WORKS CONTRACT: SERVICE TAX & VAT ISSUES: By:- Puneet Agrawal Partner Athena Law Associates INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

WORKS CONTRACT: SERVICE TAX & VAT ISSUES:

By:- Puneet Agrawal

Partner

Athena Law Associates

INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Issues for discussion

• Meaning and implications of a works contract• Taxability of works contracts

– Various options available to Contractor for discharge of his Liability for payment of Service Tax and VAT

– ITC and Cenvat Credit availability– Issue relating to Free issue materials– EPC contracts – specific reference to service tax– Taxability of Inter state works contracts and sale against Form C– Tax deduction at source – WCT– Exclusion of sub-contractor’s turnover

• Developer’s Liability under the JDA/ Collaboration Agreement• Land Owners’ Liability of service tax

– Flats sold to buyers– Transfer of Development Rights to the Developer

Concept of works contract

History of taxation of Works Contracts

• Concept of Sales and imposition of sales tax• Fictions introduced to deem certain transactions as

sale for levying sales tax. • Subsequently came the much anticipated Service tax

in 1994.• Service tax on Construction, Erection/

Commissioning and Installation (2003-2006)• Service tax on Works Contract Service• Taxation by way of negative list

• Sales tax is a tax charged on the transaction of sale of goods.

Sales Tax / VAT

Union Government-92A, List I

State Government-Entry 54 List II, subject

to Entry 92A, List I

Central Sales Tax- inter state sale

State VAT- Sale within the State

Constitutional Entries

SERVICE TAX

Service Tax is a tax levied on transaction for rendering service which is provided as a taxable service in the Act.

SERVICE TAX

Entry 97, List I – Service tax residuary

head.

Entry 92C, List I- taxes on service introduced (95th

Amendment) -Yet to be notified

Constitutional Entries

States – no power to charge service tax

2nd Leg

Construction agreements

Labour contracts Composite contracts

Analysis of construction contracts

Labour contracts : - no VAT as no transfer of property- Service tax on full value- No reverse charge under service tax

Composite and indivisible contracts: • Gannon Dunkerley I:

– Works Contracts do not involve any sale of goods:• Agreement for Transfer of property in immovables – no goods• No agreement for sale of goods – rather agreement for construction

• Gannon Dunkerley II- VAT on material portion of contract- Service Tax on Service portion

Basis of valuation – Constitutional framework

Basis of Valuation

Article 366 (29A) - 'Tax on the sale or purchase of goods includes' –

(b) a tax on the transfer of the 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 he 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;"

Gannon Dunkerley 88 STC 204 (SC)

Value of the goods in works contract =

Value of the entire works contract (Less)

charges towards labour and services

Labour and Service means…

Formula given by Gannon Dunkerley

(a) labour charges for execution of the works;

(b) amount paid to a sub-contractor for labour and services;

(c) charges for planning, designing and architect's fees;

(d) charges for obtaining on hire or otherwise machinery and tools used for the execution of the works contract;

(e) cost of consumables such as water, electricity, fuel, etc., used in the execution of the works contract the property in which is not transferred in the course of execution of a works contract; and

(f) cost of establishment of the contractor to the extent it is relatable to supply of labour and services;

(g) other similar expenses relatable to supply of labour and services

(b) profit earned by the contractor to the extent it is relatable to supply of labour and services.

The amounts deductible under these heads will have to be determined in the light of the facts of a particular case on the basis of the material produced by the contractor.

Valuation contd…

Labour and services

35%

Value of mate-rials transferred

45%

General overheads10%

Profit10%

Sales

Various methods of valuation under VAT

and Service tax

Method 1: Actual Method /General Scheme

Method 1: Actual Method/General Scheme

• Applicable where actual value of labour and service charges are known to the contractor

• Value: Taxable amount liable to VAT is determined by deducting actual value of labour and service charges from the total amount charged [Section 5(2) r/w Rule 3]

• Rate of DVAT: VAT is charged @ 12.5% on the taxable amount. However, declared goods supplied would be taxable @ 5% [Section 4(1)(d)]

• ITC: Input credit of VAT paid on inputs is available [Section 9]

Valuation under DVAT

Taxable Turnover - Section 5(2)-DVAT Act

Section 5

…..

