ST implication on REAL ESTATE SECTOR V.Raghuraman

ST implication on REAL ESTATE SECTOR

V.Raghuraman

Gannon Dunkerley & Company (Madras) Ltd AIR 1958 SC 560

No sale of goods involved in works contract

States does not have legislative competence to levy Sales tax on works contract

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Art. 366(29A) – 46th Amendment Act, 1982

tax on the sale or purchase of goods” includes (b) a tax on the transfer of property in goods

(whether as goods or in some other form) involved in the execution of a works contract;

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made

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Constitutional validity of Art. 366(29A)

Builders Association AIR 1989SC 1371

Gannon Dunkerly & Co. Vs. State of Rajastan, 1993 88 STC 204 SC

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Important issues under VAT on WC

Works contract Vs. Pure Servicei. Sasken Communications. Kar. HCii. Hindustan Shipyard Ltd. (2000) 119 STC 533 SC AIR 2000 SC 2411

Principal of accretion-State of Andhra Pradesh and others v. Larsen & Toubro Ltd. and others [2008] 17 VST 1(SC)

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Important issues under VAT on WC

Activities of developer of apartment- covered under works contract

Larsen & Toubro Ltd. 2013-TIOL-46-SC-CT-LB

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SERVICE TAX on Real estate activities

Gist of Background of ST on Real estate activities

Commercial construction

Residential Construction

Works Contract Services

Levy w.e.f.

10.09.2004 16.05.2005 1.6.2007

Levy on

Service of construction of a building structure meant /used for Business or Commerce

Construction of Residential Complex

Works Contract relating to certain Specified activities

Real estate agent services were brought to tax w.e.f. 16.10.1998

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Important circulars relating to levy on developer

Circular ref# Summary

80/10/2004-S.T., dated 17-9-2004

Estate Builders” (i.e. who get such construction done) are not covered under the ambit of these services

F.No.B1/6/2005-TRU dated 27.7.2005

Construction services provided by contractors to builder, promoters would get attracted

V/DGST/22/Audit/ Misc/1/2004, dated 16-2-2006

Builders are also covered under service tax net

Circular F. No. 332/35/2006-TRU, dated 1-8-2006

Builder is not liable but contractor who is engaged to construct the complex is liable. If no contractor is engaged but construction is done by Builder by employing labour, it becomes self service

Important circulars relating to levy on developer


96/7/2007-ST dt 23.08. 2007

Builder is not liable but contractor who is engaged to construct the complex is liable. If no contractor is engaged but construction is done by Builder by employing labour, it becomes self service

108/02/2009-ST dated 29.01.2009

- Builder is not liable-Transfer of immovable property and not service- Self service- Personal use

Trade Facility No. 1/2011, dated 15-2-2011

The Service of Construction of Residential Complex would attract service tax from 1-7-2010

Circular No. 151/2/2012-S.T., dated 10-2-2012

For the period prior to 1-7-2010 : construction service provided by the builder/developer will not be taxable,

Important circulars relating to Construction and Works Contract

Circular Summary

B1/16/2007-TRU, dated 22-5-2007

Contracts which are treated as works contract for the purpose of levy of VAT/sales tax shall also be treated as works contract for the purpose of levy of service tax

98/1/2008-S.T., dated 4-1-2008

Classification of a taxable service is determined based on the nature of service provided

128/10/2010-S.T., dated 24-8-2010

long term contracts are classifiable under ‘works contract services’

123/5/2010-TRU, dated 24-5-2010

It is the nature of the contract (i.e. a contract wherein the transfer of property in goods involved is leviable to a tax as sale of goods) rather than the nature of activities undertaken, that distinguishes construction / erection servicesIf the nature of the activities is such that they are excluded from aforesaid two services (construction or erection ) then they would generally remain excluded from this taxable service as well.

Important decisions relating BuildersCircular ref# Summary

Magus Construction Pvt. Ltd 2008 (11) S.T.R. 225 (Gau

Activities of developer amounts to transfer of immovable property and not service.

GS Promoters-2011 (21) S.T.R. 100 (P & H)

Validity of Explanation inserted w.e.f. 1.7.2010

Shrinandnagar’s-IV Co-op. Housing Society Ltd. 2011 (23) S.T.R. 439 (Guj.)

Amendment w.e.f. 1.7.2010 is only prospective in nature

Macromarvel Projects Vs. CCE, 2008(12) STR 603(Tri.-Chen)

Construction of individual residential houses does not attract service tax.

Civil appeal before SC against said order is dismissed -2012 (25) S.T.R. J154 (S.C.)]

Sujal Developers 2013 (31) S.T.R. 523 (Guj

Agreement between developer and the society which holds land, for development and construction of houses is not taxable under construction services.

Important decisions relating WCCircular ref# Summary

Nagarjuna Construcitons. 2012 (28) S.T.R. 561 (S.C.)

No Composition scheme for ongoing contracts as on 1.6.2007

CESTAT Large Bench decision in Bhayana Builders (P) Ltd.

Materials supplied free of cost by the recipient of service need not be included for the purpose of computation of abatement.

