Build Operate Transfer (BOT): Service Tax implications

Posted on February 22, 2012 by Team STO

Build Operate Transfer (BOT) is one of the most preferred business models in the Construction Sector. Under BOT Projects, many variants are being followed in different regions of the country, depending on the nature of the project. Build-Own-Operate-Transfer (BOOT) is a popular variant. Generally under BOT model, Government or its agency, concessionaire (who may be a developer/builder himself or may be independent) and the users are the parties. Risk taking and sharing ability of the parties concerned is the essence of a BOT project. Government or its agency by an agreement transfers the ‘right to use’ and/or ‘right to develop’ for a period specified, usually thirty years or near about, to the concessionaire. Transactions involving taxable service take place usually at three different levels: firstly, between Government or its agency and the concessionaire; secondly, between concessionaire and the contractor and thirdly, between concessionaire and users, all in terms of specific agreements. With respect to the service tax liability, there have been many issues raised in the recent past. On 10.2.12 the Central Board of Excise and Customs issued clarifications with respect to some of these issues.

At the first level, Government or its agency transfers the right to use and/or develop the land, to the concessionaire, for a specific period, for construction of a building for furtherance of business or commerce (partly or wholly). Consideration for this taxable service may be in the nature of upfront lease amount or annual charges paid by the concessionaire to the Government or its agency. Here the Government or its agency is providing ‘renting of immovable property service’ (renting of vacant land to be used for furtherance of business or commerce) and in such cases the concessionaire becomes the service receiver. In this model, though the concessionaire is undertaking construction of a building to be used wholly or partly for furtherance of business or commerce, on the land provided by the government or its agency for temporary use, he will not be treated as a service provider since such construction has been undertaken by him on his own account and he remains the owner of the building during the concession period.

At the second level, transaction can take place between a concessionaire and the contractor. Where the concessionaire himself does not have exposure to construction sector, he may engage a contractor for undertaking construction of a building on the land, in respect of which right to use has been obtained in his favour, from the Government or its agency. If the concessionaire is himself a builder/developer, this level of transaction may not arise. Where an independent contractor is engaged by a concessionaire for undertaking construction for him, then service tax is payable on the construction service provided by the contractor to the concessionaire.

At the third level, the concessionaire enters into agreement with several users for commercially exploiting the building developed/constructed by him, during the lease period. For example, the user may be paying a rent or premium on the sub-lease for temporary use of immovable property or part thereof, to the concessionaire. At this third level, concessionaire is the service provider and user of the building is the service receiver. The concessionaire may provide to the users, taxable services such as ‘renting of immovable property service’, ‘business support service’, ‘management, maintenance or repair service’, ‘sale of space for advertisement’, etc. Service tax is leviable on the taxable services provided by the concessionaire to the users.

There could be many variants of the BOT model explained above and implications of tax may differ. For example, at times it is possible that the concessionaire may outsource the management or commercial exploitation of the building developed/constructed by him, to another person and may receive a pre-determined amount as commission. Taxable service here will be business auxiliary service and service tax is leviable on the commission.

The CBEC categorically has clarified that regards Taxability, the service provided by the Government or its agency to the concessionaire is liable to service tax. Its also states that the construction services provided by the contractor to the concessionaire would be examined from the point of taxability as to whether the activity is not otherwise excluded. And finally the services provided by the concessionaire to the user of the facility are liable to service tax. Thus the circular clarifies that both the Persons are liable to pay, i.e Government or its agency and concessionaire are liable to pay tax on the services being provided by them. There could be several other persons liable to pay service tax, depending on the variant of the BOT model followed. Now as many of these issues stand clarified, the hiccups may be on a rise as the cost of such projects are likely to escalate while taking the service tax factor into consideration.

Posted in Construction of Residential Complex Services, Construction Services- Commercial or Industrial | Leave a comment

Service Tax Department breaks the Slumber

Posted on February 15, 2012 by Team STO

Issues Clarification on divergent practices in Construction sector

Service tax department believes that the powers to issue clarifications on law need not be used suo-motto but only in situation when the trade makes loud noises and is coming knocking at its door; they are left with no option but to act. Circulars are the tool available with the Revenue Department to clarify which the law have failed to spell out in clear words. But if the Circulars misses the mark, the tax payers start feeling the pinch. It has been the experience of the trade that the tax laws in this country have always been embroiled in confusion and the law enforcers have grasped such situations to penalize the honest tax payers.