(2) In the case of turnover arising from the execution of a works contract, the amount included in taxable turnover is the total consideration paid or payable to the dealer under the contract excluding the charges towards labour, services and other like charges, subject to such conditions as may be prescribed:

Provided that where the amount of charges towards labour, services and other like charges is not ascertainable from the books of accounts of the dealer, the amount of such charges shall be calculated at the prescribed percentages.


Rule 3 of DVAT Rules – Taxable Turnover

Works contract (Rule 3). –

(1) In case of turnover arising from the execution of the works contract, the amount representing the taxable turnover shall be the value at the time of transfer of property in goods (whether as goods or in some other form) involved in the execution of work contract and shall exclude -

(i) the charges towards labour, services and other like charges; and

(ii) the charges towards cost of land, if any, in civil works contracts;

subject to the dealer's maintaining proper records such as invoice, voucher, challan or any other document evidencing payment of referred charges to the satisfaction of the Commissioner.

- Thereafter same deductions as under Gannon Dunkerley have been specified


Method 1: Service tax

• Valuation Rules – Rule 2A

(i) Value of service portion =

gross amount charged

less

value of property in goods transferred in the execution of the said works contract.

(a) gross amount charged shall not include VAT/ sales tax

(b) value of works contract service shall include, -

‘same as Gannon Dunkerley’

Contd..

- Where VAT has been calculated on the actual value of property in goods transferred

- then, such value shall be taken even for service tax

Rate/Cenvat

• Rate of Tax: 12.36%• Cenvat Credit:

– Excise Duty paid on inputs – not available – Excise Duty paid on capital goods –available – Service Tax paid on input services –available

Method 2: Percentage reduction/ Ad-hoc method

Method 2: VAT

• Value: In case the actual amount of labour and service charges are not ascertainable from the books of accounts of the dealer the amount of such charges shall be calculated at the specified percentages (Rule 3)

• For eg – in DVAT prescribed percentage for civil works contractor - 25%– Contracts not covered in the list – 20%

• Rate of DVAT: VAT is charged @ 12.5% on the taxable amount. However, declared goods supplied would be taxable @ 5% [Section 4(1)(d)]

• ITC: Input credit of VAT paid on inputs is available [Section 9]


Method 2: Service tax

(ii) Where the value has not been determined under actual value method, the service portion involved in the execution of the works contract shall be :-

S. No Type of WORKS CONTRACT % Value

1. Original works 40% of the total amount charged

2. Other works contracts, not covered under sub-clause (A) including:a) Maintenance or repair or reconditioning or

restoration or servicing of any goods, or b) maintenance, repair, completion and finishing

services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property

70% of the total amount charged

Contd..

(a) "original works" means-

(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;

Contd…

Meaning of Total Amount

(b) "total amount" means • Gross amount charged for the works contract, and • 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:

Fair market value of goods and services to be determined as per GAAP

Issues in 2nd method – service tax

S. No

Contract for Contractor’s responsibility

Contractee’s responsibility

1. fixing tiles Cement and other fixing material

Tiles

2. Welding Welding electrodes Gate/windows

3. Maintenance of car

Parts of the mechanic Car

4. E+P+C Everything but under separate contracts

--

E+P+C Contracts

Engineering (Service Tax)15%

Procure-ment

(Sales Tax)70%

Construction (Works contract - both)

15%

Sales

Rate/Cenvat – Method 2

• Rate of Tax: 12.36%• Cenvat Credit:

– Excise Duty paid on inputs – not available – Excise Duty paid on capital goods –available – Service Tax paid on input services –available