Ramky Infrastructure Ltd. v. Commissioner — 2013 (29) S.T.R. 33 (Tribunal)

Turnkey contracts / EPC even if the same is for non commercial purposes or for the purpose of irrigation or water supply etc., would be liable to service tax under works contract.

GD Builders, 2013-TIOL-908-HC-DEL-ST

The service portion of the composite contracts can be made subject matter of service tax. Aspect doctrine is applied for bifurcating/vivisect the composite contract

Important decisions relating WC


LARSEN & TOUBRO LTD2013 (32) S.T.R. 410 (Tri. - Del

Whether for period prior to 1-6-2007 such contract could be vivisected and service components subjected to tax under other pre-existing taxable services Matter referred to Larger Bench

2014-TIOL-1753-CESTAT-BANG

No service tax on builders till 1.7.2010Individuals who have paid ST to builder are eligible for refundLimitation: refund allowable if claimed within 1 year from date of payment to builder.

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SERVICE TAX UNDER NEGATIVE LIST SCHEME

Service tax –Negative List

Introduction to Negative List schemeService is being definedRenting, construction, software

etc are specifically termed as service as declared services

Certain services not liable - listed under negative list

Definition of Service

Any activity for considerationBy one person to another Includes declared servicesExcludes

Transfer of title in goods or immovable property Deemed sale in terms of Art. 366(29A) Transaction in money or actionable claim Functions of MP, MLA, Members of Panchayat or

Municipality or Local authority Services by employee to employer in the course

of employment

DEFINITIONS

(22) "declared service" means any activity carried out by a person for another person for consideration and declared as such under section 66E

(49) "support services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis

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DEFINITIONS

(54) "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 construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property

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DEFINITIONS- EXPLAINED

Contract in which transfer of property in goods involved in execution of such contract which is liable to VAT / Sales tax

And Such contract is for the purpose of : Construction Erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration

of any movable or immovable property or for carrying out any other similar activity or a part

thereof in relation to such property

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DECLARED SERVICES – SECTION 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.

(h) service portion in the execution of a works contract

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Explanation – for Construction.

(I) the expression "competent authority" means the Government or any authority authorised 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) Registered Architect; or (B) Registered Chartered engineer; or(C) licensed surveyor of respective local body of the city or town or village or development or planning authority;

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Explanation- for Construction

(II) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure;

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Construction activity

What are the activities covered 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

When it is taxable If consideration is received prior to issue of

completion certificate by the competent authorityConstruction" includes additions, alterations,

replacements or remodeling of any existing civil structure

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EXEMPTIONS

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Notification. No. 25/2012

Services provided to the United Nations or a specified international organization (Sl. No.1)

Services by an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) by way of charitable activities (Sl. No.4)

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Notification. No. 25/2012- Sl. No. 12

Provider Any person

Recipient Government or a local authority or governmental authorityGovernmental authority’’ means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution

Nature of Services

Construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of Specified structures of buildings:

V.Raghuraman

(a) a civil structure or original works predominantly for a non-industrial or non-commercial use;

(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity etc.;

(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;


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(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; Meaning “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit, “single residential unit” means an independent residential unit with specific facilities for living, cooking and sanitary requirements,

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Provider Any person

Recipient Any person

Nature of Services

Construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

(a) a road, bridge, tunnel, or terminal for road transportation for use by general public

(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

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(c) a building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public

(d) a pollution control or effluent treatment plant, except located as a part of a factory; or

(e) a structure meant for funeral, burial or cremation of deceased

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Provider Any person

Recipient Any person

Nature of Services

construction, erection, commissioning, or installation of original works pertaining to

(a) an airport, port or railways, including monorail or metro

(b) a single residential unit otherwise than 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

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(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes

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

Original Work: (i) all new constructions;(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise

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Services of sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt

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VALUATION&

ABATEMENTS

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Valuation rules- Specific Services-2A

Works contract services

Value of Service = Gross amount charged minus Value of Goods

Gross amount charged excludes VAT Sales Tax

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Works contract- Valuation

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Value of Service = Gross amount charged minus Value of Goods

Actual value of services

Option 1 Option 2

Original Works

Pay on 40% of Gross value

Pay on 70% of Gross value

Other than original Works

No CENVAT on inputs used for execution of WC

Valuation rules- Specific Services

Gross amount includesLabour charges for execution of the works;

Amount paid to a sub-contractor for labour and services

Charges for planning, designing and architect’s 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

other similar expenses relatable to supply of labour and services; and

profit earned by the service provider relatable to supply of labour and ser

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Valuation rules

Where VAT/Sales Tax is paid on actual value of goods transferred: Such value shall be treated as value for deducting

the value of goods

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Works Contract

If VAT is not paid on actual value then Nature of works Valuation

Original works 40% of the total amount charged

Maintenance, repair, reconditioning etc of goods

70% of the total amount charged

Other works including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property

Condition: No Credit of inputs shall be availedV.Raghuraman

Works Contract

Original Works:(i) all new constructions;(ii) all types of additions and alterations to

abandoned or damaged structures on land that are required to make them workable;

(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise

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Works Contract

(d) “total amount” 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:

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ABATEMENT- Notification No.26/2012

Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, etc.

