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WELCOME TO THE PRESENTATION ON SERVICE TAX APPLICABLE TO REAL ESTATE AND CONSTRUCTION INDUSTRY. K. Vaitheeswaran K.VAITHEESWARAN & CO. ADVOCATES & TAX CONSULTANTS. Mobile : 98400-96876 E-mail : [email protected] ISSUES IN CONSTRUCTION.

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Welcome to the presentation on service tax applicable to real estate and construction industry

WELCOME TO THE PRESENTATIONONSERVICE TAX APPLICABLE TO REAL ESTATE AND CONSTRUCTION INDUSTRY

K. Vaitheeswaran

K.VAITHEESWARAN & CO.ADVOCATES & TAX CONSULTANTS

Mobile: 98400-96876 E-mail : [email protected]

K.Vaitheeswaran& Co.


Issues in construction
ISSUES IN CONSTRUCTION

  • Service tax on advance receipts. Section challenged and matter pending in the Madras High Court.

  • Materials supplied by client.

  • Scope of the explanation to Notification No.1/2006. Notification challenged and matter pending.

K.Vaitheeswaran& Co.


Issues in construction1
ISSUES IN CONSTRUCTION

  • Demolition and site excavation.

  • More than twelve dwelling units.

  • Independent bungalows or villas in a campus.

  • Liability on developers.

  • Board Circular dated 01.08.2006 and 23.08.2007.

  • Decision of the Gauhati High Court in the case of Magus Construction.

  • Raheja decision referred to Larger Bench by Supreme Court.

K.Vaitheeswaran& Co.


Works contract
WORKS CONTRACT

  • Service tax on Commercial construction was imposed w.e.f 10.09.2004.

  • Service tax on Construction of Residential Complex was imposed w.e.f. 16.06.2005.

  • Completion and Finishing Services were also covered w.e.f 16.06.2005.

  • Notification 1/2006 and the problem of non-availability of Cenvat credit.

K.Vaitheeswaran& Co.


Works contract1
WORKS CONTRACT

  • Works contracts are basically contracts, which involve both material and services and are indivisible contract in contrast to pure contract of supply of materials.

  • The 46th amendment to the Constitution permits a tax on the transfer of property involved in the execution of works contracts.

  • Daelim Industrial Co. Ltd .

K.Vaitheeswaran& Co.


Works contract2
WORKS CONTRACT

  • Department’s SLP dismissed in 2004.

  • Rolls Royce Indus Power India Ltd.

  • Geo Miller & Co. Pvt. Ltd - lays down that the meaning given in Article 366(29A) cannot be imported into Entry 52.

  • Larsen and Toubro

  • Ircon International Ltd.

  • Flex Engineering.

K.Vaitheeswaran& Co.


Works contract3
WORKS CONTRACT

  • Works Contract clearly a new service

  • Decisions available to state that a works contract cannot be vivisected for the purpose of service tax

  • Works contract executed prior to 01.06.2007

  • Applicability of residential complex and commercial construction categories for the period prior to 01.06.2007 ?

K.Vaitheeswaran& Co.


Works contract4
WORKS CONTRACT

  • Board Circular dated 22.05.2007 provides that if it involves transfer of property in goods then it falls under the category of works contract and not the specified services such as construction etc.

  • Decision of the Chennai Tribunal in Diebold.

  • Decision of Bangalore Tribunal in Blue Star.

  • Decision of Chennai Tribunal in Indian Hume Pipe and Malar Constructions.

K.Vaitheeswaran& Co.


Works contract5
WORKS CONTRACT

  • Service provided to any person by any other person in relation to execution of works contract.

  • Excludes works contract in respect of roads airports, railways, transport terminal, bridges, tunnels and dams.

  • Ports exempted.

K.Vaitheeswaran& Co.


Works contract6
WORKS CONTRACT

  • Roads

  • Airports

  • Dams

  • Restoration or repair of roads whether works contracts or maintenance of immovable property?

K.Vaitheeswaran& Co.


