Transcript Slide 1

Baroda Branch of WIRC
The Institute of Chartered Accountants of India
REAL ESTATE CONCLAVE
Service
Tax
Issues
for
Builders,
Developers, Contractors including Works
Contract Services.
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Real Estate Services in the negative list – Section 66D
Service in relation to Agriculture:
Services relating to agriculture or agricultural produce by way of renting or
leasing of vacant land with/without a structure incidental to its use [Section
66D(d)(iv)
Clarification: Education Guide:
“4.4.9 Would leasing of vacant land with a green house or a storage shed meant
for agricultural produce be covered in the negative list?
Yes. In terms of the specified services relating to agriculture 'leasing' of vacant
land with or without structure incidental to its use' is covered in the negative list.
Therefore, if vacant land has a structure like storage shed or a green house built
on it which is incidental to its use for agriculture then its lease would be covered
under the negative list entry.”
Note:
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Reference of Section in the entire presentation is of Finance Act, 1994
Education Guide means Education Guide issued by the Ministry of
Finance on negative list based taxation of services coming into force
from 01.07.2012
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Real Estate Services in the negative list –
Section 66D
contd.
Services by way of Residential Dwelling for use as residence
What is renting?
‘renting’ means allowing, permitting or granting access, entry, occupation, use or
any such facility, wholly or partly, in an immovable property, with or without the
transfer of possession or control of the said immovable property and includes
letting, leasing, licensing or other similar arrangements in respect of immovable
property; w.e.f 01.07.2012, service tax law has undergone a huge transformation.
From selective service based taxation to comprehensive service based taxation
(except for services under negative list and exempted by notification).
o
The term ‘renting’ is given a wider meaning.
o
Even part of occupation of immovable property amounts to renting.
o
Transfer of possession or control of immovable property is inconsequential to
determine arrangement of ‘renting.
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Real Estate Services in the negative list –
Section 66D
contd.
Scope of the term residential dwelling.
Clarification: Education Guide
4.13.1 What is a “residential dwelling”'?
The phrase “residential dwelling” has not been defined in the Act. It has therefore to be
interpreted in terms of the normal trade parlance as per which it is any residential
accommodation, but does not include hotel, motel, inn, guest house, camp-site, lodge,
house boat, or like places meant for temporary stay.
4.13.2 Would renting of a residential dwelling which is for use partly as a
residence
and partly for non-residential purpose like an office of a lawyer or the clinic of a doctor
be covered under this entry?
This would also be a case of bundled services as renting service is being provided both
for residential use and for non-residential use. Taxability of such bundled services has
to be determined in terms of the principles laid down in section 66F of the Act. (Please
refer to Guidance Note 9).
o
End use of the property is the deciding factor.
Comment: No new benefit post 01/07/2012. Scope of section (105)(zzzz) also did not
cover renting of residential property
o
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Exemptions:
Notification
20.06.2012)
Real
Estate
Sector
No.25/2012
ST
(vide
dated
Entry 12 –Services provided to the Government or 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 work predominantly meant for use other
than commerce industry etc.
Whether construction of hospital for a trust or a section 25 company be
exempt?
 A historical monument, archaeological site or remains of national importance.
 A structure meant predominantly for use as educational, a clinical or an
cultural establishment
 Canal, dam or irrigation works
 Pipeline conduit plant for:
Water supply, water treatment or sewage treatment or disposal
 A residential complex predominantly meant for self-use or the use of their
employees etc.
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Exemptions: Real Estate Sector
contd.
Entry 13: Services provided by way of construction, erection,
commissioning, installation, completion, fitting out, repair, maintenance,
renovation or alteration of:




Road bridge, tunnel or terminal for road transportation for use by
general public.
A civil structure/any other original works pertaining to Jawaharlal
Nehru National Urban Renewal Mission or Rajiv Awaas Yojana.
A building owned by a section 12AA of IT Act registered entity & meant
predominantly for religious use by general public.
A pollution control/effluent treatment plant (except within factory) or a
structure meant for funeral, burial or cremation.
“Religious place means a place which is primarily meant for conduct of
prayers or worship pertaining to a religion, meditation or spirituality.”
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Exemptions: Real Estate Sector
contd.
Entry 14: Services by way of construction, erection, commissioning or
installation of original works pertaining:

An airport, port or railways including monorail or metro.

