SERVICE TAX ON REAL
ESTATE TRANSACTIONS
CA. Brijesh C. Verma, Agra
+91 98970 57757 [email protected]
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
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