IMPACT OF INDIRECT TAXES ON CONSTRUCTION & BETTER TAX MANAGEMENT FOR PROJECT MGT EFFICIENCY

1. C.R.RAGHAVENDRA, B.Com, FCA, LLB IMPACT OF INDIRECT TAXES ON CONSTRUCTION & BETTER TAX MANAGEMENT FOR PROJECT MGT EFFICIENCY

2. Current In-direct Tax Scenario in India Excise / CENVAT CUSTOMS Value Added Tax / Local Sales Tax Central Sales Tax Works Contract Tax Octroi , Entry Tax Luxury Tax Service Tax

3. Central exciseconstruction sector

4. Levy on Manufacture - Central Excise duty is leviable on the activity of ‘manufacture’ of goods carried on in India – Section 3. • Basic Exemption limit –Rs. 1.5 Crores • Only for certain listed products • Only ‘goods’ are liable to levy of Central Excise • Immovable property is outside the purview of Central Excise. CENTRAL EXCISE

5. Test to check whether immovable or movable is • Whether the structure could be move to other place without any damage being made or dismantled? • Yes- it is movable • No- Immovable • Municipal Corporation of Greater Mumbai Vs. IOC, AIR 1991 SC 686 Immovable property–Excise implications

6. If the resultant of the process results in emergence of immovable property – no Manufacture Mere fixing of machinery to fixed structure would not make immovable property Apex Court in the case of CCEx., Ahmd. v. Solid & Correct Engineering Works Ltd., 2010 (252) E.L.T. 481 (S.C.) held that attachment of plant with nuts and bolts intended to provide stability and prevent vibration cannot be termed as attached to earth and the said items cannot be termed immovable property. Immovable Property

7. CCE v. Kone Elevators India Ltd., 2001 (138) E.L.T. 635 (Tri.) Tribunal held that ‘lift’ coming into existence only after it is installed along with the building and becomes functional it is an immovable property and not goods. Similar view in OTIS Elevator Co. (India) Ltd. v. SCE, 2003 (151) E.L.T. 499 (HC). Immovable property

8. Any activity which results in immovable property cannot be subjected to excise. • Supreme Court in Sirpur Paper Mills Ltd. v. CCE, 1998 (97) E.L.T. 3 (S.C.), held that assembly of a paper making machine and its erection at site mainly from bought out components and by fabricating the rest of the parts at site, amounts to manufacture. • Triveni Engineering & Industries Ltd. v. CCE, 2000 (120) E.L.T. 273, held that while the fixing of the steam turbine, alternator and coupling them to form a turbo alternator amounts to a manufacturing process, the resultant property being immovable the same cannot be brought to excise. Immovable property – NOT liable to duty

9. In Craft Interiors Pvt. Ltd. v. CCE, 2006 (203) E.L.T. 529 (S.C.), it was held that ‘Storage units, running counters, overhead unit, rear and side unit, wall unit, kitchen unit’ and other items ordinarily immovable or not removable without cannibalizing cannot be termed as furniture in common parlance and therefore it is not excisable. • The Supreme Court brought out the difference between furniture which is excisable and fixtures which are not. Hence, it was held that items like desks and chairs are furniture and therefore excisable. Immovable property

10. Service taxIMPACT ON CONSTRUCTION SECTOR

11. Service Tax Rate structure 1.4.2012 12.36%* 11.5.2007 12.36%* 12.24%* 18 Apr 2006 10.3%* 10 Sep 2004 10.2%* 14 May 2003 8% 1994 2002 * Including Education Cess 5% 5% Service tax - rate

12. All activities covered under the definition of ‘service’ would be liable to service tax. Exceptions are contained in ‘Negative List’ Definition of service specifically includes ‘Declared Service’ which is defined in Section 66E. Negative list of taxation – w.e.f. 1.7.2012

13. CONSTRUCTION (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. WORKS CONTRACT (h) service portion in the execution of a works contract V.Raghuraman DECLARED SERVICES – SECTION 66E

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

15. (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 Important DEFINITIONS

16. Contract in which goods involved in execution of such contract 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 DEFINITIONS- EXPLAINED

17. 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 Construction activity

18. EXEMPTIONS

19. Notification. No. 25/2012- Sl. No. 12

20. V.Raghuraman Notification. No. 25/2012- Sl. No. 12

21. V.Raghuraman Notification. No. 25/2012- Sl. No. 12

22. V.Raghuraman Notification. No. 25/2012- Sl. No. 13

23. V.Raghuraman Notification. No. 25/2012- Sl. No. 13

24. V.Raghuraman Notification. No. 25/2012- Sl. No. 14

25. V.Raghuraman Notification. No. 25/2012- Sl. No. 14

26. Villa Projects & Development & sale of site – not liable to service tax Sub-Contractor : Sl.No. 29 (h) Services of sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt EXEMPTION Notification. No. 25/2012

27. Joint Development Agreements – Whether construction of land owner’s share is liable to service tax? • Whether developmental rights itself can be termed as immovable property? • Bombay High Court in Chheda Housing Development ... vsBibijanShaikhFarid And Ors. 2007 (3) MhLj 402 wherein High Court examined the question as to whether F.S.I / TDR could be termed as a benefit arising from the land. Other issues in construction

28. VALUATION & ABATEMENTS

29. Works contract services • Value of Service = Gross amount charged minus Value of Goods • Whether actual value of goods only be taken? What about specified percentage of deduction (say 30% labour) • Gross amount charged excludes • VAT • Sales Tax Valuation rules- Specific Services-2A

30. Gross amount includes Valuation rules- Specific Services

31. If VAT is not paid on actual value then Works Contract

32. 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 Works Contract – What is original work?

33. Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer. • 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 Budget 2013 Notification No.2/2013 provides for 70% abatement where the carpet area of residential unit is more than 2000 square feet or the amount charged is more than Rs. One Crore ABATEMENT- Notification No.26/2012

34. REVERSE CHARGE OR JOINT CHARGE

35. Person liable to pay tax

36. POINT OF TAXATION

37. 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) Point of Taxation in general

38. 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 Proviso to R. 3: continuous supply of services

39. 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 Point of taxation for Works Contract

40. Whether developer who outsources the work completely is said to be a works contractor? K Raheja Development corporation (141 STC 298 (SC) – The decision is doubted by Supreme Court in Larsen & Toubro Ltd v. State of Karnataka 2008 (12) S.T.R. 257 (S.C.) wherein it was held if the ratio of Raheja Development case is to be accepted then there would be no difference between works contract and a contract for sale of chattel as a chattel. Works contracts under vat

41. C.R.RAGHAVENDRA B.Com, FCA, LLB, M/s. Raghuraman & Chythanya, Advocates. Email id : raghavendra@rceglobal.com Contact: 94482 07163 Thank You