Method 3: Composition Scheme

Method 3: New Composition scheme

• New composition scheme is issued vide NOTIFICATION No.3(13)/Fin.(Rev-I)/2012-13/dsvi/180/ Dated 28th February, 2013

• VAT rate for dealers opting for composition scheme is lower than the general rate of VAT

Type of dealer Composition VAT rate (Scheme A)

Composition VAT rate (Scheme A)

Every registered dealer engaged in construction, of a complex, building, civil structure or a part thereof, including a residential unit or a complex or building, for sale whether wholly or partly, to a buyer before construction is complete, where the value of land is included in the total consideration.Note: Contracts where the entire consideration is received after issuance of completion certificate by the competent authority are excluded here

1% 3%



Scheme A: Particular conditions • A registered dealer opting to pay composition tax under this Scheme shall: • (i) not purchase or procure goods from any place outside Delhi at any time during

the period for which he opts to avail this Scheme; and • (ii) not sell or supply goods to any place outside Delhi at any time during the period

for which he opts to avail this Scheme. • However, he may procure his own Plant & Machinery and Equipments from outside

Delhi, meant exclusively for use in execution of the works contract by him.



Scheme B: Particular conditions • A registered dealer shall be entitled to make purchases of goods required for the

execution of the contract in the course of inter-State trade or commerce on the strength of his certificate of registration against declaration in Form-C or by way of inward transfer of stocks from other States against Form-F or by way of imports from other countries solely for the purposes of utilizing the same in the execution of works contract in Delhi only,:

• Provided the dealer shall use the material/ goods imported or procured from outside Delhi strictly for use in execution of the works contract transactions.



General conditions (Scheme A and Scheme B

(1) The composition dealer opting for composition under this notification, shall: (i) not purchase or procure goods, other than those specified in the First Schedule appended to the Act,

within Delhi, from a person who is not registered under the Act, except to the extent of 2% of his total purchase turnover during the year or " 25 lakhs, whichever is lower;

(ii) not be eligible to claim tax credit under section 9 and/ or section 15 of the Act;

(iii) not compute his net tax under section 11 of the Act;

(iv) not collect any amount by way of tax under the Act;

(v) not be entitled to issue 'Tax Invoices';

(vi) continue to retain the originals of all tax invoices and all the retail invoices for all his purchases and copies of all retail invoices issued by him as required under section 48 of the Act;

(vii) maintain separate records of all the purchases made within Delhi, or in the course of interState trade or commerce and by way of transfer of stock or from outside India;

(viii) issue only Retail Invoices, as per provisions of the Act and the Delhi Value Added Tax Rules, 2005 (hereinafter called 'the Rules');

(2) All the provisions of the Act and the Rules, in so far as the same are not contrary to and inconsistent with this notification shall apply mutatis mutandis.



General conditions (Scheme A and Scheme B)

(4) The term "sub-contractor" means any person who has been awarded a works contract by the main contractor, or the sub-contractor, as the case may be.

(5) A dealer who opts to pay composition tax under the notification and executes different types of works contracts which are liable to tax at different rates under this notification, shall pay tax according to the rate applicable to each of such contracts.

(6) The term "Turnover" for the purposes of this composition scheme means: (i) In relation to the category at serial No. (1) and (3), in Table total consideration, received or receivable by the dealer under the

contract for transfer of property in goods (whether as goods or in some other form) involved in the execution of the contract together with the charges for labour, services and other like charges.

(ii) In relation to the category at serial No. 2, in Table the total consideration received or receivable by the dealer under the contract for transfer of property in goods (whether as goods or in some other form) involved in the execution of the contract, including the value of land, charges for supply of labour and services and other like charges.

(7) The tax period for the composition dealer shall be a quarter, unless otherwise prescribed by the Commissioner for a dealer or class of dealers. However, the tax due shall be paid by the composition dealer on monthly basis, within 21 days of the end of the month.

