Madhukar N Hiregange. Post 1.7.2012 – “service”, declared, -ive List Exemptions Valuation ...

Service Tax on Builders & Developers

Madhukar N Hiregange

Coverage Today

Post 1.7.2012 – “service”, declared, -ive List

ExemptionsValuation Issues & Possible SolutionsQ/A – time permitting

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i.Ensure compliance with thisuncertain, ever changing law

Understand the poor drafting/ omissions

ii.Least amount of disputes- SC would be decide All

iii. Optimisation of Creditiv. Value additive advice

Objectives of Advisor..

Activity [ not service anymore.. Much wider]

For a Consideration – “valuable benefit passed by promisor to promisee” [ Sec 67]

Excludes… Includes….

“Service” ??

Service excludes

Activity which constitutes merely -

• transfer of title in immovable property

by way of sale, gift or in any other

manner;

-> Single Agreement of Sale – Is it a

transfer of Title?

-> One Agreement to Sell + 1

Construction

-> Joint Venture?

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At time of contract – agreement to sell for value of the Immovable property +Balance value construction

As building progresses, the VAT [5%] + ST [ 5%] would be on reduced value. Maybe at 90% complete only @ net impact of 1 %.- On average considering todays trend – 3% total.

Give Shylock his due

Best now? Post L&T

Related Declared Service-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. the expression "construction" includes

additions, alterations, replacements or remodelling of any existing civil structure;

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

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Competent authority◦ "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) architect registered with the Council of Architecture

constituted under the Architects Act, 1972; or (20 of 1972.)

(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;

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Same competent authority- monthwise valuation

Add other evidences – electricity – individual meters

Stage wise completion

Works Contract – Definition – Sec. 65B(54)

• Transfer of property in goods involved in the execution

of such contract is leviable to tax as sale of goods.

• Contracts are for the purposes of carrying out-

– construction, erection, commissioning, installation,

completion, fitting out, repair, maintenance, renovation,

alteration of

– any moveable or immovable property or

– for carrying out any other similar activity or a part thereof

– in relation to such movable or immovable property10Hiregange

Exemption – Relevant Entries

Exemptions – Sl. No. 12 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 civil structure or any other original works meant predominantly for a non-industrial or non-commercial use;

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Exemptions – Sl. No. 12

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

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

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Exemptions – Sl. No. 12 contd..

◦ canal, dam or other irrigation works;

◦ pipeline, conduit or plant for (i) drinking water

supply (ii) water treatment (iii)sewerage

treatment or disposal; or

◦ 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;

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Exemptions – Sl. No. 13 Services provided by way of erection,

construction, maintenance, repair, alteration, renovation or restoration of,-◦road, bridge, tunnel, or terminal for road

transportation for use by general public;◦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;

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Exemptions – Sl. No. 13

◦pollution control or effluent treatment plant, except located as a part of a factory;

◦or◦electric crematorium;

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Exemptions – Sl. No. 14 Services by way of erection or construction of

original works pertaining to,- (does not cover repair, alteration etc ??)

◦airport, port or railways;◦single residential unit otherwise as a part of a residential complex;

◦low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority …

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Exemptions – Sl. No. 14 Services by way of erection or

construction ..◦post- harvest storage infrastructure for

agricultural produce including a cold storages for such purposes; or

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

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Exemptions – Sl. No. 14Services by way of erection or construction of original works pertaining to,- (does not cover repair, alteration etc)◦airport, port or railways;◦single residential unit otherwise as a part of a residential complex;

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Exemptions – Sl. No. 14◦ low- cost houses up to a carpet area of 60

square metres per house in a housing project approved by competent authority ..

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

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

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Residential Complex

"residential complex" means any complex

comprising of a building or buildings, having

more than one single residential unit

"single residential unit" means a self-contained

residential unit which is designed for use, wholly

or principally, for residential purposes for one

family;

{ Common amenities???}

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Exemptions – Sl. No. 29 (h)

• Sub-contractor providing services by way of works

contract to another contractor providing works

contract services which are exempt.

• Available only for WORKS CONTRACT sub-contract

which is EXEMPTED.

• If only labour portion is sub-contracted, exemption

not available.