Service tax on Builders was a non-starter for the government since the courts initially held that view that no service was rendered by the builders to their purchasers. To overcome the impact of such adverse rulings of the Courts, the Service Tax provisions were amended in the year 2010 and the concept of deemed service during the course of sale of flats/units etc by builders to their purchasers were introduced. This concept was introduced with some riders and failed to take care of various situations prevailing in the construction industry. The impact of such changes was felt uniformly across the length and breadth of this country and as a result various builder lobbies across the country sought take refuge in Courts. However, a series of adverse rulings during the past one year have left the builder community with no option but to collect and pay service tax on sale of flats/shops/units to their purchasers.

Nearly two years after bringing in a law by deeming fiction holding that sale of flats/shops/units would amount to providing of service, the department has woken up from their slumber and recently issued a Circular No.151/02/2012 dated 10.02.2012 clarifying the manner of taxing various situations emerging from the practice prevailing in the construction industry. It seems that the governing body of Central Excise, Customs and Service tax believes that the powers to issue clarifications on law need not be used suo-motto but only in situation when the trade coming knocking on its door and they are left with no option but to act.

This circular reveals the manner of taxing divergent business models and practices being followed in the construction industry like Tripartite Business Model consisting landowner; builder or developer; and contractor who undertakes construction. The circular clarifies that construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/developers even for the flats given to the land owner. The circular has also clarified that value in the case of flats given to landowner would be equal to the value of similar flats charged by the builder/developer to other purchasers. In case the prices of flats/houses undergo a change over the period of sale i.e. from the first sale of flat/house in the residential complex to the last sale of the flat/house, the value of similar flats as are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax.

Another popular model being investment in real estate it has been clarified that under investment model, before the commencement of the project, the same is on offer to investors. Either a specified area of construction is earmarked or a flat of a specified area is allotted to the investors and as it happens in some places, additionally the investor may also be promised a fixed rate of interest. After a certain specified period an investor has the option either to exit from the project on receipt of the amount invested alongwith interest or he can re-sell the said allotment to another buyer or retain the flat for his own use. The clarification states that under Investment model, after 01/07/2010, investment amount shall be treated as consideration paid in advance for the construction service to be provided by the builder/developer to the investor and the said amount would be subject to service tax. If the investor decides to exit from the project at a later date, either before or after the issuance of completion certificate, the builder/developer would be entitled to take credit of the Service Tax to the extent he has refunded the original amount. If the builder/developer resells the flat before the issuance of completion certificate, again tax liability would arise.

It is also clarified that mere change in use of the building does not involve any taxable service, unless conversion falls within the meaning of commercial or industrial construction service. In certain states, completion certificates have been waived or are considered as not required for certain specified types of buildings. The equivalent of completion certificate issued by Chartered Engineer or Licensed surveyor should be used as the dividing line between service and sale. In case of Joint Development Agreement Model, land owner and builder join hands and may either create a new entity or otherwise operate as an unincorporated association, on joint/collaboration basis, with mutuality of interest and to share common profit together. If the new entity undertakes construction on behalf of landowner and builder it will be treated as separate entity.

Although these clarifications may ease the anxiety of the builder community and also result in avoiding litigations with the department, its real long term effect needs to be watched and seen. The clarifications seem to have opened new areas of disputes and also have failed to take care of all divergent practices followed by the construction industry in India. The law enforcers will be bound by such clarification being issued by the governing body of Service Tax.