(8) In case a dealer has opted for this scheme but has failed to comply with the conditions specified herein or who, at any later stage, is found not eligible for having opted for this Scheme, all the provisions of the Act and Rules including the liability to pay tax under section 3, if any, shall apply mutatis mutandis as if the dealer had never opted for the composition scheme, from the financial year in which default had been committed and the amount deposited by such dealer as the composition tax, if any, shall stand forfeited.


Method 3: Old Composition scheme

• Under composition scheme VAT is levied on total contract value inclusive of service amount

• VAT rate for dealers opting for composition scheme is lower than the general rate of VAT

• Every registered dealer engaged exclusively in works contracts of the nature of civil construction i.e. construction, electrification, fitting out, improvement or repair of any building or complex, residential or commercial, bridge, flyover, dam or other similar structure or of any canal or road or such other similar activities as may be specified by the Commissioner from time to time.

Type of dealer Composition VAT rate

Dealer only engaged in sale or purchase of goods within Delhi 2.5%

Dealer engaged in making inter state procurements or supply of goods 3%


Method 3: Old Composition scheme

Special features – DVAT composition • The contractor opting for composition are not allowed to import

goods from outside India• Contractor cannot make inter state procurements against any

statutory form such as Form C• No Input tax credit is available• Contractor opting for composition cannot collect any amount by way

of VAT from the buyer• Contractor cannot issue tax invoice to the purchaser • No purchase from unregistered dealer • If sub contractor also opts for composition, then he need not pay tax• Applies to whole financial year


Service tax: Composition scheme

Service tax• Now no scheme of composition in service

tax

Other deductions from turnover

Inter State Works Contract

Exclusion of inter state sales etc

Gannon Dunkerley• We may, however, make it clear that apart from the

deductions referred to above, it will be necessary to exclude from the value of the works contract the value of the goods which are not taxable in view of sections 3, 4 and 5 of the Central Sales Tax Act and goods covered by sections 14 and 15 of the Central Sales Tax Act as well as goods which are exempt from tax under the sales tax legislation of the State. The value of goods involved in the execution of a works contract will have to be determined after making these deductions and exclusions from the value of the works contract.

Exclusion of inter state sales etc-DVAT Act

Section 5• taxable turnover means dealer's turnover less turnover of sales not subject to tax

under section 7

7. Certain sales not liable to tax. - Nothing contained in this Act or the rules made thereunder shall be deemed to impose or authorise the imposition of tax on any sale of goods when such sale takes place -

(a) in the course of inter-state trade or commerce; or

(b) outside Delhi; or

(c) in the course of import of the goods into or export of the goods out of, the territory of India.

………

Explanation . - Sections 3, 4 and 5 of the Central Sales Tax Act, 1956 (74 of 1956) shall apply for determining whether or not a particular sale takes place in the manner indicated in clause (a), clause (b) or clause (c) of this section.

Interstate works Contract

L&T 132 STC 272 (AP)

• Goods manufactured outside AP and later sent to AP for execution of works contract

ECE industries 144 STC 605 (Karnataka)

• Lift manufactured in UP and sent to Karnataka

CVT Vs. State of Haryana 23 VST 10 (CSTAA)

• Ready mix concrete sent from Haryana for use in Delhi

Deduction of Sub-contractor turnover

L&T 17 VST 1 (SC)• in works contract, transfer of property by way of accretion • Sub contractor when affixes goods on property of contractee, property in such goods get

transferred • It never becomes property of the main contractor • It is directly a sale by sub-contractor to the contractee and therefore sub-contractors

turnovers excludable from turnover of main contractor• Relied upon builders association 73 STC 370

Doshion veolia dated 23 December 2009 (Commissioner DVAT)• Distinguished L&T• Property gets transferred prior to accretion• Provisions of DVAT different from AP VAT • L&T matter reserved for orders by Delhi HC on this issue in a writ against assessment order

L&T WP No. 1907/2012 (Del) – judgment dated 01.06.2012• Held that subcontractor turnover cannot be excluded – because of VAT regime. Now

review pending.