A single residential unit other than a part of residential complex



Low-cost houses upto a carpet area of 60 square meters per house
under specified affordable housing scheme of the Government of India.
Post harvest storage infrastructure for agricultural produce including
cold storage for such purposes.
Mechanized food grains system / machinery / equipment for units
procuring agricultural produce as food stuff excluding alcoholic
beverages.
“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.
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Exemptions: Real Estate Sector
contd.
Entry 29(h)
Services by sub-contractor providing services by way of works
contract to another contractor providing works contract service
which are exempt.
[Refer definition of works contract in section 65B (54)]
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Other relevant exemptions

Entry 25 – Services provided to Government /a local authority / governmental
authority by way of:
(a) Carrying out any activity in relation to any function ordinarily entrusted to a
municipality in relation to water supply, public health, sanitation,
conservancy, solid waste, management or slum improvement or
upgradation or
(b) …………




Entry 39 – Services by a governmental authority by way of any activity in relation
to any function entrusted to a municipality under Article 243 of the Constitution.
Services provided to developer of unit of Special Economic Zone (SEZ) vide
Notification No.40/2012-ST dated 01/07/2012.
Services to diplomatic missions etc. vide Notification No.27/2012-ST dated
20/06/2012.
Threshhold Exemption vide Notification No.33/2012-ST dated 20/06/2012.
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Real Estate Sector taxed vide Declared
Services – Section 66E
 renting of immovable property;
 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.
 service portion in the execution of a works
contract;
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Select Key Issues: Real Estate Sector

Preferential location charges

Cancellation/surrender/transfer/buy back/resale of a unit prior
to completion

Assured return to investors

Transfer charge and restoration charge

Valuation of completion & finishing services in new construction

Free/concessional supply of material to contractor

Ongoing contracts of construction on July 01, 2012

Booking / Sale of plots under development stage

Build – Operate – Transfer (BOT) projects

Allotment of flat/units to land owners in lieu of grant of
development rights
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Preferential location charges
 Background:
 Introduced with effect from 01/07/2010 vide clause
(zzzzu) in section 65(105).
 Refer to clarification of the Government
No.334/1/2010-TRU dated 26/02/2010.
vide
F.
 Position post 01/07/2012:
 When consideration not specified separately
service tax is chargeable at abated rate?
whether
 When consideration is specified separately whether abated
rate is still available?
 Floor rise charge – Abatement @75% available.
Refer:
Clarification
provided
to
MCHI
No.V/ST/1/Tech-I/463/11 dated 31/08/2012
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vide
F.
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Cancellation/surrender/transfer/buy back/
resale before completion
 Cancellation or surrender of booking prior to completion
of flat or unit:
 Either the buyer surrenders the booking or the builder cancels
the booking on account of default in paying installments or
similar reason.
 Retention of an amount as “cancellation charge” while
refunding advances.
 Whether service tax chargeable under section 66E(e)?
“Agreeing to the obligations to refrain from an act or to
tolerate an act or a situation or to do an act.” At which rate?
 Whether adjustment of service tax already paid on advances
from subsequent liability allowed?
Refer para 2.3 of Circular No.151 dated 10/02/2012.
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Cancellation/surrender/transfer/buy-back/
resale before completion
contd.
 Transfer of flat/unit during construction or prior to
completion whether transfer by a prospective buyer
attracts service tax. (Refer clarification vide Education
Guide – para 6.2.8.)
 Buy-back during construction – whether service tax
already paid allowed to be adjusted from subsequent
liability?
 Re-sale of cancelled or surrendered or bought-back
unit – whether service tax is attracted on remaining
installments if unit is sold prior to obtaining completion
certificate.
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Assured Return to investors

Who is the service provider?

