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S ERVICE T AX AS APPLICABLE TO R EAL E STATE INCLUDING J OINT CHARGE & R EVERSE CHARGE By CA Sudhir V S.

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Presentation on theme: "S ERVICE T AX AS APPLICABLE TO R EAL E STATE INCLUDING J OINT CHARGE & R EVERSE CHARGE By CA Sudhir V S."— Presentation transcript:

1 S ERVICE T AX AS APPLICABLE TO R EAL E STATE INCLUDING J OINT CHARGE & R EVERSE CHARGE By CA Sudhir V S

2 C OVERAGE THIS N OON Services applicable to builders and its changes upto Position from Comparison per and post Reverse charge and joint charge Q & A

3 P OSITION PRIOR TO 30 TH J UNE 2012

4 M ILE STONE OF S ERVICES DatesEvent Consulting Engineer Erection Commissioning & Installation 2003Daelim Industrial Co. Ltd. vs Commissioner of C. Ex., Vadodara 2003 (155) ELT 0457 Tri.-De – vivisection Industrial & Commercial Construction Service

5 M ILE STONE OF S ERVICES DatesEvent K. Raheja Development Corporation vs State of Karnataka 2006 (003) STR 0337 S.C – Sales Tax Case Construction of Complex Service Circular F. No. 332/35/2006-TRU, dated Clarifying Builder/Real Estate Developers Not Liable Works Contract Service with 2.06% composition

6 M ILE STONE OF S ERVICES DateEvent Circular No. 98/1/2008-S.T., dated Baring change of classification Composition Rate increased to 4.12% from 2.06% Magus Construction Pvt. Ltd. vs Union of India 2008 (011) STR 0225 Gau – Builder not liable Circular No. 108/2/2009-S.T., dated – Personal use not liable

7 M ILE STONE OF S ERVICES DateEvent Explanation added creating deeming fiction for the Developer for Complex service and not Works Contract Service & Builder’s Special Service A.P. Ravi v. Union of India (20) S.T.R. J119 (Mad.) – Stay on the Explanation G.S. Promoters vs Union of India 2011 (021) STR 0100 P&H. – Upheld the constitutional validity of the circular SLP admitted by SC on the decision of the HC New Service Tax Law

8 I NDUSTRIAL AND C OMMERCIAL C ONSTRUCTION Const of New Buildings or civil structures Completion and finishing of building or civil structures Repairs of bldg, civil structures or pipelines Used for Commerce or Industry Other than roads, airports, railways, transport terminals, bridges, tunnel, and dams. Phrase “Service” deleted w. e. f

9 C ONSTRUCTION OF C OMPLEX S ERVICE Construction of complex, part there of Completion of complex alone and not part there of Repair of complex 12 units; common area & facility; layout approved Personal use exempt

10 P ERSONAL USE I SSUES Circular 108 validity? Rathan Melting wire SC Contracts liability? After Explanation? Still Valid Litigation chance – 90%, Success chance??? Tribunal stay in various issues – Mothisham Builders Period of this provision from till date

11 E ARLIER O PTIONS FOR PAYMENT OF S ERVICE TAX Commercial Complex Pay Full rate (10.3) take CENVAT on Steel and Cement. Excluding Land Residential Complex Option I: 2.575% on full consideration including Land Option II: 3.40% on Consideration Excluding Land (Value of Land can be as agreed also) Option III: 4.12% less CENVAT on input Service Capital Goods

12 C RITERIA FOR CHOOSING EARLIER O PTIONS Option I : For people having less land valuation and no sub-contractors and outside consultants Option II For Builders having higher land valuation and no sub-contractors and outside consultants Option III: For Builders with Higher Land Value and having Sub-contract

13 RELEVANT PROVISIONS – ON OR AFTER

14 "service" means - any activity carried out by a person for another (person) for consideration, includes a declared service, but shall not include …………………….. D EFINITION OF “S ERVICE ” – S EC 65B(44)

15  Activity which constitutes merely - ◦ transfer of title in goods or immovable property by way of sale, gift or in any other manner; ◦ transaction of deemed sale ; ◦ Transaction in money and actionable claim ;  Provision of service by employee to employer in course of or in relation to his employment ;  Fees taken in any court or tribunal established; S ERVICE EXCLUDES

16 (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 ; R ELATED D ECLARED S ERVICE 66E

17 "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; C OMPETENT AUTHORITY

18 W ORKS C ONTRACT IN G ENERAL Any contract undertaken for execution of work Professional contracts are not works contract Service contracts are not works contract Sales Tax laws defines it – Gujarat State - Any agreement for execution of works relating to civil works, construction, manufacture, processing, fabrication, erection, Installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property for cash/deferred payment or other valuable consideration is a works contract. AP VAT – Inclusive Definition

19 C AN W ORKS C ONTRACT BE DIVIDED If terms divides it for sale and service separately, it can be. If it is not so, then it cannot be divided. – Gannon Dunkerly & Co., - [1993] 88-STC-204 However in terms of the amendments to the constitution, the state is given powers to divide it notionally for the purpose of levying sales tax Daelim Industrial Co. Ltd. vs Commissioner of C. Ex., Vadodara 2003 (155) ELT 0457 Tri.-De – vivisection

20 W ORKS C ONTRACT – D EFINITION – S EC. 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 property

21 V ALUATION

22 M ETHODS 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.

23 M ETHODS 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.

24 M ETHODS 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

25 O THER A SPECTS OF V ALUATION 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. Input Service and Capital goods Credit is available Inputs Credit is not available.

26 E XEMPTIONS – S L. N O. 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; 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;

27 E XEMPTIONS – S L. N O. 12 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;

28 E XEMPTIONS – S L. N O. 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 empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India; 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;

29 R ESIDENTIAL C OMPLEX "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;

30 E XEMPTIONS – S L. N O. 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.

31 A BATEMENT – N OT. 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) Abatement is 75% Conditions – Inputs credit is not taken Value of land is included in the amount charged from the service receiver

32 SERVICE TAX IMPLICATION PRE & POST

33 TRANSACTION ONWARDS PRIOR TO Sale of flats/units where any part of sale consideration is received before issuance of completion certificate Taxable Sale of flats/units where entire sale consideration is received after issuance of completion certificate Non-Taxable Sale of single residential unit otherwise than as a part of a residential complex ExemptNon-Taxable Sale of residential flats in building/complex having more than 1 unit but not more than 12 units TaxableNon-Taxable Sale of residential flats in building/complex having more than12 units Taxable

34 TRANSACTION ONWARDS PRIOR TO Re-sale of flats/unitsNon-Taxable Sale of Entire Building ( having more than 12 units) under construction to a company meant for use of its employees as staff quarters. TaxableNon-Taxable Sale of under construction units for commercial purpose (irrespective of number of units in a complex) Taxable Sale of under construction units to Government ExemptNon-Taxable Sale of residential unit pre-dominantly meant for employees of Government, MP, MLA etc ExemptNon-Taxable Sale of unauthorized / unapproved flatsTaxableNon-Taxable

35 TRANSACTION ONWARDS PRIOR TO Sale of under construction flats/units to entity registered under Sec 12AA of Income tax Act, 1961 and to be used by general public for religious purpose Non-Taxable Sale of units to charitable trusts for educational / hospital / clinic etc. TaxableNon-Taxable

36 Notification No 26/2012 dt notified changes in abatement: PARTICULARSPOST PRE Sale of under construction flats/ units where any consideration is received before issuance of completion certificate provided value of land is included in consideration Taxable Value 25% Effective Tax 3.09% Taxable Value 25% Effective Tax 2.575%  Cenvat Availability Inputs (such as cement, steel etc) Not available Input Services (such as architect, contractor etc.) AvailableNot available Capital Goods (such as machinery, equipment etc.) AvailableNot available

37 Reverse Charge Meaning & Reasons for Introduction  Service tax - payable by the service provider of taxable service – “GENERALLY”  When there is a tax-shift and service recipient has to pay Service tax such a mechanism of tax collection is known as Reverse Charge.  Reasons:  Administrative Convenience  Increase the tax coverage viz. Unorganized sectors  Curb Tax evasion

38 S.NO.Description of Service%ST SPSR 1.Insurance Agent to a person carrying Insurance business NIL100% 2.Goods Transportation AgencyNIL100% 3.Sponsorship ServicesNIL100% 4.Advocate or firm of advocates 2 NIL100% 5.Support Services by Govt. except Renting, Posts, transportation of goods or passengers 2 NIL100% 6.Manpower/Security services 1 25%75% 7.Service portion in Works Contract 1 50% 8.Hiring of Vehicles (Abated value) 1 NIL100% 9.Hiring of Vehicles (Non-Abated) 1 60%40% 10.Import of servicesNIL100% 11.Directors Remuneration( incl. Sitting Fees)NIL100% Reverse Charge-Joint Charge

39 1 SP= Individual, Hindu Undivided Family or partnership firm and SR=Body Corporate 2 SP= Advocate/Firm of Advocate &Government/Local authority as the case maybe SR=Business Entity Business Entity defined under Section 65B(17) as – -person ordinarily carrying out -any activity relating to -industry, commerce or any other business or profession

40 I SSUES ??? What happens to continuing works where service tax was being on 33% without credit prior to ? What happens to continuing works where service tax was being paid under works contract composition prior to ? What happens to continuing works of construction of residential houses less than 12 units but more than 1? Whether Service Tax can be paid on full value and take credit of duty paid in inputs in full in new law?

41 I SSUES ??? Whether developer is liable to pay service tax under works contract? In case of joint development with land owner, whether developer is liable for share given to land owner? 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

42 I SSUES ??? Whether the sub-contractor is liable to pay service tax when main contractor has paid tax/exempted? Whether flooring work, plastering, painting, glazing, carpentry, plumbing, interiors etc., done during the course of construction can be considered as original works for valuation purposes and pay tax on 40%? Whether construction includes the above said activities?

43 I SSUES ??? Whether scope of entry 14 in exemption is restrictive in its scope as it covers only erection or construction of original work only? Whether the said activities in relation to single residential unit can be claimed exemption? Whether compensation received for transfer of buying right is liable for service tax? Whether the amounts forfeited for non-payment of installments is liable for service tax? If yes whether it is applicable on full value or as per valuation rules?

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