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SERVICE TAX IN REAL ESTATE By :- CA SANDEEP GARG 1.

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Presentation on theme: "SERVICE TAX IN REAL ESTATE By :- CA SANDEEP GARG 1."— Presentation transcript:

1 SERVICE TAX IN REAL ESTATE By :- CA SANDEEP GARG 1

2 Services Services under Negative List Services under Exempted list Other Exemptions/Abatements All remaining services to be taxable under Negative List Approach TAXATION OF SERVICES –NEGATIVE LIST REGIME 2

3 Sale of PLOTS Sale of Developed PLOTS Joint Venture Joint Venture of Development of Lands( Plot Sale) Joint Venture Agreement and Sale of Flats Joint Venture Agreement and Area Sharing Completion Certificate Vs. Occupancy Certificate Hot Topics

4 Rate of Tax on Ancillary Services Like PLC service EDC/IDC Charges IFMS – Refundable/Non Refundable Car Parking ( Open and Covered) Forfeiture Amount Transfer Charges/Admin Charges Original Works Contract Vs. Finishing Services ( Valuation ????) Free of Cost Material Supplied by the Contractee Hot Topics

5 CENVAT Credit Issues :- Whether CENVAT is eligible on all the Input services or there are some exclusions/Conditions Completed Projects and Unsold Units Township Projects Reversal of CENVAT credit for sale of Land/Plot Adjustment of Credit Note/Discount Point of Taxation Hot Topics

6 Any activity Carried out by one person For another person For consideration Includes a declared service but excludes IMAGE DEFINITION OF SERVICE: 6

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8 Renting of Immovable Property Service Taxable w.e.f It was already taxable. Validity of the levy was upheld by many courts. Covers following(an illustrative list): Renting for temporary purpose like marriages or other social functions; Permitting use of property for vending/dispensing machine Renting for entertainment or sports As per Rule 5 of the Place of Provision of Services Rules, 2012, the place of provision of services provided directly in relation to an immovable property, shall be the place where the immovable property is located or intended to be located. Taxable w.e.f It was already taxable. Validity of the levy was upheld by many courts. Covers following(an illustrative list): Renting for temporary purpose like marriages or other social functions; Permitting use of property for vending/dispensing machine Renting for entertainment or sports As per Rule 5 of the Place of Provision of Services Rules, 2012, the place of provision of services provided directly in relation to an immovable property, shall be the place where the immovable property is located or intended to be located.

9 Exemptions for Renting ….. Services by way of renting of residential dwelling for use as residence. Services relating to agriculture or agricultural produce by way of renting of vacant land; warehousing etc. 5. Services by a person by way of renting of precincts of a religious place meant for general public. 9. Renting of immovable property to an educational institution in respect of education exempted from service tax. 18. Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a unit of accommodation below Rs.1000/- per day or equivalent. 24. V ehicle parking to general public (Taxable w.e.f. 01-Apr-13) Negative List Mega Exemption 9

10 Construction Service

11 Booking of flats under construction(i.e. before issuance of completion certificate) is taxable; Sale of plots are not taxable; Builders are also allowed abatement of 75%/70%(based on type of property), provided the land value is also included in total consideration; No Abatement allowed on Preferential Location Charges, associated incomes(e.g. transfer charges, cancellation charges) CENVAT Credit is allowed on input services Capital goods; CENVAT Credit on inputs(e.g. steel, cement) barred CONSTRUCTION SERVICE: 11

12 Type of Property Residential Carpet Area < 2000 Sq. ft. Amt Charged > Rs. 1 crore Commercial YES 3.09% NO 3.708% 3.708% Are both conditions fulfilled? Applicable Rate w.e.f. 1 st March, 2013

13 No service tax on sale of completed properties Completion Certificate from Competent Authority required for sale of flat to be exempt from service tax. 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 there is non-requirement of such certificate from such authority, then from any of the following namely:- Architect Registered with Council of Architecture constituted under the Architects Act, 1972; or Chartered Engineer Registered with Institution of Engineers (India); or Licensed Surveyor of the respective local body of the city or town or village or development or planning authority. Completion Certificate from Competent Authority required for sale of flat to be exempt from service tax. 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 there is non-requirement of such certificate from such authority, then from any of the following namely:- Architect Registered with Council of Architecture constituted under the Architects Act, 1972; or Chartered Engineer Registered with Institution of Engineers (India); or Licensed Surveyor of the respective local body of the city or town or village or development or planning authority. 13

14 Works contract means a contract which involves- Transfer of property in goods And such contract is for the purpose of : Construction Erection Commissioning Installation Completion Fitting out Repair Maintenance Revocation Alteration of movable or immovable property WORKS CONTRACT SERVICE: 14