Posted in Construction of Residential Complex Services, Construction Services- Commercial or Industrial | Leave a comment

Service Tax on Joint property holders

Posted on February 8, 2012 by Team STO

As Interest is more dear than the Principle, so is the Rental Income in respect of the Capital Investment. Current recession period has made it far more important source of steady and safe income. As the issue of Service Tax on Renting of Immovable properties has almost settled in favour of the revenue department, it becomes more imperative to understand the probable grey areas so as to avoid any future litigations . Government has always encouraged the small scale sector, as it has played a significant role in the industrial growth of the Indian economy as well as the GDP. Unlike manufacturing, the service sector does not require capital intensive investments, hence the Small scale service provider account for major portion of service sector. Minimum threshold limit to attract taxes, have been a prudent practice worldwide. Accordingly in our country the small scale industries (SSI) have a special exemption under Service Tax law in order to keep them out of tax compliance hassles. The benefit is extended based on the turnover of the SSS ( small scale service providers). In this regard with a bona fide intention the Board had issued Notification No. 6/2005-S.T. dated 01.03.2005 which exempted taxable services of aggregate value not exceeding Rs.4 Lakh in any financial year from the whole of the service tax. Then later on limit of being such small service providers extended to Rs.10 Lakhs vide Notification No. 08/2008-S.T., dated 01.03.2008.

The situation becomes a bit complex when One Service Provider is providing services from Many Premises or vice versa. Taxable services upto an aggregate value of Rs. 10 lakhs is exempted from payment of service tax. This is subject to a condition that the aggregate value of the taxable services, rendered by a service provider, from one or more premises, shall not exceed Rs. 10 lakhs, during the preceding financial year. It may be observed that if a person is rendering several services, the value of all such services shall be clubbed, for the purpose of determining this eligibility limit of Rs. 10 Lakhs. Therefore, the exemption limit of Rs.10 Lakhs is not independent for different services and different locations. In case of One Premises and Many Service Providers the notification is silent. Under Central Excise, parallel Notification No. 08/2003-C.E, dated 01.03.2003. is crystal clear about such scenario as it contemplates that if more than one manufactures clears goods from one factory that the limit will not be available to individual manufacturer and their clearance will be clubbed for the purpose of SSI limit. However , Service Tax is assessee based tax or person specific and not premises specific. To determine place of provision of service under Service Tax is not as simple as to determine the clearance of goods in central excise. For example , If a retail store has taken a property on rent from 5 different persons having 5 adjoining shops, all the persons can enjoy individual threshold exemption limit. Another scenario, if a single property where there are joint owners who lease out a single property, the lease rent for individual owner is below Rs.10 Lakhs but in total it fetches more than 10 Lakhs, in such situation to the individual will be entitled to enjoy the threshold exemption limit upto10 lakhs each provided their lease agreement clearly spells out the conditions and ownership details of individuals.

A possible solution for such grey area may be determined based on the property income shown in the Income Tax Return. However the scenario is altogether different under Income Tax provisions which clubs income of property in the name of Minor with the income of mother or father having higher income among them, unless the property is earned out Minor’s own income. Government is expected to bring a paradigm shift in the approach to service tax this budget . With negative list in service tax round the corner, such grey areas and futile litigations are bound to be on a decline.

Posted in Renting of Immovable Property Services | Leave a comment

Laying cables under or alongside roads

Posted on February 1, 2012 by Team STO

Providing water and electricity to its citizens consist of the most important duties of a government. It is a well known fact even in its 65th year of independence, the country have not been able to achieve 100% electrification. The concept of electricity is still unknown in many parts of India. Except for few states, major portions of the country are reeling under severe shortage of power resulting in long hours of load shedding. Although government policies designed during the last decades were conceptualized to encourage power generation even in the private sector, somehow the policies have failed to hit the target. This situation has resulted in constant demand for electricity from the Central Government and has also led to such states resorting to purchase of power from other surplus states at exorbitant prices. Needless to say the ill-designed policies of the political parties in power in such state governments reeling under power shortages, have put the state run power utility provider under huge losses.

Laying of cables is one of the important activity undertaken by the utility provider which account for a major portion of their budget. Cable laying are needed for conversion of overhead supply of electricity to underground system, on account of renovation / widening of roads, new areas to be covered under the distribution system, increasing the load capacity of existing areas, providing public amenities, electrification of railways so on and so forth. The work of laying of cables involves laying of electrical cables under or alongside roads / railway tracks, between grids / sub-stations / transformers, between the source and distribution points of residential, commercial complexes, public facilities etc.