Works contract7
WORKS CONTRACT

  • Levy requires 2 conditions:

    • There must be transfer of property in goods involved in the execution of works contract and must be leviable to tax as sale of goods;

    • the contract must be for the purpose of carrying out:

      • Erection, commissioning or installation of plant, machinery, equipment or structure;

      • Construction of a new building or a civil structure or a part thereof or pipeline primarily for the purpose of commerce or industry;

      • Construction of a new residential complex or a part thereof;

      • Completion and finishing services, repair, alteration, renovation or restoration services;

      • Turnkey projects including engineering, procurement and construction or commissioning projects

K.Vaitheeswaran& Co.


Commerce or industry
COMMERCE OR INDUSTRY ?

  • A 20 storey office complex and 200 sq.ft. medical shop are both commercial ventures.

  • A number of small and medium unregistered and unorganised players are there in the market.

K.Vaitheeswaran& Co.


Commerce or industry issues
COMMERCE OR INDUSTRY - ISSUES

  • Construction of hotels.

  • Construction of hospitals, diagnostic centres.

  • Construction of clubs, recreation centres.

  • Construction of temples.

  • Construction of Kalyana Mandapam.

  • Construction of Office building for Chambers of Commerce and Industry.

  • Construction of Schools, Colleges (Government, Private)

  • Construction of buildings for ICAI.

K.Vaitheeswaran& Co.


Works contract ongoing projects
WORKS CONTRACT – ONGOING PROJECTS

  • Is the new category applicable for pending projects where some taxes have already been paid ?

  • Is the new category applicable when taxes have not been paid under the old categories ?

  • Answer lies in the scope of contract

  • Board Circular dated 04.01.2008 states that the new category will not apply to pending contracts.

  • Validity of circular ?

  • SC decision in Indian Dairy

K.Vaitheeswaran& Co.


Works contract computation method
WORKS CONTRACT –Computation Method

  • Rule 2A of Valuation Rules.

  • Value of works contract = gross amount charged for the said works contract minus value of transfer of property in goods involved in the said works contract.

  • VAT paid is excluded.

  • Enumerates list of items that fall within the value of works contract service.

K.Vaitheeswaran& Co.


Works contract computation method1
WORKS CONTRACT –Computation Method

  • Value of works contract shall include the following:

    • Labour charges;

    • Amount paid to sub-contractor for labour and services;

    • Charges for planning, designing and architect’s fees;

    • Hire charges on machinery and tools;

    • Cost of consumables viz. water, electricity, fuel etc.

    • Cost of establishment of the contractor relatable to supply of labour and services;

    • Other similar expenses relatable to supply of labour and services;

    • Profit earned by the service provider relatable to supply of labour and services.

K.Vaitheeswaran& Co.


Works contract computation method2
WORKS CONTRACT –Computation Method

  • Value adopted for sales tax or VAT shall be accepted for service tax.

  • There is nothing in the Valuation Rules or in the Cenvat Credit Rules, which prohibits the availment of cenvat credit on inputs or capital goods or input services.

  • Board vide Circular dated 04.01.2008 has clarified that credit is not available on inputs.

K.Vaitheeswaran& Co.


Works contract composition method
WORKS CONTRACT- Composition Method

  • WCT (Composition Scheme for payment of Service Tax) Rules, 2007.Optional Scheme.

  • 2% of the gross amount charged for the works contract.

  • Compounding rate increased from 2% to 4% w.e.f. 01.03.2008.

  • Gross amount shall not include VAT or sales tax paid.

  • No Cenvat credit on inputs. Cenvat credit available on input services and capital goods.

  • Option to be exercised prior to payment of service tax in respect of the WCT.

K.Vaitheeswaran& Co.


Works contract composition method1
WORKS CONTRACT- Composition Method

  • Whether 2% can be continued till the completion of the contract?

  • Board Circular dated 28.04.2008 stating that it is not possible has been challenged before the Madras High Court and Stayed.