Whether service tax is attracted? Why?
Transfer charge and restoration charge recovered prior to
completion of construction
Service tax implications – prior to 01/07/2012
- post 01/07/2012
Refer: Jaipuria Infrastructure Developers P. Ltd. vs. CST Delhi
2012 (25) STR-ST (Tri.-Del)
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Valuation: Completion and finishing services
Whether the term “completion & finishing services” defined?
Clause (ii) of Rule 2A of the Service Tax (Determination of Value) Rules,
2006 (Valuation Rules)
“In case of other works contracts not covered under sub-clause (A) and (B) including
maintenance-repairs, completion and finishing services such as glazing, plastering,
floor and wall tiling, installation of electric fittings of an immovable property Service
tax shall be payable on 60% of the total amount charged for the works contract”
Refer: Definition of “original works”
“original works" means(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;
In a new construction, whether completion & finishing services do not form part of
“original works”?
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Free or concessional supply of material or
services to contractor
When goods and/or services are provided free of cost to the contractor, fair market
value of all such goods or services provided in relation to execution of works
contract, whether or not supplied under the same contract or any other contract,
would be added to the value of contract for determining liability of service tax. (Rule
2A(ii) of Valuation Rules)
However, if the receiver of execution of works contract service recovers any charges
for such goods and/or service, it is deductible for the purpose of determining value
on which service liability is computed under the said Rule 2A(ii).
Refer: Explanation 1(b) of Rule 2A(ii) of the Valuation Rules:
“total amount" means the sum total of the gross amount charged for the works
contract and the fair market value of all goods and services supplied in or in relation
to the execution of the works contract, whether or not supplied under the same
contract or any other contract, after deducting—
(i) the amount charged for such goods or services, if any; and
(ii) the value added tax or sales tax, if any, levied thereon:
Provided that the fair market value of goods and services so supplied may be
determined in accordance with the generally accepted accounting principles.
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Ongoing contracts as on 01/ 07 / 2012 :
Construction of residential complex
When the service was exempt and became taxable on
01/07/2012.
Applicability of Rule 5 of the Point of Taxation Rules, 2011 (POT
Rules);
No service tax payable when:
 Invoice is issued and payment is received against invoice
before service becoming taxable.
 Payment is received before service becoming taxable and
invoice is issued within 14 days of service becoming taxable.
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Booking / sale of plots under development
stage
When a developer purchases a piece of land, books plots, receives money
in installments and undertakes the following activities:

Developing internal roads/approach road

Electrification/installation of poles etc.

Creation of other facilities like club-house, health club for the plot
owners

Laying pipelines for water sewerage etc.
Whether the above amounts to taxable service? At which rate?
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Build Operate Transfer (BOT) projects
What are BOT projects?
Infrastructure projects
Main parties involved: Government or its authorized agency
: Concessionaire
: Contractor appointed by Concessionaire
: Actual users
Refer:
Education Guide: Para 6.3.5
Refer:
2013-TIOL-136-CESTAT-MUM
2013-TIOL-586-CESTAT-MUM
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Allotment of flats/units to the land
owner for granting development rights
Whether sale of land in lieu of which units are provided is a service
and therefore attracts service tax?
If yes, how is the value
determined?
Refer: Section 67(1)(iii) of Rule 3(a) of the Valuation Rules.
What is the point of taxation for the developer?
Refer: Education Guide para 6.2.1 and 6.2.3.
Refer: Circular No.151/2/2012 of 10/02/2012
Refer: Maharashtra Chamber of Housing Industry (MCHI) vs. UOI
2012 (25) STR 305(Bom)
MCHI v. State of Maharashtra (2012) 51 VST 168 (Bom)
LCS City Makers Pvt. Ltd. vs. CST, Chennai 2013 (30) STR 33
(Tri.-Chennai)
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Maharashtra Chamber of Housing Industry vs. Union of India 2012 (25) STR 305
(Bom)
 The constitutional validity of service tax introduced from 01.07.2010 on builders
agreeing to sell immovable property during construction stage was challenged in a
bunch of petitions
 on behalf of the Petitioners the following grounds were urged:



The amendment is beyond the legislative competence of Parliament since the subject
matter of the tax falls within the legislative power of the States under Entry 49 of List
II to the Seventh Schedule of the Constitution
By the explanation to clauses (zzq) and (zzzh), the construction of a new building or
complex is by a deeming fiction treated to be a service when — (i) The construction
is intended for sale; and (ii) Some receipt is envisaged before the grant of a
completion certificate by the appropriate authority. The tax in pith and substance is
not on construction, but on the sale of land and the element of sale is essential to
fasten the charge. The sale of immovable property before, during or after
construction, but before a completion is granted can by no stretch of imagination be
regarded as a service.
The provisions of Section 65(105)(zzzzu) are unconstitutional on the grounds that no
element of service is involved whatsoever because it is a tax on location and what is
the preferential location or an extra advantage or a payment over and above the
basic sale price is not defined. The provision suffers from the vice of an excessive
delegation of legislative power.
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Maharashtra Chamber of Housing Industry vs. Union of India 2012 (25) STR 305
(Bom)
 On behalf of Revenue the following was urged:
 The explanation to clauses (zzq) and (zzzh) does not tax a transfer of
property at all. Construction is an activity on land or a user of land which does
not fall within the ambit of Entry 49 of List II;
 The explanation creates a deeming fiction under which a service is deemed to
be provided by the builder to the buyer where (i) There is a intention to sell;
and (ii) At least some payment has been received from the flat purchaser.
These, however, are incidents on the happening of which tax may be charged,
but do not form the subject matter of the tax. The tax has not been imposed
on the transfer or sale of immovable property. The tax is on a construction
service, but is triggered when there is an intent to sell and some payment is
received;
 Construction reasonably construed does involve an element of service.
 Clause (zzzzu) was introduced to cover diverse services which builders
provide under different heads for which charges are levied separately. Builders
do charge for providing preferential locational and other development
amenities which form part of service rendered.
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Maharashtra Chamber of Housing Industry vs. Union of India 2012 (25) STR 305
(Bom)
 Held:
 Incidence of the tax is not relevant to construing the subject matter of tax and
it is distinct from the taxable event; it identifies, as it were, the person on
whom the burden of tax would fall.
 intent to sell whether before, during or after construction is the touchstone of
the deeming definition of the service of the builder to the buyer.
 an explanation could be of different genres and legislature is not prevented to
enact an explanation which is not clarificatory but expansive.
 The legislature has imposed levy on the activity involving provision of service by
a builder to the buyer in the course of the execution of a contract involving
intended sale of immovable property. The charge is not on land and buildings
as a unit and it is not on general ownership of land.
 The explanation bringing in two fictions of a deemed service and deemed
service provider is not ultra vires the provisions of sections 67 and 68 of the
Finance Act.
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Maharashtra Chamber of Housing Industry vs. Union of India 2012 (25) STR 305
(Bom)
 The builders following the practice of levying charges under diverse heading
including preferred location involved value addition and a service before
obtaining a completion certificate. If no charge is levied for a preferential
location or development, no service tax is attracted. Therefore there is no
vagueness and uncertainty and there is no excessive delegation.
 By a subsequent Notification dated 22nd June, 2010, the extent of the
exemption is enhanced to 75% of the gross value. What is taxed therefore is
the value addition involved in the rendering of service.
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Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra
and Ors (2012) 51 VST 168 (Bom)
 The constitutional validity of the amended definition of „sale‟, the Trade
Circular dated 7.02.2007 an d the 1% Composition Scheme introduced w.e.f.
09.07.2010 were challenged in various writ petitions.
 Gist of contentions for the petitioners are provided as under:




The amendment was beyond the scope of the States power to tax under
Sl. No. 54 of List II of the Seventh Schedule to the Constitution.
In order to attract the application of Article 366(29A)(b), a contract would
have to among other things involve a transfer of property in „goods‟ and
immovable property does not constitute „goods‟.
Consequent upon the 46th Amendment to the Constitution, only a
transfer of property in goods involved in the execution of a works
contract is taxable and a contract for the sale of immovable property is
not a works contract.
A works contract involves only two elements viz. the transfer of property
in goods; and supply of labour and services. If a third element, the sale of
immovable property, is involved in the contract it does not constitute a
works contract and hence to such a contract, the legal fiction created by
Article 366(29A) would not apply.
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Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra and
Ors (2012) 51 VST 168 (Bom)


