Company Logo 1
Basic Division of Construction Activity Commercial or Industrial Construction Services. 10% 10% Construction of Residential Complex Services. 20% 60% Preferential Location Services. Management, Maintenance and Repair Services. Services Performed under Works Contract. 2 08
Progress Flow 2004 Commercial or Industrial Construction Services w.e.f 10.9.2004 2005 Management Maintenance and Repair Service includes Immovable Property from 16.6.2005 2005 Construction of Residential Complex w.e.f. 16.6.2005 3 14
Progress Continue 2007 Works Contract prior to 1 st June 2007 2009 Addition of Free Supply from 7 th July 2009 Bhayana Builders (P.) Ltd. [2013] 38 taxmann.com 221 (New Delhi - CESTAT) (LB) Notification No. 15/2004-ST, dated 10.09.2004, Intercontinental Conslt. & Tech. (P.) Ltd.[2009] 19 STT 320 (DELHI) 4 04
Progress Continue 2010 Explanation Added in Commercial Or Industrial Construction Services and Construction of Residential Complex Services from 1 st July 2010 to Cover Builder Services. 2012 Finally Negative List became applicable from 1 st July 2012. 2010 Then added Preferential Location Services w.e.f 1 st July, 2010 5 05
Progress Resulted in Division of Activity in Two Parts Contractor and Repair Services Builders Activity 6 02
Resulted Further Construction Activity Finally Divided Into Transfer of Material + Works Contracts Labour 7 02
Issues Which of the Construction is not taxable? Taxability on Individual Collaboration agreements Main-Contractor Vs. Sub Contractor Whether CENVAT Credit is available with abatement. Whether Abatement is available on PLC Charges after 1.7.2012 Development Rights Vs. Joint Venture Valuation of Works Contract Company Logo Sale of Plot-whether taxable 8
Issue 1- Which of the Construction is not Taxable? 9
Key issues to Understand First Issue 10% For Whom 10% the Contractor is working 60% What is the nature of the construction activity that the Contractor is doing What is the Project? 10 08
Mega Exemptions 12. Services provided to the Government, 10% a local authority or a governmental authority by way of construction, 10% 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; 20% 60% 11 09
Mega Exemptions (b) a historical monument, archaeological site 10% or remains of national importance, archaeological excavation, 10% or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); 20% 60% (c) a structure meant predominantly for use as an educational, a clinical, or an art or cultural establishment; 12 09
Mega Exemptions (d) canal, dam or other irrigation works; 10% 10% (e) pipeline, conduit or plant for water supply, water 60% treatment, or 20% 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; 13 09
Mega Exemptions 10% 13. Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, 10% maintenance, renovation, or alteration of: 60% (a) a road, bridge, tunnel, or terminal for 20% 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; 14 09
Mega Exemptions (c) 10% a building owned by an entity registered under section 12AA of the 10% Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public; 20% 60% (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; 15 09
Mega Exemptions 14. Services by way of construction, erection, commissioning, or installation of original works pertaining to: 10% (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; 10% 20% 60% 16 09
Case-I Facts: Developer XYZ Ltd has approached Mr. A (landowner) for construction of building. All expenses related to construction will be borne by developer. All land related expenses will be borne by landowner. Developer will get Third Floor of the constructed building in lieu thereof it will pay Rs. 1 Cr. to landowner. Landowner will get Ground Floor, First Floor and Second Floor. Developer has appointed ABC Ltd as contractor for construction of building. ABC Ltd has charged Rs. 1.5 Cr for construction. Assumption: Market Value of Third Floor Rs. 3 Cr. Sold by Mr A.
Activity 1 Construction Service Developer XYZ Landowner 3 rd Floor Case I Activity 2 3 rd Floor Developer XYZ Landowner Construction+ 1 Cr Activity 3 Construction Service ABC Ltd. Developer XYZ 1.5 Cr. Landowner
Service Tax Impact Developer: Output Liability: 14% of 40% of Rs. 2 Cr. (Rs. 3 Cr. Rs. 1 Cr.) CENVAT Credit: Service Tax charged by contractor i.e. 14% of 40% of Rs. 1.5 Cr Landowner: Output Liability: 14% of 30% of Rs. 3 Cr. CENVAT Credit: Service Tax charged by developer pertaining to Third Floor Contractor: Output Liability: 14% of 40% of Rs. 1.5 Cr. CENVAT Credit: Input Services and Capital Goods
Case-II Facts: Developer XYZ Ltd has approached Mr. A (landowner) for construction of building. All expenses related to construction will be borne by developer. All land related expenses will be borne by landowner. Developer will get Ground Floor and Third Floor of the constructed building in lieu thereof it will pay Rs. 2 Cr. to landowner. Landowner will get First Floor and Second Floor. Developer has sold Ground Floor for Rs. 3.5 Cr. before completion. Construction executed by developer itself. Assumption: Market Value of Ground Floor Rs. 3.5 Cr. and Third Floor Rs. 3 Cr.