After the introduction of service tax, such activity of laying of cables were subjected to tax. Service Tax being an indirect form of taxation, the ultimate burden of such taxes were borne by the utility provider, who were burdened with huge losses due to the wrong policies of the power hungry politicians. This levy also dissuaded private investments in the power sector.

With a view to provide relief to the utility provider and to attract private investments in the power sector the Central Board of Excise and Customs, New Delhi in its Circular No. 123/5/2010-TRU, dated 24.05.2010 clarified that the shifting of overhead cables & wires for any reasons such as widening/ renovation of roads, laying of cables under or alongside roads, laying of electric cables between grids / sub-stations / transformer stations en route, laying of electric cables up to distribution point of residential or commercial localities / complexes, railway electrification and electrification along the railway tracks will not attract service tax.

The circular does not provide exemption to laying of electrical cables undertaken by or on behalf of residential or commercial units or its developers or contractors but exempts the activity of laying of electrical cables undertaken by the utility provider i.e. power distribution company or its contractors, agents from the ambit of Service Tax. The Board has also clarified that installation of transformer/sub-station undertaken independently i.e. not by the utility provider but by the consumer/end user or his contractors or agents are also subject to Service Tax.

But by direct departure from their stand of promoting the power generation and distribution industry, the Board has further clarified that public utility services like installation of street lights, flood lights, traffic lights etc will be subjected to the levy of Service Tax. It is not clear why the Government wants to subject such services which are for the benefit of public at large to tax and put brakes on such projects undertaken for public good.

Disputes have arisen in many parts of the country regarding applicability of service tax on certain activities of cable laying. The above circular clarifies that shifting of overhead cables/ wires for any reasons such as widening/renovation of roads not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994. However no clarity is given if shifting of overhead cable or wires is undertaken otherwise than widening / renovation of road.

Another area of dispute has arisen wherein power transmission companies have refused to reimburse the service tax paid by the tower erection companies, on the activities of ‘erection, commissioning or installation’ of tower structures in guise of exemption under the said circular, as they have extrapolated the scope of cable laying to include erection of towers. The Board vide the said circular has clarified that such activities remain outside of the purview of the taxable services only if they do not result in emergence of an erected structure. Such mis-interpretation is leading to different practices followed by different service providers.

The circular also clarifies that Laying of electric cables up to distribution point of residential or commercial localities/ complexes and Laying of electric cables between grids/sub-stations/ transformer stations en route is not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994. However if the cables are laid beyond the distribution point of residential or commercial localities/complexes it will be termed as taxable activity under ‘commercial or industrial construction’ or ‘construction of complex’ services.

Electricity is slowly developing as basic need for our developing country. Taxing its ancillary activities is not a move which shall be welcomed by people at large. However as revenue is tapping all infrastructure projects for achieving their target, the projects of laying cable are also bound to bear the brunt of it.

Posted in Erection, Commissioning or Installation Services | Leave a comment

Service Tax on Construction remains in place

Posted on January 25, 2012 by Team STO

The Finance Act, 1994, introduced the concept of Service Tax in India for the first time. Although at its inception this tax was levied only on a handful of services, at present more than 100 services are taxed under this levy. This tax was introduced under Entry 97 of List 1 of the Seventh Schedule to the Constitution of India. The authority of Central Government to levy Service Tax as well as their legislative competence to taxes certain services have been the subject of many unsuccessful challenges before the High Courts of various states and few of such cases have knocked the doors of the Supreme Court with no avail. The Hon’ble Supreme Court of India while upholding the levy of Service Tax in the case filed by All India Federation of Tax Practitioners (STO 2007 SC 21) opined that service tax is an indirect tax levied on certain services provided by certain categories of persons including companies, association, firms, body of individuals etc.

Article 246(1) of the Constitution empowers the Parliament with exclusive powers to formulate laws with respect to any matters enumerated in List I in the Seventh Schedule to the Constitution referred to as the “Union List”. The State Government derives its powers to make laws with respect to matters enumerated in List II (State List) from Article 246(3). In respect of matters enumerated in List III (Concurrent List) both Parliament and State Government have powers to make laws. The legal backup for the Service Tax levy was further provided by the introduction of Article 268A in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003 which stated that taxes on services shall be charged by the Central Government and appropriated between the Union Government and the States. Simultaneously, a new Entry 92C was also introduced in the Union List for the levy of service tax.