Issuance of Form C

Form C by contractor:• Since contractor is transferring the property in goods

during execution of works contract it is allowed to purchase goods against form C (Section 8 (3)(b))

Exemptions allowed under service tax

Notification 25/2012-ST12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of -

(a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession;

(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (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 Act;

Notification 25/2012-ST13. Services provided by way of 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;

(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;

http://www.taxmanagementindia.com/visitor/detail_act.asp?ID=3166

http://www.taxmanagementindia.com/Site-Map/Income_Tax/List_Act_ITAct.asp

Notification 25/2012-ST

14. Services by way of 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;

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

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

Single Residential Unit

• (ze)“single residential unit” means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family;

• (zc) “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit;

Notification 25/2012-ST

29. Services by the following persons in respective capacities -(a) sub-broker or an authorised person to a stock broker;(b) authorised person to a member of a commodity exchange;(c) mutual fund agent to a mutual fund or asset management company;(d) distributor to a mutual fund or asset management company;(e) selling or marketing agent of lottery tickets to a distributer or a selling agent;(f) selling agent or a distributer of SIM cards or recharge coupon vouchers;(g) business facilitator or a business correspondent to a banking company or an insurance company, in a rural area; or(h) sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt;

Free Issue Materials

• Contract value (including Steel) = Rs. 100• Steel given by Builder to Contractor• Bill of Contractor

– Contract Value – Rs. 100– Less: Steel – Rs. 20– Net Value – Rs. 80

• Applicability of N.M. Goel Judgment (SC)

Extension of the concept

• Builder’s / Developer’s Transaction (Real estate sector)

Buyer

Contractor

Developer (Commrcl/ Residential property)

Landowner

•3rd Leg – Sale of Units

•2nd leg - Construction contract

•1st leg - Agreement for land

Real estate sector – parties and transactions

BUILDER’S/ DEVELOPER’S LIABILITY ON SALE OF UNITS

Sale of constructed units - 3rd Leg

Builder’s/ Developer’s liability – position prior to L&T judgment

K. Raheja Development Corporation 2006 (3) STR 337 SC Agreement entered with buyers prior to construction Agreement made reference to construction Agreement referred to lien over the property For all these reasons, it was held that agreement with prospective

purchasers is a works contract

Assotech Realty Pvt. Ltd 2007 (7) STR 129 (ALL) Remanded by SC and again decided in favour by the Tribunal

Assotech Supertech Pvt. Ltd 2008 Uttara – relied on Raheja (SC)

Assotech Realty Pvt. Ltd 2010 Tribunal UP – No tax - relied on Magus (Gau)

Builder’s/ Developer’s liability

Magus Construction Pvt. Ltd 2008 (11) STR 225 (Gau)~ It was held that petitioners constructing building for their own self~ Amount received in advance is against sale of future immovable

property~ Distinguished K. Raheja on the basis of the fact that in that case

contract was for construction whereas the contract in this case is for sale of immovable property

L&T Vs. State of Karnataka 17 VST 460 (SC)= 12 STR 257(SC)~ Doubted K. Raheja and referred to the mater to larger bench~ It was held that there is a difference between contract of sale and works

contractMAHARASHTRA CHAMBER OF HOUSING INDUSTRY AND

ANOTHER (2012-VIL-15-BOM-ST)~ Upheld the constitutional validity of section charging sales tax on

developers

Special provisions regarding developers liability

Haryana (Circular No. 152/ST-1 dated 7 May 2013)– Developers/ builders are liable to pay tax as works contractor, if the agreement

is entered into between developer and prospective buyer for sale of fully constructed apartment before/during construction but before the completion of construction,

– Developers/ builders need to be registered under HVAT Act, and – Developers/ builders are required to file return in Form VAT R-1 (for normal

dealer) or VAT R-6 (for lumpsum dealer).– Circular has followed the judgment of K. Raheja Development Corporation V.

