Service Tax as applicable to Real Estate including Joint charge & Reverse charge

1. Service Tax as applicable to Real Estate including Joint charge & Reverse charge By CA Sudhir V S

2. Coverage this Noon • Services applicable to builders and its changes upto 30.06. 2012 • Position from 01.07.2012 • Comparison per and post 01.07.2012 • Reverse charge and joint charge • Q & A

3. Position prior to 30th June 2012

4. Mile stone of Services

5. Mile stone of Services

6. Mile stone of Services

7. Mile stone of Services

8. Industrial and Commercial Construction • 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 01.07.2010

9. Construction of Complex Service • 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. Personal use Issues • 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 16.06.2005 till date

11. Earlier Options for payment of Service tax • Commercial Complex • Pay ST @ 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. Criteria for choosing earlier Options • 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 01.07.2012

14. Definition of “Service” – Sec 65B(44) • "service" means - • any activity • carried out • by a person • for another (person) • for consideration, • includes a declared service, • but shall not include ……………………..

15. Service excludes • 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;

16. 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;

17. 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;

18. Works Contract in General • 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. Can Works Contract 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. 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 property

21. Valuation

22. 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.

23. 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.

24. 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

25. 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. • Input Service and Capital goods Credit is available • Inputs Credit is not available.

26. 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; • 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. Exemptions – Sl. No. 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. 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 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. 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;

30. 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.

31. 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) • 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 1.7.2012

36. Notification No 26/2012 dt 20.07.2012 notified changes in abatement:

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. Reverse Charge-Joint Charge

39. 1SP= Individual, Hindu Undivided Family or partnership firm and SR=Body Corporate 2SP= 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. Issues??? • What happens to continuing works where service tax was being on 33% without credit prior to 01.07.2012? • What happens to continuing works where service tax was being paid under works contract composition prior to 01.07.2012? • 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. Issues ??? • 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. Issues ??? • 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. Issues ??? • 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?

45. e-mail: vssudhir@gmail.com Contact: 9908 11 3787