The mindset of the Apex Court is revealed in their decisions to uphold the constitutional validity of imposition of service tax in the cases Gujarat Ambuja Cements Ltd. Vs. Union of India (STO 2005 SC 734) and Tamil Nadu Mandap Keeper Association case – (STO 2004 SC 124) as well as in the case of All India Fedn. of Tax of Tax Practitioners (STO 2007 SC 21).

Service Tax on construction of commercial complex and residential complex was introduced from 10.09.2004 and 16.06.2005 respectively. This levy was set aside by the High Courts on the ground that the ownership and possession of the flat/shop/commercial premises throughout the process of construction remained with the builder and only the constructed unit can be transferred to the buyer on receipt of entire sale consideration and hence no service in relation to construction of complex is rendered by the builder to the buyer. The High Courts also held that the right, title and interest in the construction continued to remain with the builder and therefore the construction cannot be said to have been undertaken for and on behalf of the buyers. The High Courts further ruled that the service rendered during the course of construction is nothing but service to self and hence not taxable. The Government realising their mistake in introducing a poorly drafted law came out with a face saving circular on 29.01.2009 clarifying that any service till the execution of sale deed would be in the nature of “self service” and not leviable to tax.

Not to be undone by the adverse rulings of the Court, the Union Government during presentation of Budget 2010 introduced a deeming provision with effect from 01.07.2010 by way of an explanation in construction of commercial complex and residential complex services. This deeming provision once again brought to fore the levy of service tax on construction of residential complex and commercial/industrial constructions. As per this explanation, any constructions which are intended for sale wholly or partly by a builder or any person authorised by the builder before, during or after construction, except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force, shall be deemed to be service provided by the builder to the buyer. The CBEC also issued Circular No. 334/03/2010-TRU dated 01.07.2010, which clarified that in the event of entering into agreement of sale or receipt of payment before issuance of completion certificate, the transaction will attract service tax since the builder in such cases are providing construction services. It was further clarified that completion certificate issued by an architect or chartered engineer or licensed surveyor will be also valid to determine the service tax liability. Notification No. 36/2010-S.T., dated 28.06.2010 was also issued exempting all advances received before 01.07.2010 from the purview of service tax.

Ever since the introduction of this deeming provision Builder Associations across the country have moved courts to declare the impugned levy of Service Tax on Construction services as unconstitutional. The High Court of Punjab and Haryana in the case of M/s G.S Promoters held that the levy of tax is on service and not on service provider and construction services are certainly provided even when a constructed flat is sold. Taxing of such transaction is not outside the purview of the Union Legislature as the same does not fall in any of the taxing entries of State list.

The Maharashtra Chamber of Housing Industry (MCHI), on behalf of its member builders, also decided to try its hand in the Bombay High Court. The Court, while admitting the petition filed by MCHI also granted interim relief vide its order dated 23.07.2010, by expressly prohibiting coercive steps against the petitioners for the recovery of service tax, but permitted the continuance of assessments in accordance with law. The court vide its further order dated 03.08.2010 however restricted the applicability of the interim relief to those members of MCHI who are party to the petition and also directed these members to file an undertaking that they shall pay the service tax dues in the event of the petition being dismissed. By its subsequent order dated 18.02.2011 the builders were directed to deposit service tax collected from buyers of under construction structures directly in the court, instead of putting the same in an escrow account. The service tax thus deposited in the high court was to be refunded to the members of MCHI along with accrued interest thereon if the decision goes in favour of the builders who have challenged the levy of service tax imposed by the union government.

But on Friday i.e. 20.01.2012, the High Court of Bombay dealt a telling blow on the prospects of builders by upholding the levy of Service Tax on construction. A division bench of Justices D.Y. Chandrachud and A.A. Sayed, on the petition filed by MCHI, held that although the power to levy tax on land and building lies with the state government, construction was a service activity and the Union Government has the power to levy service tax.