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Contracts governed by the Maharashtra Ownership Flats (Regulations
of the Promotion of Construction, Sale, Management and Transfer)
Act, 1963 („MOFA‟) cannot be regarded as a works contract, being
agreements for the purchase of immovable property.
The MVAT ignores the concept of plurality of deemed sales. Where
the developer is the owner of the land, the promoter is both the
owner and developer. Alternately, a developer may enter into a
development agreement with the owner of the land. When a promoter
appoints a sub contractor and gets a building constructed, that
contract is a works contract under Article 366(29A) and a transfer of
the property in the goods involved in the execution of the works
contract takes place to the developer. This the first deemed sale.
When the developer enters into an agreement with a purchaser under
the MOFA, a sale of goods is not involved since this amounts to a
second deemed sale of the same goods which cannot be brought to
tax. Property has already passed on accretion and the same
transaction of deemed sale cannot be taxed twice.
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Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra and
Ors (2012) 51 VST 168 (Bom)
 Gist of contentions for the revenue are provided as follows:
 The purpose underlying the enactment of the deeming fiction in Article
366(29A) was to override the limited definition of the expression „sale‟ in the
Sale of Goods Act, 1930 and to isolate the sale of goods element involved,
inter alia, in a contract which is a works contract. The amended definition of
„sale‟ falls within the compass of Article 366(29A).
 A works contract is a contract to execute works and encompasses a wide range
of contracts; it is not restricted to building contracts having only two elements
viz. the sale of material and goods and the supply of labour and services.
 The well settled connotation of the expression „works contract‟ is that a
building contract may also involve in certain situations a sale of land. A works
contract does not cease to be such merely because any other obligation exists.
 In an agreement which is governed by the MOFA, a conveyance of the interest
in the flat or at any rate an interest therein is created at the stage of the
execution of an agreement. The doctrine of accretion is always subject to a
contract to the contrary. The provisions of the MOFA contain a statutory
stipulation to the contrary where the accretion to the property enures to the
benefit of the flat purchaser; and
 The Trade Circular and the deduction schemes are only clarificatory in nature.
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Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra and
Ors (2012) 51 VST 168 (Bom)
 Held:
 Works contracts have numerous variations and it is not possible to accept the
contention that a contract for work in the course of which title is transferred to
the flat purchaser would cease to be a works contract
 The effect of the amendment to Section 2(24) is to clarify the legislative intent
that a transfer of property in goods involved in the execution of works contract
including an agreement for building and construction of immovable property
would fall within the description of a sale of goods within the meaning of the
provision.
 The constitutional validity of the provisions of the MVAT Act, 2002, as
amended, is not contingent upon any other statutory regulation of apartments
under cognate legislation in the State of Maharashtra.
 Having regard to this statutory scheme, it is not possible to accept the
submission that a contract involving an agreement to sell a flat within the
purview of the MOFA is an agreement for sale of immovable property
simplicitor.
 The Constitutional validity of the amended definition of „sale‟, the Trade
Circular dated 7.02.2007 etc. upheld.
 Held Liable to VAT
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Amendment vide Notification No. 2 / 2013-ST
dated & effective from 01.03.2013
Substituted entry no.12 in Notification No.26/2012-ST
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.
(i) For residential unit having carpet
area upto 2000 sq.feet OR whether
amount charged is less than Rs.1
Crore
(ii) For other than (i) above
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Value chargeable to service tax
25%
30%
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Amendment vide Notification No. 2 / 2013-ST
dated & effective from 01.03.2013
contd.
Conditions:
No CENVAT on inputs for providing the above service is taken.
The value of land is included in the amount charged to service receiver.
Based on the above:


Whether Rs.80 lakh charged for a 2200 sq. feet flat; OR
Whether Rs.2 Crore charged for 800 Sq. feet flat; eligible for 75%
abatement?
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Thank you
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