Transcript SERVICE TAX SEMINAR

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SERVICE TAX IN REAL ESTATE
By :- CA SANDEEP GARG
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TAXATION OF SERVICES –NEGATIVE LIST REGIME
Services
Services under
Negative List
Services under Exempted
list
Other
Exemptions/Abatements
All remaining services
to be taxable under
Negative List
Approach
Hot Topics
 Sale of PLOTS
 Sale of Developed PLOTS
 Joint Venture
 Joint Venture of Development of Lands( Plot Sale)
 Joint Venture Agreement and Sale of Flats
 Joint Venture Agreement and Area Sharing
 Completion Certificate Vs. Occupancy Certificate
Hot Topics
 Rate of Tax on Ancillary Services Like
 PLC service
 EDC/IDC Charges
 IFMS – Refundable/Non Refundable
 Car Parking ( Open and Covered)
 Forfeiture Amount
 Transfer Charges/Admin Charges
 Original Works Contract Vs. Finishing Services ( Valuation ????)
 Free of Cost Material Supplied by the Contractee
Hot Topics
 CENVAT Credit Issues : Whether CENVAT is eligible on all the Input services or there
are some exclusions/Conditions
 Completed Projects and Unsold Units
 Township Projects
 Reversal of CENVAT credit for sale of Land/Plot
 Adjustment of Credit Note/Discount
 Point of Taxation
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DEFINITION OF SERVICE:
Any activity
Carried out by one person
For another person
For consideration
Includes a declared service
 but excludes IMAGE
Entries of Declared List governing
Construction/Builders Services (Section 66E)
(a) Renting of immovable property;
(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;
Renting of Immovable Property Service
Taxable w.e.f. 01.06.2007
 It was already taxable. Validity of the levy was upheld by
many courts.
 Covers following(an illustrative list):
• Renting for temporary purpose like marriages or other social functions;
• Permitting use of property for vending/dispensing machine
• Renting for entertainment or sports
 As per Rule 5 of the Place of Provision of Services Rules, 2012, the place of
provision of services provided directly in relation to an immovable property, shall
be the place where the immovable property is located or intended to be located.
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Exemptions for Renting …..
Negative List
 Services by way of renting of residential dwelling for use as
residence.
 Services relating to agriculture or agricultural produce by way of
renting of vacant land; warehousing etc.
Mega Exemption
5. Services by a person by way of renting of precincts of a religious place
meant for general public.
9. Renting of immovable property to an educational institution in respect of
education exempted from service tax.
18. Renting of a hotel, inn, guest house, club, campsite or other commercial
places meant for residential or lodging purposes, having declared tariff
of a unit of accommodation below Rs.1000/- per day or equivalent.
24. Vehicle parking to general public (Taxable w.e.f. 01-Apr-13)
Construction Service
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CONSTRUCTION SERVICE:
 Booking of flats under construction(i.e. before issuance of
completion certificate) is taxable;
 Sale of plots are not taxable;
 Builders are also allowed abatement of 75%/70%(based on
type of property), provided the land value is also
included in total consideration;
 No Abatement allowed on Preferential Location Charges,
associated incomes(e.g. transfer charges, cancellation
charges)
 CENVAT Credit is allowed on
 input services
 Capital goods;
 CENVAT Credit on inputs(e.g. steel, cement) barred
Applicable Rate
Type of
Property
Residential
Carpet Area
< 2000 Sq.
ft.
w.e.f. 1st March, 2013
Commercial
Amt
Charged >
Rs. 1 crore
Are both conditions fulfilled?
YES
3.09%
NO
3.708%
3.708%
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No service tax on sale of completed
properties
Completion Certificate from Competent Authority required for sale of
flat to be exempt from service tax.
Competent Authority means The Government or any authority
authorized to issue completion certificate under any law for the time
being in force and In case there is non-requirement of such certificate
from such authority, then from any of the following namely: Architect Registered with Council of Architecture constituted under
the Architects Act, 1972; or
Chartered Engineer Registered with Institution of Engineers (India);
or
Licensed Surveyor of the respective local body of the city or town or
village or development or planning authority.