Case II Activity 1 Activity 2 Construction Service Developer XYZ Landowner Ground Floor & 3 rd Floor Ground Floor & 3 rd Floor Developer XYZ Landowner Construction+ 2 Cr Activity 3 Developer XYZ Construction Service 3.5 Crore Customer Landowner
Service Tax Impact Developer: Output Liability: 14% of 40% of Rs. 4.5 Cr. (Rs. 6.5 Cr. Rs. 2 Cr.) CENVAT Credit: Input Services and Capital Goods Landowner: Output Liability: 14% of 30% of Rs. 6.5 Cr. CENVAT Credit: Service Tax charged by developer pertaining to Ground Floor and Third Floor.
Case-III Facts: Developer XYZ Ltd has approached Mr. A (landowner) for construction of building. All expenses related to construction will be borne by developer. All land related expenses will be borne by landowner. Developer will get Third Floor of the constructed building in lieu thereof it will pay Rs. 1 Cr to landowner. Landowner will get Ground Floor, First Floor and Second Floor. Developer has sold Third Floor for Rs. 4 Cr. after completion. Construction executed by developer itself. Assumption: Market Value of Third Floor Rs. 3 Cr.
Case III Activity 1 Activity 2 Construction Service Developer XYZ Landowner 3 rd Floor 3 rd Floor Developer XYZ Landowner Construction+ 1 Cr Activity 3 Sale of Third Floor Customer Landowner 4 Crore Landowner
Service Tax Impact Developer: Output Liability: 14% of 40% of Rs. 2 Cr. (Rs. 3 Cr. Rs. 1 Cr.) CENVAT Credit: Input Services and Capital Goods Landowner: Output Liability: 14% of 30% of Rs. 3 Cr. CENVAT Credit: Service Tax charged by developer pertaining to Third Floor.
Case-IV Facts: Developer XYZ Ltd has approached Mr. A (landowner) for construction of building. All expenses related to construction will be borne by developer. All land related expenses will be borne by landowner. Developer will get Third Floor of the constructed building in lieu thereof it will pay Rs. 1 Cr to landowner. Landowner will get Ground Floor, First Floor and Second Floor. landowner has sold Ground Floor for Rs. 3.5 Cr. before completion. Construction executed by developer itself. Assumption: Market Value of Third Floor Rs. 3 Cr.
Case IV Activity 1 Activity 2 Developer Construction XYZ Service Landowner 3 rd Floor 3 rd Floor Developer XYZ Landowner Construction+ 1 Cr Activity 3 Sale of Ground Floor Customer Developer XYZ 3.5 Cr Landowner
Service Tax Impact Developer: Output Liability: 14% of 40% of Rs. 2 Cr. (Rs. 3 Cr. Rs. 1 Cr.) CENVAT Credit: Input Services and Capital Goods Landowner: Output Liability: 14% of 30% of Rs. 3 Cr. 14% of 30% of Rs. 3.5 Cr. CENVAT Credit: Service Tax charged by developer pertaining to Ground Floor and Third Floor.