15 Valuation under Works Contract Service(Rule 2A of Service tax (Determination of Value) Rules, 2006) WORKS CONTRACT SERVICE: 15 Material & Labour can be segregated Yes 12.36% on Labour portion Original Works(40% ) R&M of Goods(70%) Others(60%) 4.944% of Gross amount charged 7.416% of Gross amount charged 8.652% of Gross amount charged

16 Exemptions from Service Tax in Real Estate Sector 16

17 Exemptions from Service Tax in Real Estate Sector Mega Exemption: Entry No.12 In Relation to : 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 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; The Government, a Local Authority or a Governmental Authority Service of Construction, Erection, Commissioning, Installation, Completion, Fitting Out, Repair, Maintenance, Renovation, or Alteration. 17

18 Exemptions from Service Tax in Real Estate Sector Mega Exemption: Entry No.13 Service 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. c)A building owned by an entity registered under section 12AA of the Income tax Act, 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. e)A structure meant for funeral, burial or cremation of deceased. 18

19 Exemptions from Service Tax in Real Estate Sector Mega Exemption: Entry No.14 Service 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 meters 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. e)Mechanized food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages. 19 Repair, maintenance are not included in this entry

20 Charges collected by Builders and rate of Service Tax applicable on said charges S. NoChargesRate of Service tax 1. Basic Charges3.09%/3.708% 2.Preferential Location Charges % or 3.09%/3.708% 3.Club Charges Towards cost of construction For membership of club 3.09%/3.708% 12.36% 4.Car Parking- open & covered 3.09%/3.708%

21 S. NoChargesRate of Service tax 5.EDC/IDC On Actual Payment Basis On Adhoc basis without disclosing actual charges Actual Charges plus own service charge Not Taxable Full amount is Taxable Only own service charges are taxable 6. External Electrification charges/ Electrical Installation Charges 3.09%/3.708%/4.944% 7. Administrative Charges for registration 12.36% 8.Interest Free Maintenance Security (IFMS) Refundable Non Refundable Non Taxable

22 S. NoChargesRate of Service tax 9. Firefighting Equipment Installation charges 3.09%/3.708%/4.944% 10. Power Backup Charges (Towards cost of installation of DG Sets and substations) 3.09%/3.708%4.944% 11. Administrative/Transfer Charges (In case of sale of flat by original buyer, builder charge said charged for modifying its records i.e. entering the name of new buyer in its records) 12.36%

23 Maintenance Services provided by a Developer/Builder Apart from construction Services developers/Builders also provide the services of maintenance of buildings/complexes constructed by it. For providing such services developer charges maintenance charges form the occupants of flats/offices. The nature of charges collected by builders and Rate of Tax applicable on the same has been summarised as under: Mai Maintenance Charges Apart from construction Services developers/Builders also provide the services of maintenance of buildings/complexes constructed by it. For providing such services developer charges maintenance charges form the occupants of flats/offices. The nature of charges collected by builders and Rate of Tax applicable on the same has been summarised as under: Mai Maintenance Charges ChargesDescriptionTaxability Maintenance Charges Towards maintenance of building/complex 12.36% Electricity ChargesFor supplying electricity in flats/shops (Charged on actual basis) Non Taxable Common Area Electricity Charges Towards cost of electricity consumed in Common Area 12.36%

24 Construction for NGO/ Charitable Institutions made taxable Renting for NGO/ Charitable Institutions made taxable Services in relation to development of plots provided by builders made taxable Changes in the definition of Residential Complex Car Parking made taxable. Scope of entry no. 12 of Notification No. 25/2012 dated Impact of Negative List Regime

25 CENVAT OF INPUT SERVICES

26 A builder ABC Ltd. construct and sold the building. Costs incurred by him for constructing the building & other relevant details are as under: S. NoParticularsAmount(Rs.) 1. Total Gross Amount Charged1,00, Cost of Land 60, Value of Material used 22, Cost of Labour Services 4, CENVAT Credit on Input CENVAT Credit on Inputs services CENVAT Credit on Capital Goods (Total CENVAT is RS % of the has been availed) 200

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28 Value for Reversal under Rule 6 (3) of CENVAT Credit Rules, 2004

29 Example For Instance: 1) Value of flats sold by M/s ABC Ltd = Rs 1,00,00,000/- (Taxable Service) Service Tax discharged = Company is paying service tax at the rate of 3.09% on the above value. 2) Gross Amount Charged for construction of Road = Rs 1,00,00,000 (Exempted Service Entry No 13 of Notification No 25/2012 dated ). Further, ABC Ltd has availed CENVAT Credit of Rs 4.00,000 in respect of aforesaid services. For Instance: 1) Value of flats sold by M/s ABC Ltd = Rs 1,00,00,000/- (Taxable Service) Service Tax discharged = Company is paying service tax at the rate of 3.09% on the above value. 2) Gross Amount Charged for construction of Road = Rs 1,00,00,000 (Exempted Service Entry No 13 of Notification No 25/2012 dated ). Further, ABC Ltd has availed CENVAT Credit of Rs 4.00,000 in respect of aforesaid services. What will be the amount which ABC Pvt Ltd is liable to pay as per Rule 6 (3) of CENVAT Credit Rules, 2004?