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WORKS CONTRACT SERVICE:
 Works contract means a contract which involves Transfer of property in goods
And
 such contract is for the purpose of :
• Construction
• Erection
• Commissioning
• Installation
• Completion
• Fitting out
• Repair
• Maintenance
• Revocation
• Alteration
of movable or immovable property
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WORKS CONTRACT SERVICE:
 Valuation under Works Contract Service(Rule 2A of
Service tax (Determination of Value) Rules, 2006)
Material &
Labour can
be
segregated
Original
Works(40% )
4.944% of Gross
amount charged
R&M of
Goods(70%)
8.652% of Gross
amount charged
Yes
12.36% on Labour
portion
Others(60%)
7.416% of Gross
amount charged
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Exemptions
from Service Tax
in
Real Estate Sector
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Exemptions from Service Tax in Real Estate Sector
Mega Exemption: Entry No.12
Service of Construction, Erection,
Commissioning, Installation,
Completion, Fitting Out, Repair,
Maintenance, Renovation, or
Alteration.
The Government, a Local
Authority or a Governmental
Authority
In Relation to :
a) a civil structure or any other ‘original works’ meant predominantly for use other
than for commerce, industry, or any other business or profession;
b) a historical monument, archaeological site or remains of national importance,
archaeological excavation, or antiquity specified under the Ancient Monuments
and Archaeological Sites and Remains Act, 1958
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;
e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or
(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 Act;
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Exemptions from Service Tax in Real Estate Sector
Mega Exemption: Entry No.13
Service provided by way of
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.
c) A building owned by an entity registered under section 12AA of the
Income tax Act, 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.
e) A structure meant for funeral, burial or cremation of deceased.
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Exemptions from Service Tax in Real Estate Sector
Mega Exemption: Entry No.14
Service by way of
Construction, Erection, Commissioning, or
Installation of Original Works pertaining to
Repair, maintenance
are not included in
this entry
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 meters 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.
d) Post-harvest storage infrastructure for agricultural produce including a
cold storages for such purposes.
e) Mechanized food grain handling system, machinery or equipment for
units processing agricultural produce as food stuff excluding alcoholic
beverages.
Charges collected by Builders and rate of Service Tax
applicable on said charges
S. No
Charges
1.
Basic Charges
2.
Preferential Location
Charges
3.
Club Charges
Towards
cost
of
construction
For membership of club
4.
Car Parking- open &
covered
Rate of Service tax
3.09%/3.708%
12.36 % or 3.09%/3.708%
3.09%/3.708%
12.36%
3.09%/3.708%
S. No
Charges
Rate of Service tax
5.
EDC/IDC
On Actual Payment Basis
 On Adhoc basis without
disclosing actual charges
 Actual Charges plus own
service charge
6.
External Electrification charges/
Electrical Installation Charges
7.
Administrative
registration
8.
Interest Free Maintenance
Security (IFMS)
Refundable
Charges
Non Refundable
for
Not Taxable
Full amount is Taxable
Only own service charges are
taxable
3.09%/3.708%/4.944%
12.36%
Non Taxable
Taxable @12.36%
S. No
Charges
Rate of Service tax
9.
Firefighting Equipment
Installation charges
3.09%/3.708%/4.944%
10.
Power Backup Charges
(Towards cost of installation
of DG Sets and substations)
3.09%/3.708%4.944%
11.
Administrative/Transfer
Charges (In case of sale of
flat by original buyer, builder
charge said charged for
modifying its records i.e.
entering the name of new
buyer in its records)
12.36%
Maintenance Services provided by a
Developer/Builder
Apart from construction Services developers/Builders also provide the
services of maintenance of buildings/complexes constructed by it. For
providing such services developer charges maintenance charges
form the occupants of flats/offices. The nature of charges collected
by builders and Rate of Tax applicable on the same has been
summarised as under:
Charges
Description
Maintenance
Mai MaintenanceTowards
Charges maintenance
Charges
building/complex
Taxability
of
12.36%
Electricity Charges
For supplying electricity in
flats/shops
(Charged
on
actual basis)
Non
Taxable
Common Area
Electricity Charges
Towards cost of electricity
consumed in Common Area
12.36%
Impact of Negative List Regime
 Construction for NGO/ Charitable Institutions made taxable
 Renting for NGO/ Charitable Institutions made taxable
 Services in relation to development of plots provided by builders
made taxable
 Changes in the definition of Residential Complex
 Car Parking made taxable .
 Scope of entry no. 12 of Notification No. 25/2012 dated
20.06.2012
CENVAT OF INPUT SERVICES
Whether Credit can be taken against Output
Service
Credit on Input
Service
Works Contract
(including
R&M)
Construction
of
Complex
Renting of
Immovable
Property
Works Contract
Yes
Yes
NO
Manpower Supply
Yes
Yes
Yes
Commission/ Brokerage Yes
Yes
Yes
Legal Consultancy
Yes
Yes
Yes
Telephone Bills
Yes
Yes
Yes
Other Services
Yes
Yes
Yes
A builder ABC Ltd. construct and sold the building. Costs incurred
by him for constructing the building & other relevant details are
as under:
S. No
Particulars
1.
Total Gross Amount Charged
2.
3.
4.
5.
Cost of Land
Value of Material used
Cost of Labour Services
CENVAT Credit on Input
6.
CENVAT Credit on Inputs services
7.
CENVAT Credit on Capital Goods (Total
CENVAT is RS. 400. 50% of the has been
availed)
Amount(Rs.)
1,00,000
60,000
22,000
4,000
1200
412
200
PARTICULARS
Valuation Methods
Option A
Option B
Option C
Option D
Separate Land Agreement is required to be made
Relevant Notification/provision
No. 26/2012
Rule 2A (i)
Rule 2A (ii)
Rs. 1,00,000
Rs. 1,00,000
Rs. 1,00,000
(Rs. 75,000)
NIL
NIL
NIL
Less :- Cost of Land
NIL
(Rs. 60,000)
(Rs. 60,000)
(Rs. 60,000)
Less :- Value of Material
NIL
(Rs. 22,000)
NIL
NIL
Rs. 25,000
Rs. 18,000
Rs. 40,000
Rs.40,000
Rs. 3,090
Rs. 2,225
Rs. 1978
(@4.944%)
Rs. 4,944
NIL
NIL
1200
Gross Amount Charged
Less : - Exemption of 75%
Taxable Value
Service Tax thereon (12.36%)
Less :- CENVAT Credit on Input
NIL
Section 67
Rs. 1,00,000
Less :- CENVAT Credit on Input
Services
412
412
412
412
Less :- CENVAT Credit on Capital
Goods
200
200
200
200
Rs. 1,366
Rs. 3,132
Service Tax to be paid in cash
Rs. 2,478
Rs. 1,613
Value for Reversal under Rule 6 (3) of
CENVAT Credit Rules, 2004
Example
For Instance:
1) Value of flats sold by M/s ABC Ltd = Rs 1,00,00,000/(Taxable Service)
Service Tax discharged = Company is paying service tax at the
rate of 3.09% on the above value.
2) Gross Amount Charged for construction of Road = Rs
1,00,00,000
(Exempted Service Entry No 13 of Notification No 25/2012 dated
20.06.2012).
Further, ABC Ltd has availed CENVAT Credit of Rs 4.00,000 in
respect of aforesaid services.
What will be the amount which ABC Pvt Ltd is liable to pay
as per Rule 6 (3) of CENVAT Credit Rules, 2004?
Amount required to be paid as per Rule 6 (3) (i) of CENVAT
Credit Rules, 2004 = 6% of Exempted Services
= 6% of Rs 1,00,00,000
=
Rs 6,00,000
Amount required to be paid as per Rule 6 (3) (ii) of CENVAT
Credit Rules, 2004 =
4,00,000 *
1,00,00,000
2,00,00,000
= Rs 2,00,000
To Conclude: The value should be taken for the purpose of
aforesaid Rule shall be Gross Amount Charged not the
amount on which Service Tax has been paid.
Reverse Charge
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Person Liable to Pay Tax
 Every person providing taxable services to any person
shall pay service tax in such manner and within such
time as may be prescribed. [Section 68(1)]
 Central Government has power to notify such other
person to discharge service tax liability and all
provisions of service tax law would be applicable as if
he is service provider.
 Board has notified such person by issuance of
Notification No. 15/2012 – dated 17-03-2012
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Person Liable to Pay Tax
Description of
Service
Service
Provider
Service Receiver
Person Liable
Rate of
Tax
Insurance Business
Insurance
Agent
Insurance Company
Insurance
Company
12.36%
Goods Transport
GTA
Specified persons
Specified persons
12.36%
Sponsorship
Any person
Body corporate or
Firm
Body corporate or
Firm
12.36%
Legal Services
Arbitral
Tribunal or
Advocate
Business Entity
Business Entity
12.36%
Support Services
Government or
Local Authority
Business Entity
Business Entity
12.36%
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Person Liable to Pay Tax
Description of
Service
Service
Provider
Service Receiver
Person Liable
Rate of
Tax
Hiring of Motor
Vehicle On abated Value
Individual,
HUF, Prop.
Firm, P’ Firm,
or AOP
Business Entity
registered as Body
Corporate
Business Entity
registered as Body
Corporate
12.36%
Hiring of Motor
Vehicle On non abated Value
Individual,
HUF, Prop.
Firm, P’ Firm,
or AOP
Business Entity
registered as Body
Corporate
Business Entity
registered as Body
Corporate
40% of
12.36%
Individual,
HUF, Prop.
Firm, P’ Firm,
or AOP
Business Entity
registered as Body
Corporate
Supply of Manpower
& Security Services
for any purpose
Provider
Business Entity
registered as Body
Corporate
Provider
60% of
12,36%
75% of
12.36%
25% of
12.36%
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Person Liable to Pay Tax
Description of
Service
Service
Provider
Service Receiver
Person Liable
Rate of
Tax
Director Services
Non Executive
Director
Company
Company
12.36%
Works Contract
Individual,
HUF, Prop.
Firm, P’ Firm,
or AOP
Business Entity
registered as Body
Corporate
Business Entity
registered as
Body Corporate
50% of
12.36%
Provider
50% of
12.36%
Any person
located in Taxable
Territory
12.36%
Any Taxable Service
?????
Located in Non
Taxable
Territory
Any person located
in Taxable Territory
CASE STUDIES
Case Study-1
ABC ltd has entered into a contract for construction of road
meant for general public. ABC ltd sub contracts the aforesaid
work to three contractors namely:
 DEF Ltd , the work of site formation for construction of road
 XYZ Ltd , laying the surface of road
 GHI Ltd , other physical activities in respect of such roads.
What will be the Service tax implication on the aforesaid
transactions?
 Services provided by way of construction of road meant for use
by general public is Exempted from payment of Service Tax.
Thus, any service which is used in the construction of said road
shall be exempted from Service Tax as per Entry 13(a) of N/N
25/2012 dated 20.06.2012. Accordingly, all the aforesaid services
in respect of roads are not exigible to Service Tax.
 Further, as far as laying of surface is concerned same is also
covered under definition of Works Contract as engrafted under
Section 65B (54) of Finance Act, 1994. Since, main Contractor
enjoys exemption, the sub contractor also continue to enjoy the
exemption in respect of Works Contract Services - Entry 29(h) of
N/N 25/2012 dated 20.06.2012
Case Study-2
M/s ABC Pvt Ltd is engaged in construction of hospitals and
educational institutes. Whether M/s ABC Pvt Ltd. is required to pay
Service Tax on the same?
If M/s ABC Ltd is constructing such structures for the government, a
local authority or a governmental authority, in that case M/s ABC is
not required to pay Service Tax on the same as per Entry 12 (a) of
Notification No 25/2012.
However, if such structure are built for persons other than government,
a local authority, governmental authority, M/s ABC Ltd is required to
pay Service Tax on the same.
Case Study-3
M/s XYZ Pvt Ltd is engaged in maintenance & Repair of Ports.
Whether M/s ABC Pvt Ltd. is liable to pay Service Tax on the same?
Yes, M/s XYZ Pvt Ltd is required to pay Service Tax on the same as vide
Entry No 14 of Notification No 25/2012 dated 20.06.2012, exemption has
been provided only to services in respect of Construction of Ports.
Case Study-4
M/s XYZ Pvt Ltd is Renting out its Immovable Property to an NGO.
Whether M/s XYZ Pvt Ltd is required to pay Service Tax on the
same?
Yes, M/s XYZ Pvt Ltd is required to pay Service Tax on the same as
exemption has not been granted to such activity anywhere under
Finance Act, 1994.
Case Study-5
Mr. A has rented a house to Mr. B, consisting of two floors. one floor
of which is to be used as residence and the other for the purpose
of running of a office? What shall be the Service Tax implications on
the same?
Such renting for two different purposes is not naturally bundled in the
ordinary course of business. Therefore if a single rent deed is executed it
will be treated as a service comprising entirely of such service which
attracts highest liability of Service Tax. In this case renting for use as
residence is a Negative List Service while renting for non-residence use is
chargeable to tax. Since, the latter category attracts highest liability of
Service Tax amongst the two services bundled together, the entire
bundle would be treated as renting of commercial property.
Case Study-6
Mr. A has let out a house to Mr. B for Residential purposes. Further,
along with such house Mr. A has also provided various amenities
such as furniture, refrigerator, air conditioners etc. What shall be
Service tax implications of the same?
This will be a case of Bundled Services where a number of services have
been provided in lieu of a Single Consideration. Accordingly, taxability of
the same shall be determined as per Section 66F of Finance Act, 1994. As
per said Section, if services are considered Naturally Bundled in the
ordinary Course of business, it shall be considered as the provision of said
service which provide essential character to it. In this case, Renting of
Immovable Property is the essence of aforesaid activity. Further, Renting
of property for residential purposes is not exigible to Service Tax. Thus,
said activity of Renting by Mr. A shall not be exigible to Service Tax.
Case Study-7
Now the moot question arises whether a person providing
Works Contract Services is mandatorily required to discharge
its Service Tax Liability as per aforesaid Rule 2A or can avail
any other method of valuation?
Apart from adopting methods prescribed by Rule 2A, the person
providing Works Contac service provider has an option to
valued its service as per the provisions contained in Section 67
read with Rule 5 of Service Tax (Determination of Value) Rules,
2006
Case Study- 8
A builder engages three sub-contracts in order to execute the
construction work (including material) of a new building. The said
Sub-Contractors have been awarded the work as follows:
Civil work has been given to Mr. A
Electrification work has been given to Mr. B
Plumbing & Fire fighting work has been given to Mr. C
Whether all aforesaid contracts fall under the ambit of term
original works as defined under Rule 2A of Service Tax
(Determination of Value) Rules, 2006?
The scope of term “Construction” can not be restricted to merely
putting up walls, roof and floor etc. In different words, completion
and finishing services [such as glazing, plastering, floor and wall
tiling, installation of electrical fittings, plumbing works etc.] also fall
within the ambit of term “Construction” which itself gets covered
under the definition of term “Original Works”.
Therefore, all above contracts are eligible to discharge service tax
liability on the 40% of the total amount charged for the works
contract.
Case Study- 9
What are the options available to a Builder for discharging
its Service Tax Liability?
In addition to discharging Service Tax liability after availing
abatement as per Notification No 26/2012 dated 20.06.2012, the
builder can also discharge its Service Tax Liability as per Rule 2A
of Service Tax (Determination of Value), Rules, 2006 provided it
entered into a separate agreement with the allottee for the sale
of land.
Hot Topics
 Sale of PLOTS
 Sale of Developed PLOTS
 Joint Venture
 Joint Venture of Development of Lands( Plot Sale)
 Joint Venture Agreement and Sale of Flats
 Joint Venture Agreement and Area Sharing
 Completion Certificate Vs. Occupancy Certificate
Hot Topics
 Rate of Tax on Ancillary Services Like
 PLC service
 EDC/IDC Charges
 IFMS – Refundable/Non Refundable
 Car Parking ( Open and Covered)
 Forfeiture Amount
 Transfer Charges/Admin Charges
 Original Works Contract Vs. Finishing Services ( Valuation ????)
 Free of Cost Material Supplied by the Contractee
Hot Topics
 CENVAT Credit Issues : Whether CENVAT is eligible on all the Input services or there
are some exclusions/Conditions
 Completed Projects and Unsold Units
 Township Projects
 Reversal of CENVAT credit for sale of Land/Plot
 Adjustment of Credit Note/Discount
 Point of Taxation