The real estate
market has been growing rapidly in India for the past one decade. Many
residential hubs are being developed not only in and around Delhi NCR, but also
at other places in the country, claiming to provide affordable homes to fit the
budget of each category of customers and investors. The recent changes in the
Service Tax laws to be applicable w.e.f. 1st July 2012 have brought
some points to be noted by the real estate developers, builders and contractors
engaged in this industry, so that they ensure proper compliance of law.
Applicability
Service
Tax was leviable on construction
activities under the following three categories of services
until 30-06-2012:
·
Commercial or Industrial Construction Services with effect from 10-09-2004
·
Construction of Complex Services
with effect from 16-06-2005
·
Works Contract Services with
effect from 01-06-2007.
However,
with effect from 01-07-2012 all activities related to construction fall within
the purview of the following “Declared Services” under
Section 66E of the Act:
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.
Section
66E (h): Service
portion in the execution of a works contract.
With
effect from 01.07.2012, the following definition of “Works Contract” as given in Section 65B
(54) of the Act is applicable:
"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.
The
above definition reveals that scope of works contract has increased immensely,
as it now applies to both movable and immovable properties.
Exemption to certain construction
activities
Certain
construction activities have been exempted by virtue of entry no. 12, 13
and 14 of Notification
No. 25/2012 dated 20-06-2012 with effect from 01.07.2012.
· Entry No. 12, inter alia, grants exemption to
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 use other
than for commerce, industry, or any other business or
profession, a historical monument, archaeological site, a structure meant
predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art
or cultural establishment. Services covered by this entry are exempted only if
these services are provided to the Government or Local Authority or
Governmental Authority.
·
Entry No. 13, inter alia, grants exemption to
services provided by way of construction, erection, commissioning,
installation, completion, fitting out, repair, maintenance, renovation or
alteration of a road, bridge, tunnel, or terminal for
road transportation for use by general public, a civil structure or
any other original works pertaining to a scheme under Jawaharlal Nehru
National Urban Renewal Mission or Rajiv Awaas Yojana. In order to
avail exemption under entry no. 13 the status of service recipient is
insignificant-be it Government, a Local Authority or a Governmental
Authority or any other person.
·
Entry No. 14 inter
alia, grants exemption to Services by way of construction, erection,
commissioning, or installation of original works pertaining to an airport, port
or railways, including monorail or metro, a single residential unit otherwise
than as a part of a residential complex, Low-cost houses upto 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. The
scope of exemption granted vide entry no. 14 is restricted because it does not
cover completion, fitting out, repair, maintenance, renovation or alternation
of original works pertaining to any of the specified structures, immovable
properties, machineries or equipments.
Exemption
to sub-contractor
Exemption
has also been provided with effect from 01-07-2012 vide Entry No. 29(h) of
Notification No. 25/2012 to sub-contractor providing services by way of works
contractor to another contractor providing works contract services which are
exempt. This exemption was also available until 30-06-2012 vide. Circular
No. 147/16/2011 dated 21-10-2011.
Illustrative list of
services in relation to Construction Activities which have become taxable
w.e.f. 1st July 2012
1. Construction
of Boundary Wall
2.
Construction of Parking Area
3.
Services in respect of Cutting of Plots and
Development of colonies received by builders
4.
Construction of Residential Complex of units
ranging between 2-12 units (more than one unit)
5.
Construction of Private Roads
6.
Construction Services provided to Non-Commercial organisation
in respect of buildings which are used for other than Religious Purpose
7.
Services provided in respect of Construction
of hospitals to any person other than Government or Governmental Authority or
Local Authorities
8.
Services provided in respect of Construction
of buildings to be used for the purpose of Education to any person other than
Government or Governmental Authority or Local authorities
Valuation of service portion in execution of a works
contract w.e.f. 1st July 2012
Substituted
Rule 2A(i) of Service Tax (Determination of Value) Rules, 2006,
inter alia, provides that the value of service portion in the execution of a
works contract is the gross amount charged for the works contract less the
value of transfer of property in goods involved in the execution of the said
works contract. Alternatively, under foregoing Rule 2A (ii), the aforementioned
value will be determined as under:
|
S. No.
|
Purpose
of the Works Contract
|
Percentage of total
amount deemed as Value of service
portion of the Works Contract
|
|
(A)
|
Execution
of Original Works
|
40%
|
|
(B)
|
Maintenance
or Repair or Reconditioning or Restoration or Servicing of any goods
|
70%
|
|
(C)
|
Any
purpose other than:
(A)
& (B) above, including Maintenance, Repair, Completion and Finishing Services [such as Glazing,
Plastering, Floor and Wall-Tiling,
Installation of Electrical Fittings] of an immovable property
|
60%
|
Abatement
Notification No.
26/2012 dated 20th June 2012 states the relevant abatement scheme,
under which there is an abatement of 75% offered in the abovementioned service,
details of which are as under:
|
S.No.
|
Description of taxable service
|
Percentage of Taxable portion
|
Conditions
|
|
12
|
Construction of a complex, building, civil structure or a part
thereof, intended for sale to a buyer, wholly or partly except where entire
consideration is received after issuance of completion certificate by the
competent authority
|
25%
|
i. CENVAT credit on inputs used for
providing the taxable service has not been taken under the provisions of
the CENVAT Credit Rules, 2004.
ii.