State of Karnataka 141 STC 298


Maharashtra• Sec 42(3A) provides:

The State Government may, by notification published in the Official Gazette,-

(a) provide a scheme of composition for the registered dealers who undertake the construction of flats, dwellings or buildings or premises and transfer them in pursuance of an agreement along with the land or interest underlying the land;

(b) prescribe the rate of tax by way of composition, in lieu of the amount of tax payable on the transfer of goods (whether as goods or in some other form), in the execution of such works contracts by such registered dealer under this Act.

• A registered dealer who undertakes the construction of flats and transfer them in pursuance of an agreement along-with land or interest underlying the land -- 1% (Notification)


Andhra Pradesh• Section 4(7)(d)

(d) every dealer engaged in construction and selling of residential apartments, houses, buildings or commercial complexes may, in lieu of the amount of tax payable by him under clause (a) opt to pay tax by way of composition at the rate of five percent (5%) on twenty five percent (25%) of the amount, received or receivable towards the composite value of both the land and building or the market value fixed therefor for the purpose of stamp duty, whichever is higher, subject to such conditions as may be prescribed:


Punjab

Developers paying VAT on the materials they purchase.

The said materials are assumed to be resold at the same price.

No profit added

Tax liability on inter state purchases

Inter state purchases against Form C

Uttar Pradesh

Developers paying VAT on the materials they purchase.

The said materials are assumed to be resold and Profit at a certain % is assumed

Inter state purchases against Form C

L&T (SC - LARGER BENCH)

Premise of the judgment and Facts involved

Matters before SC

• SC decided 26 appeals:– 14 from Karnataka– 12 from Maharashtra

Facts of the Lead case (Karnataka)

• L&T entered into Development agreement with owner of land• Owner contributed the land and L&T was to do the construction of

complex• After development

– 25% of total salable area was to belong to the Owner, and – 75% to L&T

• L&T entered into agreements with intended purchasers• The Agreements provided:

– on completion of construction, the apartment would be handed over to purchasers along with undivided interest in land

– Sale deeds were executed in favour of intending purchasers by L&T and Owners

Facts of the Maharashtra case

• Challenged the Constitutional validity of:– Explanation added to section 2(24) of the MVAT Act including within

the definition of sale – transfer of property in goods involved in an agreement for building and construction of immovable property,

– Rule 58(1A) which provided for exclusion of value of land for determining value of goods, and provided that value of land shall be excluded based upon Circle Rates under Stamp Law

– Notification and Circulars allied to above

TESTS LAID DOWN IN L&T

VAT on works contracts

Conditions for Levy of VAT on WC

Three conditions must be fulfilled [Para 94 of L&T case]:(i) there must be a works contract,

(ii) the goods should have been involved in the execution of a works contract, and

(iii) the property in those goods must be transferred to a third party either as goods or in some other form

Application to building contracts

• Para 94– In a building contract or any contract to do construction,

the above three things are fully met. – In a contract to build a flat there will necessarily be a sale

of goods element. – Works contracts also include building contracts and

therefore without any fear of contradiction it can be stated that building contracts are species of the works contract

Sale of building under construction

• Date of Agreement with flat buyer [para 115]: – Works contract begins only after date of agreement– Value addition made to goods transferred after that date is

chargeable to VAT

• Goods transferred prior to agreement, no VAT chargeable

Sale of completed building

• If building is complete and agreement entered thereafter [para 118]– There is no construction contract– Goods used in construction: no sale to flat buyer

Factors that do not matter

• Contract for sale entered during construction is a works entered (to the extent materials are used after the agreement)

• Following factors do not make any difference– the flat purchaser has no control over the type and standard of the material to

be used in the construction – he does not get any right to monitor or supervise the construction activity – he has no say in the designing or lay-out of the building

[Para 93]

• The Agreement is for Immovable property still it can be a works contract• Thus essentially it seems that following shall coexist:

– VAT in value of goods transferred– Stamp Duty on value of immovable property transferred

VALUE FOR PAYMENT OF VATPrinciples laid down in L&T case

Value for payment of VAT

• No VAT chargeable on goods incorporated before Agreement• VAT chargeable on goods incorporated after Agreement, even

if property passes after incorporation [at the time of sale deed]• Measure for levy of VAT [para 101]

– Value of goods at the time of incorporation in the WORKS

• This shall include the following:– Cost of goods which are transferred– Overheads attributable to the abovesaid goods– Profit attributable to the abovesaid goods

Exclusion of value of Land

• Value is generally determined as follows:

– Value of goods = Total sale price – [Value of labour/ Services + Value of Land]

• Provision for determining value should not purport to tax the transfer of immovable property [para 124]

– Rule 58(1A) of MVAT Rules providing for reduction of value of land based upon Circle rates under Stamp Law thus READ DOWN by SC

• In our view, the SC has held that value of land to be excluded based upon actual value (or some close substitute)

• Exclusion of value of land based upon CIRCLE RATES for STAMP DUTY rejected by SC

L&T CASE: CONCLUSION AND ISSUES UNANSWERED

Confusion galore

Conclusions

• Levy– Agreement for sale of Flat during construction amounts to works contract – Buyer becomes owner on execution of sale deed does not matter– Buyer has no control over plans, use of materials and no right of

supervision does not matter

• Value:– Value of goods transferred after entering into agreement is chargeable to

VAT– Measure of tax is to be the “Value of goods” at the time of incorporation

in the WORKS– For determining value of goods, value of labour/ services and land shall

be excluded– Value of land cannot be based upon Circle rates

Several issues which shall arise

• Value for levy of VAT: there are several flats in group housing and Flat Buyer Agreements entered periodically

• Issues relating to Input Tax Credit of tax paid on inputs– Tax paid on materials transferred after agreement, corresponding ITC may also

be unavailable

• VAT for previous periods: – Assessments may be reopened for maximum permissible periods– ITC may be unavailable in absence of Tax/ VAT invoices– Tax may be unrecoverable from buyers as sale deed already executed– Interest and penalties

• Service tax on works contracts: Period 2007-2010

• ………

L&T CASE: VAT AUTHORITIES PERSPECTIVE

Seeing a chance of extracting huge tax

Authorities Perspective

• Traditionally Value for purpose of VAT determined by deductive method:Value of goods = Total contract value – value of labour and services

• Authorities seeking to extend the formula by excluding cost of land. Thereby indirectly seek to charge tax on:– value addition in the value of land, and – expenses unrelated to transfer of property in goods. For example:

• Change of land use charges, • Conversion charges,• Charges for sanctioning and processing of maps, • License fee and license renewal fee,• Charges for fire , forest, environment, aviation, Pollution and other approvals• Marketing and advertisement expenses, • Brokerage,• Finance charges,• Several other charges

Illustration

• Historical Cost of land – 5 Lakh • Current value – 500 Lakh• Construction cost including fair profit

– Materials – 30 Lakh, – Labour and services – 20 Lakh

• Sale price of Building - 700 Lakh• VAT on materials:

– Value Rs 30 Lakh– Already tax paid by the sub contractors

• As per Deptt– Value for VAT:

• Sale price of building: 700 • (Less) Labour: 20• (Less) Cost of Land: 5

– NET = 675• Some sympathetic officers may also allow profit and overheads related to labour and land to be deducted on

a proportionate basis

Our view

• Tax is on “transfer of property in goods in execution of works contract”,

• The legislation/ authorities cannot bring to tax portions of value over and above materials transferred in course of execution of works contract

• We are arguing:– Deductive method without providing for all exclusions is

unconstitutional– In any case, the Court is to read down the said formulae in a

manner that only the value of materials is taxed– Stay given by P&H HC in CHD Developers & Ors case

