Presentation on theme: "27/04/2013 CA PULOMA DALAL 1 Baroda Branch of WIRC The Institute of Chartered Accountants of India REAL ESTATE CONCLAVE Service Tax Issues for Builders,"— Presentation transcript:
27/04/2013 CA PULOMA DALAL 1 Baroda Branch of WIRC The Institute of Chartered Accountants of India REAL ESTATE CONCLAVE Service Tax Issues for Builders, Developers, Contractors including Works Contract Services.
27/04/2013 CA PULOMA DALAL 2 Real Estate Services in the negative list – Section 66D Service in relation to Agriculture: Services relating to agriculture or agricultural produce by way of renting or leasing of vacant land with/without a structure incidental to its use [Section 66D(d)(iv) Clarification: Education Guide: Would leasing of vacant land with a green house or a storage shed meant for agricultural produce be covered in the negative list? Yes. In terms of the specified services relating to agriculture 'leasing' of vacant land with or without structure incidental to its use' is covered in the negative list. Therefore, if vacant land has a structure like storage shed or a green house built on it which is incidental to its use for agriculture then its lease would be covered under the negative list entry. Note:Reference of Section in the entire presentation is of Finance Act, 1994 Education Guide means Education Guide issued by the Ministry of Finance on negative list based taxation of services coming into force from
27/04/2013 CA PULOMA DALAL 3 Real Estate Services in the negative list – Section 66D contd. Services by way of Residential Dwelling for use as residence What is renting? renting means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property; w.e.f , service tax law has undergone a huge transformation. From selective service based taxation to comprehensive service based taxation (except for services under negative list and exempted by notification). o The term renting is given a wider meaning. o Even part of occupation of immovable property amounts to renting. o Transfer of possession or control of immovable property is inconsequential to determine arrangement of renting.
27/04/2013 CA PULOMA DALAL 4 Scope of the term residential dwelling. Clarification: Education Guide What is a residential dwelling'? The phrase residential dwelling has not been defined in the Act. It has therefore to be interpreted in terms of the normal trade parlance as per which it is any residential accommodation, but does not include hotel, motel, inn, guest house, camp-site, lodge, house boat, or like places meant for temporary stay Would renting of a residential dwelling which is for use partly as a residence and partly for non-residential purpose like an office of a lawyer or the clinic of a doctor be covered under this entry? This would also be a case of bundled services as renting service is being provided both for residential use and for non-residential use. Taxability of such bundled services has to be determined in terms of the principles laid down in section 66F of the Act. (Please refer to Guidance Note 9). o End use of the property is the deciding factor. o Comment: No new benefit post 01/07/2012. Scope of section (105)(zzzz) also did not cover renting of residential property Real Estate Services in the negative list – Section 66D contd.
27/04/2013 CA PULOMA DALAL 5 Entry 12 –Services provided to the Government or 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 work predominantly meant for use other than commerce industry etc. Whether construction of hospital for a trust or a section 25 company be exempt? A historical monument, archaeological site or remains of national importance. A structure meant predominantly for use as educational, a clinical or an cultural establishment Canal, dam or irrigation works Pipeline conduit plant for: Water supply, water treatment or sewage treatment or disposal A residential complex predominantly meant for self-use or the use of their employees etc. Exemptions: Real Estate Sector (vide Notification No.25/ ST dated )
27/04/2013 CA PULOMA DALAL 6 Entry 13: Services provided by way of 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. A civil structure/any other original works pertaining to Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana. A building owned by a section 12AA of IT Act registered entity & meant predominantly for religious use by general public. A pollution control/effluent treatment plant (except within factory) or a structure meant for funeral, burial or cremation. Religious place means a place which is primarily meant for conduct of prayers or worship pertaining to a religion, meditation or spirituality. Exemptions: Real Estate Sector contd.