Percentage of Abatement- 75%Conditions:

No Cenvat shall be availed on inputs Value of land is included in the amount charged from

the service receiver

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ABATEMENT- Notification No.26/2012

Nature of works Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, etc.

Percentage of Abatement-

Carpet area upto 2000 square feet and where the amount charged is less than rupees one crore;

75%(pay tax on 25%)

Others 70%(pay tax on 30%)

Condition: a)No Cenvat shall be availed on inputsb) Value of land is included in the amount charged from the service receiver

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PLACE OF PROVISION

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PLACE OF PROVISION

Applicable Rule

Rule 4- In respect of works contracts relating to movable propertyEg. Repair & maintenance

Rule 5- in case of immovable property related works contract and construction service

If services are provided at more than one location (one or more locations in taxable territory and one or more locations in non taxable territory)- location in the taxable territory where the greatest proportion of the service is provided

If both provider and recipient located within taxable territory- location of recipient see rule 8

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POPS immovable property:

Nature of services Place of provision

Services relating to immovable property Services directly directly in relation to an immovable property, including services provided in this regard by experts and estate agents, provision of hotel accommodation by a hotel, inn, guest house, club or campsite, by whatever, name called, grant of rights to use immovable property, services for carrying out or co-ordination of construction work, including architects or interior decorators,

place where the immovable property is located or intended to be located

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POINT OF TAXATION

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Point of Taxation in general

Rule 3 Earliest of following events would be the point

of taxation Date of invoice Date of completion of service (if invoice is not issued

within 30 days of completion of service) Date of receipt of advance (to the extent of advance)

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Proviso to R. 3: continuous supply of services

Meaning: services are to be provided on continuous basis or

recurrent basis under a contract for a period exceeding 3 months period with obligation for payment on periodical basis or from time to time

OR Notified by Government

Service Notified by Government Telecommunication services Service portion in works contract

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Rule 3 –continuous supply of services

Where contract provides for determination of value of service on periodical basis on completion of an event Date of completion of such specified event

Where no such event is specified General provisions under Rule 3 would apply

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Point of taxation for Construction service

If construction activity would last for more than 3 months and there is an obligation for payment on periodical basis or from time to time

Then in such case, completion of event or the period as provided in contract would be point of taxation

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Point of taxation for Works Contract

Notified by Government as Continuous Supply of service

If contract / agreement provides for payment on periodical basis then Each event or period shall be point of taxation

Else, follow Rule 3

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Rule 4 –Change in effective rate of tax

Meaning:Change in the rate of tax shall include

a change in the portion of value on which tax is payable in terms of a notification issued in the Official Gazette under the provisions of the Act, or rules made thereunder

i.e. change in the abatements, composition rates etc.

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Change in Effective RateProvision of service

Invoice &/or payment Rate applicable

Point of Taxation

Before rate change

Either invoice is issued or payment is received before rate change

OLD RATE

Date of invoice or payment whichever is earlierAfter

rate change

If both invoice as well as payment is received before rate change

OLD RATE

In all other cases NEW RATE

Date of invoice or payment whichever is later

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Rule 5 new services:

Situation Taxability

Where invoice has been issued and the payment received against such invoice before service became taxable

No tax shall be payable to the extent of the invoice raised and payment received.

Invoice issued before service became taxable but consideration received after the same became taxable

Liable to the extent received

Where the payment has been received before the service becomes taxable and invoice has been issued within 30 days as specified in rule 4A of the Service Tax Rules, 1994.

No tax shall be payable

Where invoice is not issued within 30days Taxable

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Rule 7:Services still taxable on payment basis

Services where person other than provider of service is liable to pay tax [68(2)] GTA, import of service, Sponsorship, manpower supply,

works contract

If payment is not made within 6 months from date of invoice- then Rule 3 would be applicable

Service tax payable as recipient of works contract service would be on the basis of payment made to contractor

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REVERSE CHARGE OR

JOINT CHARGE

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Nature of service

Provider Recipient Person liable

Works contract

IndividualPartnership,AOP

Business entity registered as a Body corporate

Proportionate basis by Recipient and provider if both are located in taxable territory

50% each

Both provider and recipient could adopt their own valuation methods

Business Entity & Person

(i) an individual,(ii) a H U F,(iii) a company,(iv) a society,(v) a LLP,(vi) a firm,

(vii) an association of persons or body of individuals, whether incorporated or not,

(viii) Government,(ix) a local authority, or(x) every artificial juridical person,

not falling within any of the preceding sub-clauses;

(17) "business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession;

(37) Person includes:

Business entity

Business entity registered as a Body Corporate – Section 2(7) of Companies Act, 1956.

Society which is deemed to be a body corporate as per Societies Registration Act, cannot be termed as ‘body corporate’ for reverse unless the same is registered as such.

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Questions?

EMAIL ID : [email protected]

Thank You

V.RAGHURAMAN.B Com, FCA, ACS, Grad.CWA LLB,

Partner M/s.. Raghuraman & Chythanya, Advocates.

V.Raghuraman

Documents

ST implication on REAL ESTATE SECTOR V.Raghuraman