30 Amount required to be paid as per Rule 6 (3) (i) of CENVAT Credit Rules, 2004 = 6% of Exempted Services = 6% of Rs 1,00,00,000 = Rs 6,00,000 Amount required to be paid as per Rule 6 (3) (ii) of CENVAT Credit Rules, 2004 = 4,00,000 * 1,00,00,000 2,00,00,000 = Rs 2,00,000 To Conclude: The value should be taken for the purpose of aforesaid Rule shall be Gross Amount Charged not the amount on which Service Tax has been paid.

31 Reverse Charge

32 Every person providing taxable services to any person shall pay service tax in such manner and within such time as may be prescribed. [Section 68(1)] Central Government has power to notify such other person to discharge service tax liability and all provisions of service tax law would be applicable as if he is service provider. Board has notified such person by issuance of Notification No. 15/2012 – dated Person Liable to Pay Tax 32

33 Description of Service Service Provider Service ReceiverPerson LiableRate of Tax Insurance BusinessInsurance Agent Insurance Company 12.36% Goods TransportGTASpecified persons 12.36% SponsorshipAny personBody corporate or Firm 12.36% Legal ServicesArbitral Tribunal or Advocate Business Entity 12.36% Support ServicesGovernment or Local Authority Business Entity 12.36% Person Liable to Pay Tax 33

34 Description of Service Service Provider Service ReceiverPerson LiableRate of Tax Hiring of Motor Vehicle - On abated Value Individual, HUF, Prop. Firm, P Firm, or AOP Business Entity registered as Body Corporate 12.36% Hiring of Motor Vehicle - On non abated Value Individual, HUF, Prop. Firm, P Firm, or AOP Business Entity registered as Body Corporate Provider 40% of 12.36% 60% of 12,36% Supply of Manpower & Security Services for any purpose Individual, HUF, Prop. Firm, P Firm, or AOP Business Entity registered as Body Corporate Provider 75% of 12.36% 25% of 12.36% Person Liable to Pay Tax 34

35 Description of Service Service Provider Service ReceiverPerson LiableRate of Tax Director ServicesNon Executive Director Company 12.36% Works ContractIndividual, HUF, Prop. Firm, P Firm, or AOP Business Entity registered as Body Corporate Provider 50% of 12.36% Any Taxable Service ????? Located in Non Taxable Territory Any person located in Taxable Territory 12.36% Person Liable to Pay Tax 35

36 CASE STUDIES

37 Case Study-1 ABC ltd has entered into a contract for construction of road meant for general public. ABC ltd sub contracts the aforesaid work to three contractors namely: DEF Ltd, the work of site formation for construction of road XYZ Ltd, laying the surface of road GHI Ltd, other physical activities in respect of such roads. ABC ltd has entered into a contract for construction of road meant for general public. ABC ltd sub contracts the aforesaid work to three contractors namely: DEF Ltd, the work of site formation for construction of road XYZ Ltd, laying the surface of road GHI Ltd, other physical activities in respect of such roads. What will be the Service tax implication on the aforesaid transactions ?

38 Services provided by way of construction of road meant for use by general public is Exempted from payment of Service Tax. Thus, any service which is used in the construction of said road shall be exempted from Service Tax as per Entry 13(a) of N/N 25/2012 dated Accordingly, all the aforesaid services in respect of roads are not exigible to Service Tax. Further, as far as laying of surface is concerned same is also covered under definition of Works Contract as engrafted under Section 65B (54) of Finance Act, Since, main Contractor enjoys exemption, the sub contractor also continue to enjoy the exemption in respect of Works Contract Services - Entry 29(h) of N/N 25/2012 dated

39 Case Study-2 M/s ABC Pvt Ltd is engaged in construction of hospitals and educational institutes. Whether M/s ABC Pvt Ltd. is required to pay Service Tax on the same ? If M/s ABC Ltd is constructing such structures for the government, a local authority or a governmental authority, in that case M/s ABC is not required to pay Service Tax on the same as per Entry 12 (a) of Notification No 25/2012. However, if such structure are built for persons other than government, a local authority, governmental authority, M/s ABC Ltd is required to pay Service Tax on the same.

40 Case Study-3 M/s XYZ Pvt Ltd is engaged in maintenance & Repair of Ports. Whether M/s ABC Pvt Ltd. is liable to pay Service Tax on the same ? Yes, M/s XYZ Pvt Ltd is required to pay Service Tax on the same as vide Entry No 14 of Notification No 25/2012 dated , exemption has been provided only to services in respect of Construction of Ports.