27/04/2013 CA PULOMA DALAL 7 Exemptions: Real Estate Sector contd. Entry 14: Services by way of construction, erection, commissioning or installation of original works pertaining: An airport, port or railways including monorail or metro. A single residential unit other than a part of residential complex Low-cost houses upto a carpet area of 60 square meters per house under specified affordable housing scheme of the Government of India. Post harvest storage infrastructure for agricultural produce including cold storage for such purposes. Mechanized food grains system / machinery / equipment for units procuring agricultural produce as food stuff excluding alcoholic beverages. 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.
27/04/2013 CA PULOMA DALAL 8 Entry 29(h) Services by sub-contractor providing services by way of works contract to another contractor providing works contract service which are exempt. [Refer definition of works contract in section 65B (54)] Exemptions: Real Estate Sector contd.
27/04/2013 CA PULOMA DALAL 9 Other relevant exemptions Entry 25 – Services provided to Government /a local authority / governmental authority by way of: (a)Carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation, conservancy, solid waste, management or slum improvement or upgradation or (b)………… Entry 39 – Services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under Article 243 of the Constitution. Services provided to developer of unit of Special Economic Zone (SEZ) vide Notification No.40/2012-ST dated 01/07/2012. Services to diplomatic missions etc. vide Notification No.27/2012-ST dated 20/06/2012. Threshhold Exemption vide Notification No.33/2012-ST dated 20/06/2012.
27/04/2013 CA PULOMA DALAL 10 Real Estate Sector taxed vide Declared Services – Section 66E renting of immovable property; 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 the execution of a works contract;
27/04/2013 CA PULOMA DALAL 11 Select Key Issues: Real Estate Sector Preferential location charges Cancellation/surrender/transfer/buy back/resale of a unit prior to completion Assured return to investors Transfer charge and restoration charge Valuation of completion & finishing services in new construction Free/concessional supply of material to contractor Ongoing contracts of construction on July 01, 2012 Booking / Sale of plots under development stage Build – Operate – Transfer (BOT) projects Allotment of flat/units to land owners in lieu of grant of development rights
27/04/2013 CA PULOMA DALAL 12 Background: Introduced with effect from 01/07/2010 vide clause (zzzzu) in section 65(105). Refer to clarification of the Government vide F. No.334/1/2010-TRU dated 26/02/2010. Position post 01/07/2012: When consideration not specified separately whether service tax is chargeable at abated rate? When consideration is specified separately whether abated rate is still available? Floor rise charge – available. Refer: Clarification provided to MCHI vide F. No.V/ST/1/Tech-I/463/11 dated 31/08/2012 Preferential location charges
27/04/2013 CA PULOMA DALAL 13 Cancellation/surrender/transfer/buy back/ resale before completion Cancellation or surrender of booking prior to completion of flat or unit: Either the buyer surrenders the booking or the builder cancels the booking on account of default in paying installments or similar reason. Retention of an amount as cancellation charge while refunding advances. Whether service tax chargeable under section 66E(e)? Agreeing to the obligations to refrain from an act or to tolerate an act or a situation or to do an act. At which rate? Whether adjustment of service tax already paid on advances from subsequent liability allowed? Refer para 2.3 of Circular No.151 dated 10/02/2012.
27/04/2013 CA PULOMA DALAL 14 Cancellation/surrender/transfer/buy-back/ resale before completion contd. Transfer of flat/unit during construction or prior to completion whether transfer by a prospective buyer attracts service tax. (Refer clarification vide Education Guide – para ) Buy-back during construction – whether service tax already paid allowed to be adjusted from subsequent liability? Re-sale of cancelled or surrendered or bought-back unit – whether service tax is attracted on remaining installments if unit is sold prior to obtaining completion certificate.