  • Compounding Scheme is an alternative mechanism.

  • Option valid till the completion of the contract.

K.Vaitheeswaran& Co.


Land owner share
LAND OWNER SHARE

  • Joint Venture

  • Is the contractor liable to pay service tax on construction done for the land owner

  • No tax view

  • Contract executed and consideration has passed prior to insertion of Valuation Rules view

  • Tax on same rate as charged on other buyers

  • Tax payable by adopting value of UDS transferred

  • Decision of the Supreme Court – (Faqir Chand Gulati Vs. Uppal Agencies Pvt. Ltd.) Consumer case.

K.Vaitheeswaran& Co.


Renting of immovable property
RENTING OF IMMOVABLE PROPERTY

  • Where building is partly let out for residential purposes and partly for business or commerce it shall be deemed to be for business or commerce.

  • Property tax paid excluded.

  • Stamp duty based on rent when document is registered.

  • Whether Constitutionally valid ?

K.Vaitheeswaran& Co.


Renting of immovable property1
RENTING OF IMMOVABLE PROPERTY

  • Entry 6, List III, Seventh Schedule covers transfer of property other than agricultural land, registration of deeds and documents.

  • Rent Control Laws are made by the State in exercise of powers available in Entry 6, Concurrent List.

  • Stamp duty is levied by the State on lease in terms of Article 35 of the Indian Stamp Act.

  • The duty is on the amount payable or deliverable under the lease.

  • Service tax is levied in terms of Entry 97, Union List which empowers legislation on any other matter not enumerated in the State List or Concurrent List including any tax not mentioned in either of those Lists.

K.Vaitheeswaran& Co.


Renting of immovable property issues
RENTING OF IMMOVABLE PROPERTY - Issues

  • Cost increase to companies which cannot avail cenvat.

  • Possibility of credit being questioned on companies, which avail cenvat credit.

  • Board Circular dated 04.01.2008 states that service tax charged by contractors cannot be availed as credit by the person paying service tax on rentals

  • Deposits

  • Non-payment of rent

  • Disputed property where rent is deposited with the Court

  • Co-ownership

  • Property owned by NRIs.

  • Effective date and past transactions

K.Vaitheeswaran& Co.


Renting of immovable property issues1
RENTING OF IMMOVABLE PROPERTY - Issues

  • Court enhanced rent

  • Scope of rent

  • Percentage of turnover

  • What is ‘use in the course or furtherance of business’??

  • Loan / Property transactions

  • Section 194I of the Income Tax Act

  • Co-sharing of office premises ?

  • Airport letting out stalls ?

K.Vaitheeswaran& Co.


Renting of immovable property2
RENTING OF IMMOVABLE PROPERTY

Allowing, permitting the use of space in the immovable property, even without the transfer of possession or control property.

Vending machines in malls, cinema theatres;

Communication towers;

Vendor islands in shopping malls;

Hoardings in Govt. buildings;

K.Vaitheeswaran& Co.


Renting of immovable property3
RENTING OF IMMOVABLE PROPERTY

Hoardings by political parties on payment of charges to Corporation.

Private Sector, telecom junction boxes kept on roads.

Flat owners allow a telecom company to use their terrace for erecting communication tower – Who is the service provider?

‘For the removal of doubts?’

K.Vaitheeswaran& Co.


Builder
BUILDER

  • Which takes priority in builder’s worry ?

  • Escalating material cost …

  • Non-availability of skilled labour…

  • Title disputes…

  • Whether Airport is going to come in that area…

  • Sky rocketing land prices…

  • Down trend in industry…

  • Lack of funds…

  • ‘Sevai vari and value added vari…worry ?

K.Vaitheeswaran& Co.


Thank you k vaitheeswaran k vaitheeswaran co advocates tax consultants

Thank youK. VaitheeswaranK. VAITHEESWARAN & CO.Advocates & Tax Consultants

Mobile: 98400-96876E-mail : [email protected]

K.Vaitheeswaran& Co.


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