The
value of land is included in the amount charged from the service receiver.
|
The rate of
abatement in this case has been kept the same as was prior to 1st
July 2012.
CENVAT Credit
Earlier there was
an absolute bar on availment of CENVAT credit. However, after 1st July 2012, CENVAT credit in respect of capital goods and input services (as defined
under rule 2 of CENVAT Credit Rules, 2004) has been allowed. It is to be noted
that CENVAT credit in respect of inputs shall not be allowed.
Capital
goods CENVAT
credit available
Input
services CENVAT
credit available
Input
goods CENVAT
credit NOT available
As
per definition Of ‘Input Service’ under Rule 2(l) of Cenvat Credit Rules, 2004,
credit of service tax paid in respect of following services can be
availed and utilized only for paying service tax on such ‘specified services’:
·
Service portion in execution of works contract and Construction Services (includes commercial
or industrial construction service, maintenance or
repair service)
·
Construction of Complex Service including
deemed construction service (as listed under
Section 66E-Declared Service)
In
simple terms, the nature of input service and output service should be
similar.
In case of other
input services viz. Manpower supply, legal consultancy, telephone bills, GTA
service (up to place of removal), banking or financial services etc., credit
can be taken on such services if they are used in providing output service (works
contract/construction of complex service).
For example,
A Builder is
engaged in providing service of construction
of building/flats.
Further, the Builder sub-contracts the work of construction to another
contractor. In this case Builder is providing output service of works contract/construction of complex service
and at the same time availing input service of works contract from contractor. Therefore, the Builder can
take the Cenvat Credit on input service and utilize the same in paying its tax
liability only for works contract service, maintenance or repair or construction
of complex service.
Net Savings for Developers
After 1st
July 2012, the
developers shall continue to charge service tax from their customers however; they
will now avail CENVAT credit on capital goods and input services, thus making
their liability to deposit service tax lesser. The developers will now save an
amount equivalent to the CENVAT credit availed.
Illustration
A residential flat is sold by a
developer for Rs. 50 lakhs, including land value. Service tax will be
calculated on 25% of the sale value @12.36%, which will come to Rs. 1,54,500.
This amount will be charged by the builder from
his customer.
The developer can claim CENVAT credit on capital goods and input services used by him.
Assuming that input capital goods used and input services received to construct
the flat are worth Rs. 12 lakhs, CENVAT credit available to the developer @12.36%
is Rs. 1,48,320. Therefore, the developer/builder
will be required to pay only the balance amount of Rs. 6,180 towards service
tax.
Claim of Cenvat Credit: Whether
on due basis or payment basis?
As per Rule 4(7)
of Cenvat Credit Rules, 2004, Cenvat Credit in respect of input service shall be
allowed on or after the day on which invoice or bill is received, and not on
payment basis (as was the case earlier).
This
is subject to the following condition:
Ø payment of value
of input service and service tax shall be made within three months of the date of invoice or bill.
If the payment is
not made within the prescribed period, Cenvat Credit taken earlier on accrual
basis shall be reversed and it can be taken back once payment is made.
Renting of Immovable Property as
Output Service
Cenvat
Credit of service tax paid on services of Works Contract, Construction of Complex
Service, maintenance or repair service cannot be taken and used in paying service tax on ‘renting of
immovable property service’ because these services are actually used in
construction of immovable property and not directly used in provision of such
renting services.
The
validity of such disallowance stands because ‘Immovable property’ is neither a
‘good’ nor ‘service’ and cannot be taxed. Even Cenvat Credit Rules, 2004 do not
allow the taking of credit in such situation. (Read with Circular No. 98/1/2008 dated 04.01.2008).
Whereas,
credit on other input services can validly be taken and utilized accordingly.
Summary of
CENVAT Credit
|
CENVAT
Credit on Input Service
|
Whether
CENVAT Credit can be taken against Output Service
|
||
|
Works Contract (including
maintenance or repair)
|
Construction of Complex
|
Renting of Immovable Property
|
|
|
Works Contract
|
Yes
|
Yes
|
No
|
|
Man Power
Supply
|
Yes
|
Yes
|
Yes
|
|
Commission/Brokerage
|
Yes
|
Yes
|
|
|
Professionals/Legal
Consultancy
|
Yes
|
Yes
|
Yes
|
|
Telephone Bills
|
Yes
|
Yes
|
Yes
|
|
Other Services
|
Yes
|
Yes
|
Yes
|
Conclusion
The scope
of service tax on construction activities has been
enlarged with effect from 01.07.2012 because many services which were hitherto
outside the tax net, have become taxable with the exception of construction,
erection, commissioning or installation of original works pertaining to
low-cost houses as mentioned above. On the other hand, CENVAT Credit in respect of “input services” and
“capital goods” has been allowed to builders with effect from 01.07.2012. The Valuation of Works
Contract Services under substituted Rule 2A of Valuation Rules, 2006 will
affect adversely the specified service providers in specific cases.