27/04/2013 CA PULOMA DALAL 15 Assured Return to investors Who is the service provider? Whether service tax is attracted? Why? Transfer charge and restoration charge recovered prior to completion of construction Service tax implications – prior to 01/07/ post 01/07/2012 Refer:Jaipuria Infrastructure Developers P. Ltd. vs. CST Delhi 2012 (25) STR-ST (Tri.-Del)
27/04/2013 CA PULOMA DALAL 16 Valuation: Completion and finishing services Whether the term completion & finishing services defined? Clause (ii) of Rule 2A of the Service Tax (Determination of Value) Rules, 2006 (Valuation Rules) In case of other works contracts not covered under sub-clause (A) and (B) including maintenance-repairs, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electric fittings of an immovable property Service tax shall be payable on 60% of the total amount charged for the works contract Refer: Definition of original works 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; In a new construction, whether completion & finishing services do not form part of original works?
27/04/2013 CA PULOMA DALAL 17 When goods and/or services are provided free of cost to the contractor, fair market value of all such goods or services provided in relation to execution of works contract, whether or not supplied under the same contract or any other contract, would be added to the value of contract for determining liability of service tax. (Rule 2A(ii) of Valuation Rules) However, if the receiver of execution of works contract service recovers any charges for such goods and/or service, it is deductible for the purpose of determining value on which service liability is computed under the said Rule 2A(ii). Refer: Explanation 1(b) of Rule 2A(ii) of the Valuation Rules: total amount" means the sum total of the gross amount charged for the works contract and the 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: Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles. Free or concessional supply of material or services to contractor
27/04/2013 CA PULOMA DALAL 18 Ongoing contracts as on 01/ 07 / 2012 : Construction of residential complex When the service was exempt and became taxable on 01/07/2012. Applicability of Rule 5 of the Point of Taxation Rules, 2011 (POT Rules); No service tax payable when: Invoice is issued and payment is received against invoice before service becoming taxable. Payment is received before service becoming taxable and invoice is issued within 14 days of service becoming taxable.
27/04/2013 CA PULOMA DALAL 19 When a developer purchases a piece of land, books plots, receives money in installments and undertakes the following activities: Developing internal roads/approach road Electrification/installation of poles etc. Creation of other facilities like club-house, health club for the plot owners Laying pipelines for water sewerage etc. Whether the above amounts to taxable service? At which rate? Booking / sale of plots under development stage
27/04/2013 CA PULOMA DALAL 20 What are BOT projects? Infrastructure projects Main parties involved: Government or its authorized agency : Concessionaire : Contractor appointed by Concessionaire : Actual users Refer:Education Guide: Para Refer:2013-TIOL-136-CESTAT-MUM 2013-TIOL-586-CESTAT-MUM Build Operate Transfer (BOT) projects
27/04/2013 CA PULOMA DALAL 21 Whether sale of land in lieu of which units are provided is a service and therefore attracts service tax? If yes, how is the value determined? Refer:Section 67(1)(iii) of Rule 3(a) of the Valuation Rules. What is the point of taxation for the developer? Refer:Education Guide para and Refer:Circular No.151/2/2012 of 10/02/2012 Refer:Maharashtra Chamber of Housing Industry (MCHI) vs. UOI 2012 (25) STR 305(Bom) MCHI v. State of Maharashtra (2012) 51 VST 168 (Bom) LCS City Makers Pvt. Ltd. vs. CST, Chennai 2013 (30) STR 33 (Tri.-Chennai) Allotment of flats/units to the land owner for granting development rights
27/04/2013 CA PULOMA DALAL 22 Maharashtra Chamber of Housing Industry vs. Union of India 2012 (25) STR 305 (Bom) The constitutional validity of service tax introduced from on builders agreeing to sell immovable property during construction stage was challenged in a bunch of petitions on behalf of the Petitioners the following grounds were urged: The amendment is beyond the legislative competence of Parliament since the subject matter of the tax falls within the legislative power of the States under Entry 49 of List II to the Seventh Schedule of the Constitution By the explanation to clauses (zzq) and (zzzh), the construction of a new building or complex is by a deeming fiction treated to be a service when (i) The construction is intended for sale; and (ii) Some receipt is envisaged before the grant of a completion certificate by the appropriate authority. The tax in pith and substance is not on construction, but on the sale of land and the element of sale is essential to fasten the charge. The sale of immovable property before, during or after construction, but before a completion is granted can by no stretch of imagination be regarded as a service. The provisions of Section 65(105)(zzzzu) are unconstitutional on the grounds that no element of service is involved whatsoever because it is a tax on location and what is the preferential location or an extra advantage or a payment over and above the basic sale price is not defined. The provision suffers from the vice of an excessive delegation of legislative power.
27/04/2013 CA PULOMA DALAL 23 Maharashtra Chamber of Housing Industry vs. Union of India 2012 (25) STR 305 (Bom) On behalf of Revenue the following was urged: The explanation to clauses (zzq) and (zzzh) does not tax a transfer of property at all. Construction is an activity on land or a user of land which does not fall within the ambit of Entry 49 of List II; The explanation creates a deeming fiction under which a service is deemed to be provided by the builder to the buyer where (i) There is a intention to sell; and (ii) At least some payment has been received from the flat purchaser. These, however, are incidents on the happening of which tax may be charged, but do not form the subject matter of the tax. The tax has not been imposed on the transfer or sale of immovable property. The tax is on a construction service, but is triggered when there is an intent to sell and some payment is received; Construction reasonably construed does involve an element of service. Clause (zzzzu) was introduced to cover diverse services which builders provide under different heads for which charges are levied separately. Builders do charge for providing preferential locational and other development amenities which form part of service rendered.
27/04/2013 CA PULOMA DALAL 24 Maharashtra Chamber of Housing Industry vs. Union of India 2012 (25) STR 305 (Bom) Held: Incidence of the tax is not relevant to construing the subject matter of tax and it is distinct from the taxable event; it identifies, as it were, the person on whom the burden of tax would fall. intent to sell whether before, during or after construction is the touchstone of the deeming definition of the service of the builder to the buyer. an explanation could be of different genres and legislature is not prevented to enact an explanation which is not clarificatory but expansive. The legislature has imposed levy on the activity involving provision of service by a builder to the buyer in the course of the execution of a contract involving intended sale of immovable property. The charge is not on land and buildings as a unit and it is not on general ownership of land. The explanation bringing in two fictions of a deemed service and deemed service provider is not ultra vires the provisions of sections 67 and 68 of the Finance Act.
27/04/2013 CA PULOMA DALAL 25 Maharashtra Chamber of Housing Industry vs. Union of India 2012 (25) STR 305 (Bom) The builders following the practice of levying charges under diverse heading including preferred location involved value addition and a service before obtaining a completion certificate. If no charge is levied for a preferential location or development, no service tax is attracted. Therefore there is no vagueness and uncertainty and there is no excessive delegation. By a subsequent Notification dated 22 nd June, 2010, the extent of the exemption is enhanced to 75% of the gross value. What is taxed therefore is the value addition involved in the rendering of service.
27/04/2013 CA PULOMA DALAL 26 Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra and Ors (2012) 51 VST 168 (Bom) The constitutional validity of the amended definition of sale, the Trade Circular dated an d the 1% Composition Scheme introduced w.e.f were challenged in various writ petitions. Gist of contentions for the petitioners are provided as under: The amendment was beyond the scope of the States power to tax under Sl. No. 54 of List II of the Seventh Schedule to the Constitution. In order to attract the application of Article 366(29A)(b), a contract would have to among other things involve a transfer of property in goods and immovable property does not constitute goods. Consequent upon the 46th Amendment to the Constitution, only a transfer of property in goods involved in the execution of a works contract is taxable and a contract for the sale of immovable property is not a works contract. A works contract involves only two elements viz. the transfer of property in goods; and supply of labour and services. If a third element, the sale of immovable property, is involved in the contract it does not constitute a works contract and hence to such a contract, the legal fiction created by Article 366(29A) would not apply.
27/04/2013 CA PULOMA DALAL 27 Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra and Ors (2012) 51 VST 168 (Bom) Contracts governed by the Maharashtra Ownership Flats (Regulations of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) cannot be regarded as a works contract, being agreements for the purchase of immovable property. The MVAT ignores the concept of plurality of deemed sales. Where the developer is the owner of the land, the promoter is both the owner and developer. Alternately, a developer may enter into a development agreement with the owner of the land. When a promoter appoints a sub contractor and gets a building constructed, that contract is a works contract under Article 366(29A) and a transfer of the property in the goods involved in the execution of the works contract takes place to the developer. This the first deemed sale. When the developer enters into an agreement with a purchaser under the MOFA, a sale of goods is not involved since this amounts to a second deemed sale of the same goods which cannot be brought to tax. Property has already passed on accretion and the same transaction of deemed sale cannot be taxed twice.
27/04/2013 CA PULOMA DALAL 28 Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra and Ors (2012) 51 VST 168 (Bom) Gist of contentions for the revenue are provided as follows: The purpose underlying the enactment of the deeming fiction in Article 366(29A) was to override the limited definition of the expression sale in the Sale of Goods Act, 1930 and to isolate the sale of goods element involved, inter alia, in a contract which is a works contract. The amended definition of sale falls within the compass of Article 366(29A). A works contract is a contract to execute works and encompasses a wide range of contracts; it is not restricted to building contracts having only two elements viz. the sale of material and goods and the supply of labour and services. The well settled connotation of the expression works contract is that a building contract may also involve in certain situations a sale of land. A works contract does not cease to be such merely because any other obligation exists. In an agreement which is governed by the MOFA, a conveyance of the interest in the flat or at any rate an interest therein is created at the stage of the execution of an agreement. The doctrine of accretion is always subject to a contract to the contrary. The provisions of the MOFA contain a statutory stipulation to the contrary where the accretion to the property enures to the benefit of the flat purchaser; and The Trade Circular and the deduction schemes are only clarificatory in nature.
27/04/2013 CA PULOMA DALAL 29 Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra and Ors (2012) 51 VST 168 (Bom) Held: Works contracts have numerous variations and it is not possible to accept the contention that a contract for work in the course of which title is transferred to the flat purchaser would cease to be a works contract The effect of the amendment to Section 2(24) is to clarify the legislative intent that a transfer of property in goods involved in the execution of works contract including an agreement for building and construction of immovable property would fall within the description of a sale of goods within the meaning of the provision. The constitutional validity of the provisions of the MVAT Act, 2002, as amended, is not contingent upon any other statutory regulation of apartments under cognate legislation in the State of Maharashtra. Having regard to this statutory scheme, it is not possible to accept the submission that a contract involving an agreement to sell a flat within the purview of the MOFA is an agreement for sale of immovable property simplicitor. The Constitutional validity of the amended definition of sale, the Trade Circular dated etc. upheld. Held Liable to VAT
27/04/2013 CA PULOMA DALAL 30 Amendment vide Notification No. 2 / 2013-ST dated & effective from Construction of a complex building, civil structure or a part thereof intended for sale to a buyer wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority. (i) For residential unit having carpet area upto 2000 sq.feet OR whether amount charged is less than Rs.1 Crore (ii) For other than (i) above Value chargeable to service tax 25% 30% Substituted entry no.12 in Notification No.26/2012-ST
27/04/2013 CA PULOMA DALAL 31 Conditions: No CENVAT on inputs for providing the above service is taken. The value of land is included in the amount charged to service receiver. Based on the above: Whether Rs.80 lakh charged for a 2200 sq. feet flat; OR Whether Rs.2 Crore charged for 800 Sq. feet flat; eligible for 75% abatement? Amendment vide Notification No. 2 / 2013-ST dated & effective from contd.