/HUF/

Prop/Firm

BE regd as

BC.

Yes 50% 50%

2. Ind/HUF/

Prop/Firm

Person other

than BE regd

as BC.

No 100% 0%

3 BE Regd as BC Any Person No 100% 0%

PECULIAR ISSUES FOR

TAX PLANNING PURPOSES

ISSUE 1:

OPEN LAND

DEVELOPED , THEN

SALE AFTER DOING

PLOTTING

Such Activity will be considered as

Construction services.

With effect from 1-7-2012 (POST NEGATIVE LIST ERA) all

activities relating to construction fall within the purview of following

“Declared Services” under section 66E of finance act, 1994:

66E(b): 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.

66E(h): Service portion in the execution of a works contract.

Illustrative list of services in relation to

construction activities would be taxable:

• Construction of boundary wall,

• Construction of parking wall,

• Services in respect of cutting of plots and development of

colonies received by builders,

• Construction of residential complex and units ranging between

2-12 units (more than one unit),

• Construction of private roads,

Illustrative list of services in relation to

construction activities would be taxable:

• Construction services provided to non-commercial organization

in respect of building which are used for other than religious

purpose,

• Services provided in respect of construction of hospitals to any

person other than government or government authorities or local

authorities,

• Services provided in respect of construction of building to be

used for the purpose of education to any person other than

government or governmental authorities or local authorities.

Relevance of completion certificate in

construction services:

Completion certificate plays a vital role in determining the

taxability of activity. The entire activity of builder / developer

would be deemed to be service only if any amount has been

received prior to issuance of completion certificate by a competent

authority. If any amount is received after issuance of completion

certificate, then the activity would be a mere transfer of title in

immovable property and thereby doesn’t fall within definition of

service.

Relevance of completion certificate in

construction services:

“Competent authority” means the government or any authority

authorized to issue completion certificate under any law for the

time being in force and in case of non requirement of such

certificate from such authority, from any of the following namely:-

a) Architect registered with the council of architecture constituted

under the architects act, 1972 or

b) Chartered engineer registered with the institution of engineers

(India); or

c) Licensed surveyor of the respective local body of the city or

town or village or development or planning authority.

L&T VS. STATE OF

KARNATAKA –SC 2013

• Work related to roads/drains/water lines –

Considered as part of road- Hence

Exempted.

• Therefore, Developer could decide to pay

Service Tax on development Cost- On the

basis of accounting records or Certificate of

Chartered Engineer.

PREFRENCIAL

LOCATION

ISSUE

2:

Preferential Location: 10.09.2004 to 30.06.2010

Not subject to Service Tax because these charges did not

fall within the ambit of “Commercial or Industrial

Construction Services”, “Complex Construction Services” or “Management, Maintenance or

Repair Services”

Taxable: Section 65 (105) (zzzzu) Taxable service means any service

provided or to be provided to a buyer, by a builder of a residential complex,

or a commercial complex, or any other person authorised by such

builder, for providing preferential location or development of such

complex but does not include services covered under sub-clauses

(zzg), (zzq), (zzzh) and in relation to parking place.

Preferential Location: 10.09.2004 to 30.06.2010

Preferential Location: 01.07.2012 till date.

Taxable but Depend on:

No separate Consideration:

In this situation, exemption of 75% of

the gross amount charged will be

available.

Separate Consideration:

The amount charged on account of Preferential

location is taxable at the full rate [which is presently

12.36%] and not at abated rate

37

FREE MATERIALS

SUPPLIED BY THE

CONTRACTEE

ISSUE

3:

Under Lump sum Deduction service tax is payable at a specified

percentage of total amount i.e. total value of works contract including

value of free material supplied by customer either under same contract or

under different contract.

CENVAT credit cannot be availed of excise duty or cess paid on any

input goods, the property of which is transferred to customer.

Free Materials Supplied by the Contractee

Sr.

No. Particulars Taxable

Amount

1 Original Works (i.e. New Construction). 40%

2 Maintenance or repair or reconditioning. 70%

3 Other works Contract (Other than (1) & (2) above) 60%

4 If Construction contract (need not be works contract)

includes value of Land.

25%

% AMOUNT TAXABLE

TAXABILITY OF

VEHICLE PARKING

ISSUE 4:

41

1. COVERED VEHICLE

PARKING:

Taxability of Vehicle Parking

It is subject to Service Tax because space used for constructing the relevant space is considered as a part and parcel of the relevant building. As a result, Service Tax is payable at the same rate at which it is charged in respect of the remaining portion of the building.

42

2. OPEN VEHICLE PARKING

Taxability of Vehicle Parking

Amount Charged :

Taxable, Hence Service Tax shall be

levied.

Eg: In Cinema halls etc.

Vide Notification No. 03/2013- ST, the

exemption has been withdrawn. As a

result, service tax will be levied on the

parking charges collected w.e.f. January

1, 2013.

Amount Not Charged :

Not liable to service tax.