Form C/ ITC

Form C by developer• Since developer is engaged in making sales by way of

execution of works contract – can certainly issue Form C

ITC• Being chargeable to tax, ITC also allowed • Provisions of ITC as they apply to a works contractor apply

Our suggestion post L&T

• Post L&T – very imp to get registered– Buy against Form C– Buy against tax invoices – in case of assessments, at least VAT ITC available– Make record of area sold and materials consumed each month – Proper sub – contractor data

• That they are registered• That they are paying tax after including turnover of sales made to Developer• Certification from the sub-contractor with appropriate workings

– When still no VAT being charged by the WBVAT Deptt – write a letter to the deptt explaining the position:

• as per the Co. no tax payable • No enabling provisions under the VAT Act• Still registration taken, and goods being procured against Form C• Deptt may clarify

Service Tax - Charging section - 66B

• There shall be levied a tax (hereinafter referred to as the service tax)

• at the rate of twelve per cent • on the value (section 67) – no change• of all services, [section 65B(44) read with 66E]• other than those services specified in the negative list, -

(Section 66D)• provided or agreed to be provided • in the taxable territory [section 65B(51)]• by one person to another, and [Section 65B(37)]• Collected in such manner as may be prescribed

Declared Service – S. 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;

Service tax liabilityDeclared Service

(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.

Notification 26/2012-ST - abatements

Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority – 25 (30% in some cases)

Conditions –

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004.

(ii)The value of land is included in the amount charged from the service receiver.

http://www.taxmanagementindia.com/Site-Map/Cenvat%20Credit/List_Rule.asp

Abatement on

• Tax rate on:– BSP– EDC/IDC– PLC, EEC– Parking– Club

• F.No.V/St-1/Tech-II/463/11 Mumbai dated 31st August, 2012 - Clarification regarding service tax on construction industry

Cenvat to developers

• For enabling Cenvat – provisions specially made• Input services definition amended• Capital goods like –

– gensets, transformers, pipes, electrical equipments – – Not capitalised in books

Partial exemption not compulsory

• Developers in fitting cases may not opt for exemption – Exemptions are always optional– The exemption of 75% is very expensive when the value of land is

very high – say in Metros– Cost of Land 90% of flat value or above– Value of construction services very low– Becomes pain when negotiation of all inclusive price

• Tax is on construction:– In the earlier example:

• Tax under abatement – 700 Lakh X 30% X 12.36% = 26 Lakh (Approx)• More than service value• pay service tax on 20 Lakhs X 12.36% = 2.50 Lakh (approx)• If this method followed, make appropriate disclosures to the Deptt

DEVELOPER’S LIABILITY

Developer’s liability under JDAs / Collaboration Agreements

Taxability under JDA

• Developer’s liability– Like normal construction work (2nd Leg)– Chargeable to service tax and VAT as a works contract– Service tax payable as per POT Rules:

• POT: taxable when development and sale rights are received, – Agreement clauses determine when transferred

• Value: value of construction service prevailing at that time

– VAT:• Payable when property is transferred or as per special rule framed

in the State Law• Value: value of goods transferred, computed as if he is a contractor

LAND OWNER’S LIABILITY

Land Owner’s liability under service tax

Owner’s liability under JDA

• Development Rights to the Developer– May be

• transfer of title in immovable property – no Service tax, or• Mere commercial rights short of transfer of title in immovable

property – may be charged to Service tax

– Terms of JDA holds the key– Education guide assumes it as a transfer– Deptt conducting raids on developers and collecting

Service tax

Owner’s liability on sale of his share of flats

• Education guide says – taxable• More convenient for collection of service tax from

the buyers• Cenvat credit of tax paid by the Developer – available• Credit chain maintained

THANK YOU

Contact us:

Puneet Agrawal

Athena Law [email protected]

+91-9891-898911

Documents

WORKS CONTRACT: SERVICE TAX & VAT ISSUES: By:- Puneet Agrawal Partner Athena Law Associates INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA