2. ST implication on REAL ESTATE SECTOR V.Raghuraman

3. Gannon Dunkerley & Company (Madras) Ltd AIR 1958 SC 560 No sale of goods involved in works contract States does not have legislative competence to levy Sales tax on works contract V.Raghuraman

4. Art. 366(29A) – 46 th Amendment Act, 1982 tax on the sale or purchase of goods” includes (b)a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made V.Raghuraman

5. Constitutional validity of Art. 366(29A) Builders Association AIR 1989SC 1371 Gannon Dunkerly & Co. Vs. State of Rajastan, 1993 88 STC 204 SC V.Raghuraman

6. Important issues under VAT on WC Works contract Vs. Pure Service i. Sasken Communications. Kar. HC ii. Hindustan Shipyard Ltd. (2000) 119 STC 533 SC AIR 2000 SC 2411 Principal of accretion- State of Andhra Pradesh and others v. Larsen & Toubro Ltd. and others [2008] 17 VST 1(SC) V.Raghuraman

7. Important issues under VAT on WC Activities of developer of apartment- covered under works contract Larsen & Toubro Ltd. 2013-TIOL-46-SC-CT-LB V.Raghuraman

8. SERVICE TAX on Real estate activities

9. Gist of Background of ST on Real estate activities Commercial construction Residential Construction Works Contract Services Levy w.e.f. 10.09.200416.05.20051.6.2007 Levy on Service of construction of a building structure meant /used for Business or Commerce Construction of Residential Complex Works Contract relating to certain Specified activities Real estate agent services were brought to tax w.e.f. 16.10.1998 V.Raghuraman

10. Important circulars relating to levy on developer Circular ref#Summary 80/10/2004-S.T., dated 17-9-2004 Estate Builders” (i.e. who get such construction done) are not covered under the ambit of these services F.No.B1/6/2005- TRU dated 27.7.2005 Construction services provided by contractors to builder, promoters would get attracted V/DGST/22/Audit/ Misc/1/2004, dated 16-2-2006 Builders are also covered under service tax net Circular F. No. 332/35/2006-TRU, dated 1-8-2006 Builder is not liable but contractor who is engaged to construct the complex is liable. If no contractor is engaged but construction is done by Builder by employing labour, it becomes self service

11. Important circulars relating to levy on developer Circular ref#Summary 96/7/2007-ST dt 23.08. 2007 Builder is not liable but contractor who is engaged to construct the complex is liable. If no contractor is engaged but construction is done by Builder by employing labour, it becomes self service 108/02/2009-ST dated 29.01.2009 - Builder is not liable -Transfer of immovable property and not service - Self service - Personal use Trade Facility No. 1/2011, dated 15- 2-2011 The Service of Construction of Residential Complex would attract service tax from 1-7-2010 Circular No. 151/2/2012-S.T., dated 10-2-2012 For the period prior to 1-7-2010 : construction service provided by the builder/developer will not be taxable,

12. Important circulars relating to Construction and Works Contract CircularSummary B1/16/2007- TRU, dated 22-5-2007 Contracts which are treated as works contract for the purpose of levy of VAT/sales tax shall also be treated as works contract for the purpose of levy of service tax 98/1/2008- S.T., dated 4-1-2008 Classification of a taxable service is determined based on the nature of service provided 128/10/201 0-S.T., dated 24-8-2010 long term contracts are classifiable under ‘works contract services’ 123/5/2010- TRU, dated 24-5-2010 It is the nature of the contract (i.e. a contract wherein the transfer of property in goods involved is leviable to a tax as sale of goods) rather than the nature of activities undertaken, that distinguishes construction / erection services If the nature of the activities is such that they are excluded from aforesaid two services (construction or erection ) then they would generally remain excluded from this taxable service as well.

13. Important decisions relating Builders Circular ref#Summary Magus Construction Pvt. Ltd 2008 (11) S.T.R. 225 (Gau Activities of developer amounts to transfer of immovable property and not service. GS Promoters-2011 (21) S.T.R. 100 (P & H) Validity of Explanation inserted w.e.f. 1.7.2010 Shrinandnagar’s-IV Co- op. Housing Society Ltd. 2011 (23) S.T.R. 439 (Guj.) Amendment w.e.f. 1.7.2010 is only prospective in nature Macromarvel Projects Vs. CCE, 2008(12) STR 603(Tri.-Chen) Construction of individual residential houses does not attract service tax. Civil appeal before SC against said order is dismissed -2012 (25) S.T.R. J154 (S.C.)] S.T.R. Sujal Developers 2013 (31) S.T.R. 523 (Guj Agreement between developer and the society which holds land, for development and construction of houses is not taxable under construction services.

14. Important decisions relating WC Circular ref#Summary Nagarjuna Construcitons. 2012 (28) S.T.R. 561 (S.C.) No Composition scheme for ongoing contracts as on 1.6.2007 CESTAT Large Bench decision in Bhayana Builders (P) Ltd. Materials supplied free of cost by the recipient of service need not be included for the purpose of computation of abatement. Ramky Infrastructure Ltd. v. Commissioner — 2013 (29) S.T.R. 33 (Tribunal) Turnkey contracts / EPC even if the same is for non commercial purposes or for the purpose of irrigation or water supply etc., would be liable to service tax under works contract. GD Builders, 2013-TIOL-908- HC-DEL-ST The service portion of the composite contracts can be made subject matter of service tax. Aspect doctrine is applied for bifurcating/vivisect the composite contract

15. Important decisions relating WC Circular ref#Summary LARSEN & TOUBRO LTD 2013 (32) S.T.R. 410 (Tri. - Del Whether for period prior to 1-6-2007 such contract could be vivisected and service components subjected to tax under other pre-existing taxable services Matter referred to Larger Bench 2014-TIOL-1753- CESTAT-BANG No service tax on builders till 1.7.2010 Individuals who have paid ST to builder are eligible for refund Limitation: refund allowable if claimed within 1 year from date of payment to builder.

16. V.Raghuraman SERVICE TAX UNDER NEGATIVE LIST SCHEME

17. Service tax –Negative List Introduction to Negative List scheme Service is being defined Renting, construction, software etc are specifically termed as service as declared services Certain services not liable - listed under negative list

18. Definition of Service Any activity for consideration By one person to another Includes declared services Excludes  Transfer of title in goods or immovable property  Deemed sale in terms of Art. 366(29A)  Transaction in money or actionable claim  Functions of MP, MLA, Members of Panchayat or Municipality or Local authority  Services by employee to employer in the course of employment

19. DEFINITIONS (22) "declared service" means any activity carried out by a person for another person for consideration and declared as such under section 66E (49) "support services" means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis V.Raghuraman

20. DEFINITIONS (54) "works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property V.Raghuraman

21. DEFINITIONS- EXPLAINED Contract in which transfer of property in goods involved in execution of such contract which is liable to VAT / Sales tax And Such contract is for the purpose of :  Construction  Erection, commissioning, installation,  completion, fitting out,  repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property V.Raghuraman

22. DECLARED SERVICES – SECTION 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. (h) service portion in the execution of a works contract V.Raghuraman

23. Explanation – for Construction. (I) the expression "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) Registered Architect; or (B) Registered Chartered engineer; or (C) licensed surveyor of respective local body of the city or town or village or development or planning authority; V.Raghuraman

24. Explanation- for Construction (II) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure; V.Raghuraman

25. Construction activity What are the activities covered  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 When it is taxable  If consideration is received prior to issue of completion certificate by the competent authority Construction" includes additions, alterations, replacements or remodeling of any existing civil structure V.Raghuraman

26. EXEMPTIONS V.Raghuraman

27. Notification. No. 25/2012 Services provided to the United Nations or a specified international organization (Sl. No.1) Services by an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) by way of charitable activities (Sl. No.4) V.Raghuraman

28. Notification. No. 25/2012- Sl. No. 12 ProviderAny person RecipientGovernment or a local authority or governmental authority Governmental authority’’ means a board, or an authority or any other body established with 90% or more participation by way of equity or control by Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution Nature of Services Construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of Specified structures of buildings: V.Raghuraman

29. (a) a civil structure or original works predominantly for a non- industrial or non-commercial use; (b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity etc.; (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; Notification. No. 25/2012- Sl. No. 12 V.Raghuraman

30. Notification. No. 25/2012- Sl. No. 12 (e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (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 Finance Act ; Meaning “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit, “single residential unit” means an independent residential unit with specific facilities for living, cooking and sanitary requirements, V.Raghuraman

31. Notification. No. 25/2012- Sl. No. 13 ProviderAny person RecipientAny person Nature of Services 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 Yojana; V.Raghuraman

32. Notification. No. 25/2012- Sl. No. 13 (c) a 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 (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 V.Raghuraman

33. Notification. No. 25/2012- Sl. No. 14 ProviderAny person RecipientAny person Nature of Services 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 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 V.Raghuraman

34. Notification. No. 25/2012- Sl. No. 14 (d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes (e) Mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages Original Work: (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 V.Raghuraman

35. Notification. No. 25/2012- Sl. No. 29 Services of sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt V.Raghuraman

36. VALUATION & ABATEMENTS V.Raghuraman

37. Valuation rules- Specific Services-2A Works contract services Value of Service = Gross amount charged minus Value of Goods Gross amount charged excludes  VAT  Sales Tax V.Raghuraman

38. Works contract- Valuation V.Raghuraman Value of Service = Gross amount charged minus Value of Goods Actual value of services Option 1 Option 2 Original Works Pay on 40% of Gross value Pay on 70% of Gross value Other than original Works No CENVAT on inputs used for execution of WC

39. Valuation rules- Specific Services Gross amount includes Labour charges for execution of the works; Amount paid to a sub-contractor for labour and services Charges for planning, designing and architect’s fees charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract cost of consumables such as water, electricity, fuel, used in the execution of the works contract cost of establishment of the contractor relatable to supply of labour and services other similar expenses relatable to supply of labour and services; and profit earned by the service provider relatable to supply of labour and ser V.Raghuraman

40. Valuation rules Where VAT/Sales Tax is paid on actual value of goods transferred:  Such value shall be treated as value for deducting the value of goods V.Raghuraman

41. Works Contract If VAT is not paid on actual value then Nature of worksValuation Original works40% of the total amount charged Maintenance, repair, reconditioning etc of goods 70% of the total amount charged Other works including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property Condition: No Credit of inputs shall be availed V.Raghuraman

42. Works Contract Original Works: (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 V.Raghuraman

43. Works Contract (d) “total amount” 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 : V.Raghuraman

44. ABATEMENT- Notification No.26/2012 Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, etc. Percentage of Abatement- 75% Conditions:  No Cenvat shall be availed on inputs  Value of land is included in the amount charged from the service receiver V.Raghuraman

45. ABATEMENT- Notification No.26/2012 Nature of worksConstruction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, etc. Percentage of Abatement- Carpet area upto 2000 square feet and where the amount charged is less than rupees one crore; 75% (pay tax on 25%) Others70% (pay tax on 30%) Condition: a) No Cenvat shall be availed on inputs b) Value of land is included in the amount charged from the service receiver V.Raghuraman

46. PLACE OF PROVISION V.Raghuraman

47. PLACE OF PROVISION Applicable Rule Rule 4- In respect of works contracts relating to movable property Eg. Repair & maintenance Rule 5- in case of immovable property related works contract and construction service If services are provided at more than one location (one or more locations in taxable territory and one or more locations in non taxable territory)- location in the taxable territory where the greatest proportion of the service is provided If both provider and recipient located within taxable territory- location of recipient see rule 8 V.Raghuraman

48. POPS immovable property: Nature of services Place of provision Services relating to immovable property  Services directly directly in relation to an immovable property,  including services provided in this regard by experts and estate agents,  provision of hotel accommodation by a hotel, inn, guest house, club or campsite, by whatever, name called,  grant of rights to use immovable property,  services for carrying out or co-ordination of construction work, including architects or interior decorators, place where the immovable property is located or intended to be located V.Raghuraman