• However if the activity is covered under any other

entry it is possible to claim that exemption.22Hiregange

Abatement – Not. 26/2012-ST 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)

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Abatement – Not. 26/2012-ST Abatement is 75%-(i) the carpet area of

unit<than 2000 sq ft; and (ii) amount charged for

the unit is less than Rs 1crore;

or 70%

Conditions : Inputs credit is not taken ◦ Value of land is included in the amount charged

from the service receiver

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ValuationPost 1.7.2012

Methods In case of only labour works service tax on

full value. In case of contracts which are not covered

within the meaning of works contract though involves material - service tax on full value.

In case of works contact as per the definition – service tax is on service portion of the contract – arrived as per valuation rules.

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Methods Service portion in execution of WC -> Gross Amount

Charged Less Value of property in goods trfd. Less VAT/Sales Tax on such value of property.

Value of property in goods trfd. how to determine: ◦ Where VAT is paid on turnover arrived based on

records by deducting labour and other charges – Value for Service Tax is Balance Amount

◦ Where VAT is paid on composition– Value of goods transferred to be determined based on records and deducted to arrive at taxable value

◦ Where VAT is paid ad-hoc basis – Since it is said not possible to ascertain value of goods next option.

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Methods to compute value If not as per above – (compulsory)

◦ For original works – 40% of the total amount ◦ If repair, maintenance or servicing of goods - 70%

of the total amount ◦ Other contracts including maintenance, repair,

completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property – 60% of the total amount

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Other Aspects of Valuation

• Original Works means –

– All New Constructions;

– Additions and alterations – to abandoned or damaged

structures to make them workable

– erection, commissioning or installation of plant, machinery or

equipment or structures, whether pre-fabricated or otherwise

• Total Amount = Gross Amount (+) FMV of all goods

and services supplied (by the service receiver) (–)

any amount charged for such supply (-) VAT.

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L&T Limited v. State of Karnataka (2013-TIOL-46-SC-CT-LB)

Affirmed its earlier decision in K Raheja case The Court in Raheja Development held:

◦ the developer would be liable to pay tax on works contract.

◦ If the agreement is entered into after the flat or unit is constructed, there would be no works contract.

Decision-L&T

The decisions in the Magus Construction Pvt Ltd Vs Union of India -   (2008-TIOL-321-HC-GUW-ST) and Assotech Realty no longer valid

JD liable on non-monetary consideration [maybe-disputed]?

Decision-L&T-ST implications

Whether single agreement liable u/s 66E(b) upto date of agreement and under WC entry thereafter?

Whether amounts received earlier to agreement date could be treated as immoveable property-excluded from Service definition?

Whether pure service contracts alone covered in declared services entry 2?-as WC more specific entry………..

Decision-L&T-ST Issues:

Inputs not allowed in WC

Capital goods used – Cranes, hoists, dumpers, tippers, concrete mixers – Allowed if used partially

Capital goods used in building/ Mall itself- lifts, DG, travellators, escalators, parking equipment? – what if part rented

Inputs services – all if eligible.

Which Credit Availability?

Site Development & sale- Single Contract would that be covered prior to 1.7.2012

Coverage after 1.7.12?

Issues

“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 certificate of completion by a competent authority”.

Possible Solution??- One agreement to sell [ completions stage wise] + development agreement – Bifurcated for roads, sewage, electrical lines, drains [ 60%] + others [40%]

FOC Supply- If not part of agreement, If not charged – No liability? – Bhayana Builders

Under 33% can we continue OR have to change to pay on actual basis or 40% of 12.36 ? Nagarjuna- SC

Issues

Issues??? Whether service Tax can be paid on full

value and take credit of duty paid on inputs

in full in new law?

• In case of joint development with land

owner, whether developer is liable for share

given to land owner?

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Issues ???

• If liable on what value and when it is to be paid?

• Whether the land value claimed by the developer

is in case of joint development, where land is

registered directly by the land owner to buyer, is

eligible for exclusion from scope service

definition?

• Whether the profit/gross amount charged by the

developer on land is liable for service tax?

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Issues ???

• Whether the said activities in relation to single

residential unit can be claimed as exemption-

Villa?

• Whether compensation received for transfer of

buying right is liable for service tax?

Nomination/ Relinquishment

• Whether the amounts forfeited for non-payment

of installments is liable for service tax?

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Questions?pdicai.org

madhukar@hiregange.com