41 Case Study-4 M/s XYZ Pvt Ltd is Renting out its Immovable Property to an NGO. Whether M/s XYZ Pvt Ltd is required to pay Service Tax on the same ? Yes, M/s XYZ Pvt Ltd is required to pay Service Tax on the same as exemption has not been granted to such activity anywhere under Finance Act, 1994.

42 Case Study-5 Mr. A has rented a house to Mr. B, consisting of two floors. one floor of which is to be used as residence and the other for the purpose of running of a office ? What shall be the Service Tax implications on the same ? Such renting for two different purposes is not naturally bundled in the ordinary course of business. Therefore if a single rent deed is executed it will be treated as a service comprising entirely of such service which attracts highest liability of Service Tax. In this case renting for use as residence is a Negative List Service while renting for non-residence use is chargeable to tax. Since, the latter category attracts highest liability of Service Tax amongst the two services bundled together, the entire bundle would be treated as renting of commercial property.

43 Case Study-6 This will be a case of Bundled Services where a number of services have been provided in lieu of a Single Consideration. Accordingly, taxability of the same shall be determined as per Section 66F of Finance Act, As per said Section, if services are considered Naturally Bundled in the ordinary Course of business, it shall be considered as the provision of said service which provide essential character to it. In this case, Renting of Immovable Property is the essence of aforesaid activity. Further, Renting of property for residential purposes is not exigible to Service Tax. Thus, said activity of Renting by Mr. A shall not be exigible to Service Tax. Mr. A has let out a house to Mr. B for Residential purposes. Further, along with such house Mr. A has also provided various amenities such as furniture, refrigerator, air conditioners etc. What shall be Service tax implications of the same ?

44 Apart from adopting methods prescribed by Rule 2A, the person providing Works Contac service provider has an option to valued its service as per the provisions contained in Section 67 read with Rule 5 of Service Tax (Determination of Value) Rules, 2006 Now the moot question arises whether a person providing Works Contract Services is mandatorily required to discharge its Service Tax Liability as per aforesaid Rule 2A or can avail any other method of valuation ? Case Study-7

45 Case Study- 8 A builder engages three sub-contracts in order to execute the construction work (including material) of a new building. The said Sub-Contractors have been awarded the work as follows: Civil work has been given to Mr. A Electrification work has been given to Mr. B Plumbing & Fire fighting work has been given to Mr. C A builder engages three sub-contracts in order to execute the construction work (including material) of a new building. The said Sub-Contractors have been awarded the work as follows: Civil work has been given to Mr. A Electrification work has been given to Mr. B Plumbing & Fire fighting work has been given to Mr. C Whether all aforesaid contracts fall under the ambit of term original works as defined under Rule 2A of Service Tax (Determination of Value) Rules, 2006 ?

46 The scope of term Construction can not be restricted to merely putting up walls, roof and floor etc. In different words, completion and finishing services [such as glazing, plastering, floor and wall tiling, installation of electrical fittings, plumbing works etc.] also fall within the ambit of term Construction which itself gets covered under the definition of term Original Works. Therefore, all above contracts are eligible to discharge service tax liability on the 40% of the total amount charged for the works contract. The scope of term Construction can not be restricted to merely putting up walls, roof and floor etc. In different words, completion and finishing services [such as glazing, plastering, floor and wall tiling, installation of electrical fittings, plumbing works etc.] also fall within the ambit of term Construction which itself gets covered under the definition of term Original Works. Therefore, all above contracts are eligible to discharge service tax liability on the 40% of the total amount charged for the works contract.

47 What are the options available to a Builder for discharging its Service Tax Liability ? In addition to discharging Service Tax liability after availing abatement as per Notification No 26/2012 dated , the builder can also discharge its Service Tax Liability as per Rule 2A of Service Tax (Determination of Value), Rules, 2006 provided it entered into a separate agreement with the allottee for the sale of land. Case Study- 9

48 Sale of PLOTS Sale of Developed PLOTS Joint Venture Joint Venture of Development of Lands( Plot Sale) Joint Venture Agreement and Sale of Flats Joint Venture Agreement and Area Sharing Completion Certificate Vs. Occupancy Certificate Hot Topics

49 Rate of Tax on Ancillary Services Like PLC service EDC/IDC Charges IFMS – Refundable/Non Refundable Car Parking ( Open and Covered) Forfeiture Amount Transfer Charges/Admin Charges Original Works Contract Vs. Finishing Services ( Valuation ????) Free of Cost Material Supplied by the Contractee Hot Topics

50 CENVAT Credit Issues :- Whether CENVAT is eligible on all the Input services or there are some exclusions/Conditions Completed Projects and Unsold Units Township Projects Reversal of CENVAT credit for sale of Land/Plot Adjustment of Credit Note/Discount Point of Taxation Hot Topics

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