Issue 2- Main Contractor Vs Sub Contractor 29
Issue 2 10% 10% Clause 29(h) of Mega Exemption.. D 20% A 60% B sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt; C 30 10
Mega Exemptions (d) Post- harvest storage infrastructure 10% for agricultural produce including a cold storages for such purposes; or 10% 20% 60% (e) Mechanized food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages; 31 09
Issue 3- Abatement and CENVAT Credit 32
New Abatement Valuation & Scheme Notification 10% 26/2012 allow from 1 st July 2012. Old Abatement New Abatement Commercial Construction Construction of Complex Erection, Commission & Installation 66/75 Nil 66/75 Nil 66 Nil Builder 75 75 33
New Abatement Valuation & Scheme Construction of Complex Commercial Construction Works Contract Service Erection, Commissioning & Installation + Repair & Materials 34
New Abatement Valuation & Scheme Works Contract Service Composition Scheme @ 4.8% + Cess on full value. Now Deleted w.e.f 1.7.2012 Value = Gross Amount Less Sale of/transfer in property No Credit of Inputs Exemption Original work 60% Completion work 40% 30%(from 1 st October 2014) Movable property 30% 35
Issue 4- Taxability of Joint Venture 36
Issue 4: Taxability of Joint Venture D 10% 20% 10% A FAQIR CHAND GULATI Versus UPPAL AGENCIES PVT. LTD. 2008 (12) S.T.R. 401 (S.C.) 60% B The use of the words joint venture or collaboration in the title of an agreement or even in the body of the agreement will not make the transaction a joint C venture, if there are no provisions for shared control of interest or enterprise and shared liability for losses. [para 21] 37 10
Issue 4: Taxability of Joint Venture 10% Circular 151/2012 dated 10.2.2012 deals with Joint Venture 10% and Collaboration Agreements. 60% 38 08
Land Owner Commercial/ Residential Units (Eg. 100 units) Developer Taxable Value: FMV at the time of receipt Development rights Effective rate of tax: 25% to 12.36% (BSP) Benefit of CENVAT: Available w.e.f 1 st july 2012 Taxable Value: Transaction value Effective rate of tax: 25% to 12.36% (BSP) Benefit of CENVAT: Available w.e.f 1 st july 2012 Sales to prospective buyer 30 units 70 units Note: w.e.f. 1 st july 2012, service tax would also apply on sale of allotted units by land owners to prospective buyer. 39
Taxability At a Glance S. No Activity Applicability of Service Tax 1. Sale of No, Sale of Land/Development Immovable Property Rights 2. Units allotted to land Yes owner by the developer 3. Sale of such units by land owner to prospective buyers Yes (w.e.f. 1 st July, 2012) Valuation NA FMV of units at the time receiving development rights Transaction Value 40
Issue 5- Services of builder for providing preferential location or development of such complex 41
Issue :5 - Services of builder for providing preferential location or development of such complex Taxability of charges for other facilities as these charges do not form part of the taxable value for charging tax on construction like: prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastuhaving the bed room in a particular direction; Number- lucky numbers); 42
Issue :5 - Services of builder for providing preferential location or development of such complex (b) internal or external development charges which are collected for developing/maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc; (c) fire-fighting installation charges; and (d) power back up charges etc. 43
Rate of Tax in case of PLC (Positive List) Honorable Bombay High Court in the case of MAHARASHTRA CHAMBER OF HOUSING INDUSTRY vs UNION OF INDIA 2012(25) S.T.R.305 (Bom.) special value addition service includes the provision of a flat on a preferred floor to a prospective buyer, a flat facing a particular direction or a particular room in a particular direction. This involves a locational choice of a prospective buyer having an extra advantage for which additional payment is made by the buyer to the builder over and above the basic sale price. Since these charges are in the nature of service provided by the builder to the buyer over and above the construction service 44
Rate of Tax in case of PLC (Negative List) Naturally Bundled Service Floor rise charges or charges where increase in cost of flat is linked with construction cost. PLC not bundled Service (Mumbai Commissionerate vide F.No. V/ST-I/Tech-II/463/11 dated 31st August 2012) 45
Exclusion 10% Development charges, to the extent they are paid to State Government 10% or local bodies, will be would be excluded from the taxable value levy 20% 60% Any service provided by Resident Welfare Associations or Cooperative Group Housing Societies consisting of residents/owners as their members would not be taxable under this service. 46 08
Sale of Plot [2013] 30 taxmann.com 10% 42 (SC) Narne Construction (P.) Ltd. Vs. Union of India 10% 366(29A) of Constitution prescribe deemed sale empower 60% state to 20% levy tax on composite contract and Centre is empowered through declared services. Question is how to value? 47 08
atul@servicetax.net pctl@rediffmail.com Thank You! +91-9810103611 CA. Atul Kumar Gupta www.servicetax.net 48