49. POINT OF TAXATION V.Raghuraman

50. Point of Taxation in general Rule 3 Earliest of following events would be the point of taxation  Date of invoice  Date of completion of service (if invoice is not issued within 30 days of completion of service)  Date of receipt of advance (to the extent of advance) V.Raghuraman

51. Proviso to R. 3: continuous supply of services Meaning:  services are to be provided on continuous basis or recurrent basis under a contract for a period exceeding 3 months period with obligation for payment on periodical basis or from time to time OR  Notified by Government Service Notified by Government  Telecommunication services  Service portion in works contract V.Raghuraman

52. Rule 3 –continuous supply of services Where contract provides for determination of value of service on periodical basis on completion of an event  Date of completion of such specified event Where no such event is specified  General provisions under Rule 3 would apply V.Raghuraman

53. Point of taxation for Construction service If construction activity would last for more than 3 months and there is an obligation for payment on periodical basis or from time to time Then in such case, completion of event or the period as provided in contract would be point of taxation V.Raghuraman

54. Point of taxation for Works Contract Notified by Government as Continuous Supply of service If contract / agreement provides for payment on periodical basis then  Each event or period shall be point of taxation Else, follow Rule 3 V.Raghuraman

55. Rule 4 –Change in effective rate of tax Meaning: Change in the rate of tax shall include  a change in the portion of value on which tax is payable in terms of a notification issued in the Official Gazette under the provisions of the Act, or rules made thereunder  i.e. change in the abatements, composition rates etc. V.Raghuraman

56. Change in Effective Rate Provision of service Invoice &/or paymentRate applicable Point of Taxation Before rate change Either invoice is issued or payment is received before rate change OLD RATE Date of invoice or payment whichever is earlier After rate change If both invoice as well as payment is received before rate change OLD RATE In all other casesNEW RATE Date of invoice or payment whichever is later V.Raghuraman

57. Rule 5 new services: SituationTaxability Where invoice has been issued and the payment received against such invoice before service became taxable No tax shall be payable to the extent of the invoice raised and payment received. Invoice issued before service became taxable but consideration received after the same became taxable Liable to the extent received Where the payment has been received before the service becomes taxable and invoice has been issued within 30 days as specified in rule 4A of the Service Tax Rules, 1994. No tax shall be payable Where invoice is not issued within 30daysTaxable V.Raghuraman

58. Rule 7: Services still taxable on payment basis Services where person other than provider of service is liable to pay tax [68(2)]  GTA, import of service, Sponsorship, manpower supply, works contract If payment is not made within 6 months from date of invoice- then Rule 3 would be applicable Service tax payable as recipient of works contract service would be on the basis of payment made to contractor V.Raghuraman

59. REVERSE CHARGE OR JOINT CHARGE V.Raghuraman

60. Nature of service ProviderRecipientPerson liable Works contract Individual Partnership, AOP Business entity registered as a Body corporate Proportionate basis by Recipient and provider if both are located in taxable territory 50% each Both provider and recipient could adopt their own valuation methods

61. Business Entity & Person (i) an individual, (ii) a H U F, (iii) a company, (iv) a society, (v) a LLP, (vi) a firm, (vii) an association of persons or body of individuals, whether incorporated or not, (viii) Government, (ix) a local authority, or (x) every artificial juridical person, not falling within any of the preceding sub-clauses; (17) "business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession; (37) Person includes:

62. Business entity Business entity registered as a Body Corporate – Section 2(7) of Companies Act, 1956. Society which is deemed to be a body corporate as per Societies Registration Act, cannot be termed as ‘body corporate’ for reverse unless the same is registered as such. V.Raghuraman

63. Questions?

64. EMAIL ID : VRAGHURAMAN@VSNL.COMVRAGHURAMAN@VSNL.COM Thank You V.RAGHURAMAN.B Com, FCA, ACS, Grad.CWA LLB, Partner M/s.. Raghuraman & Chythanya, Advocates. V.Raghuraman