ELECTRIC

DISTRIBUTION SERVICE

ISSUE 5:

44

Covered under Section 66 D of the Finance Act,

1994. The term “electricity transmission or distribution utility” defined in Section

65B of the act covers within its ambit the following entities:

a. The Central Electricity Authority

b. A State Electricity Board

c. The Central Transmission Utility (CTU)

d. A State Transmission Utility (STU) notified under the Electricity Act, 2003

(36 of 2003)

e. A distribution or transmission licensee licensed under the said Act

f. Any other entity entrusted with such function by the Central or State

Government.

45

The services provided by way installation of gensets or

similar equipment by private contractors for distribution of

electricity would not be covered by this entry as this entry

does not cover services provided by private contractors.

Moreover the services provided are not by way of

transmission or distribution of electricity. All such activities

will attract service tax and cannot claim the benefit of the

section 66D.

Electricity Distribution service….. Cont…..

SALE OF SPACE OF

BUILDING ROOF

ISSUE 6:

47

No Service Tax is applicable.

Only sale of space of time on broadcasting media/

internet is taxable.

Taxable

Non-taxable

1.Sale of space or time for

advertisement to be broadcast on

radio or television

1. Sale of space for advertisement in

print media

2. Sale of time slot by a broadcasting

organization.

2. Sale of space for advertisement in

bill boards, public places, buildings,

conveyances, cell phones,

automated teller machines, internet.

3. Aerial Advertisement

CONSTRUCTION OF

CLUB

ISSUE

7:

1. Whether club actually

sold???

2. Still amount being

charged ?

3. What rate applicable ?

4. Is it a “residential

unit” ?

5. Definition of

construction u/s 66E(b).

6. Club membership –

Lifetime vs. annual.

IFMS

ISSUE

8:

51

Interest Free ??? Really ???

Adjustable vs. Non-Refundable

Income from IFMS

IFMS prior to formation of

society

One time deposits.

CONSTRUCTION

SERVICES TO

GOVERNMENT

ISSUE

9:

53

Govt. LA, Govt. Auth

Construction, erection, commissioning, installation,

completion, fitting, repair, maintenance, renovation or

alteration of: Civil structure, original work (purpose other than commerce or

industry, B/P)

Monument/ Archeological site

Structure predominantly for (i) Education (ii) Clinical (iii) Art or

cultural establishment

Canal, dam or irrigation

Pipeline/conduit for (i) water supply (ii) water treatment (iii)

Sewerage treatment

Residential complex (for self use, employees, MP, MLA etc)

[sarkari awaas]

Construction Service to Government… Cont…

CONSTRUCTION IN

RELATION TO GPU

PROPERTIES

ISSUE 10:

55

Construction, erection, commissioning, installation, completion, fitting out,

repair, maintenance, renovation or alteration of:

Road, bridge, tunnel or terminal – FOR ROAD TRANSPORTATION

FOR USE BY GENERAL PUBLIC.

Civil Structure or any other Original Work under JNURM or Rajiv

Awas Yojna.

Building owned by 12AA entity and MEANT PREDOMINANTLY

FOR RELIGIOUS USE BY GENERAL PUBLIC.

Pollution control, effluent treatment (both except Factory used),

Structure used for funeral, burial, cremation of deceased.

Construction in relation to GPU Properties… Cont…

OTHER

CONSTRUCTIONS OF

ORIGINAL WORKS

ISSUE 11:

57

Construction, erection, commissioning, installation of: Airport, Port or railways

Single residential unit otherwise than as a part of residential complex

Low cost houses (upto carpet area 60 Sq.mt.) under “Scheme Of Affordable

Houses in Partnership”

Post harvest storage Infrastructure for agriculture produce including a cold

storage for “such purpose”

Mechanised food grain handling system, machinery or equipment for units

processing agricultural produce as food stuff excluding alchoholic beverage.

Other Constructions of Original Works…. Cont…

ISSUE 12:

MISCELLANEOUS ISSUES

MISCELLANEOUS

ISSUES

ISSUE 12:

60

Flats to land owner

When a certain number of flats are given by the

builder/developer to a land owner in a collaborative agreement

to construct, in lieu of the land or development rights

transferred, in such case transferee would be required to pay

service tax on further sale of flats to customers, if any

consideration is received by him from any person before the

receipt of completion certificate.

ISSUE 12(1)

61

Joint Development Agreement Model Under this model, land owner and builder/developer join hands and

may either create a new entity or otherwise operate as an

unincorporated association, on partnership /joint / collaboration

basis, with mutuality of interest and to share common risk/profit

together.

The new entity undertakes construction on behalf of landowner and

builder/developer.

In such cases, service tax will be payable.

ISSUE 12(2)

62

In some cities, building is being demolished and new building

with better amenities and additional floor space Index (FSI) are

constructed.

In such cases, the existing owners of the flat are required to make

some payment for allotment of additional floor space in newly

constructed building.

Whether such amount received will be taxable for builder?

Yes, amount received by builder for allotment of additional floor

space would be liable for service tax.

ISSUE 12(3)

63

What if buyer of flat transfer before paying full installments

and before completion of building transfers, whether service

tax would be applicable or not on such transfer?

No, service tax would not be liable on such transfer as such

transfer does not fall in declared service entry as the said

person is not providing any construction service.

ISSUE 12(4)

64

CA. Brijesh Verma, Agra 98970 57757

brijeshvermaca@gmail.com

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