The builders association all over India and the leading builders having pan-India presence needs to unite and collectively fight this levy in the Hon’ble Supreme Court, failing which it will be curtains for them and this challenge will also go down in the history of Service Tax as one of those unsuccessful challenges, which have not only failed to get the desired result, but at the same time have also strengthened the Central Government resolve to bring various other untaxed services within the tax bracket, by introduction of negative list of services.

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To err repeatedly is inhumane!

Posted on January 18, 2012 by Team STO

To err is human but to continue to repeat the same mistakes time and again is inhumane. Service Tax is a unique tax which affects the common man more than any other form of indirect taxation, since even the professionals, small time businessman, rental income earners, self employed people etc are all subjected to this tax. Section 70 of the Finance Act, 1994, which requires a service tax assessee to file half yearly returns, states that every person liable to pay service tax shall himself assess the Service Tax and furnish a return to the department. Till September, 2011 only those assesses who paid a total service tax of rupees ten lakh or more including the amount paid by utilization of CENVAT credit in the preceding financial year, was required to file returns electronically. All other assesses were required to submit the returns manually by physical submission of returns in hard copy format.

Although computerization have invaded even the remotest part of this country, its influence is limited to the younger generation with the older generation still finding the going difficult to get accustomed with its working. The majority population of this country is still skeptical in accepting electronically generated receipts as proof, since bred and brought up on the age old concept to only recognize paper based documents as genuine. Digitization is a concept which is yet to earn its place in business administration. Yet disregarding these facts, electronic filing of returns for all classes of service tax assesses were made mandatory from 01.10.2011 vide Notification No. 43/2011-S.T., dated 25.08.2011 from 1st of October 2011 CBEC. This requirement have made the life of various service tax assesses miserable as many of them are not having access to computers let alone internet. Mandatory electronic filing of returns have let in a scramble among assesses to acquire computers with internet facility or in alternative to put themselves at the mercy of professionals/consultants engaged in filing of e-returns on behalf of assesses for a fees.

As per Rule 7 of the Service Tax Rules, 1994 half yearly returns for the half year ending 30th September, 2011 was required to be filed by 25.10.2011. The mandatory requirement to file returns electronically have compounded the problems faced by the assesses necessitating the government to extend the date of submission of half yearly return for the period April 2011 to September 2011 from 25.10. 2011 to 26.12.2011 vide Order No. 1/2011 – S.T., dated 20.10.2011. Although this was a welcome relief to the trade and industry, who required time and expertise to adjust to the new legal requirement, the extension of two months was found to be inadequate. As is the practice of the administrators of providing relief in piecemeal and installments, further extension till 06.01.2012 was granted vide Order No. 3/2011–S.T., dated 29.12.2011. The last date was again extended to 20.12.2012 Order No. 1/2012– Service Tax 09.01.2012. These extensions have given further opportunity to the defaulters to comply with the mandatory e-filing requirement but at the same time have put those assesses who have e-filed returns with late fee on 27th or 28th of December, 2011 or on 7th and 8th of January, 2012. Since this anomaly has arisen on account of the failure to issue communication extending the date of e-filing returns before the expiry of the extended period, the government needs to immediately address this issue and allow self adjustment of the late fee paid from the future service tax liability.

As is the case with other schemes introduced by the government, the e-filing system is also ridden with follies, omissions and defects, the prominent among them being lack of the requirement of signature and physical filing of returns in the absence of Digital Signature. The Income Tax provisions, where mandatory filing of returns are also compulsory, requires physical submission of the e-filed return to the Centralized Processing Centre if not affixed with Digital Signature. This requirement will ensure misuse of username and password by unauthorized persons and will also provide check and balance.

The government needs to wake up from their slumber and introduce corrective measures to ensure a fool proof system to take care of any eventualities. But unfortunately, the system in this country doesn’t believe in prevention but operates on the principle of providing remedies only when the problem erupts and assumes alarming proportions. It is about time that the government learns from its past mistakes and do not undertake an half hearted measures while implementing any new scheme. To err is human, but to keep on erring is just inhumane !!

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Exemption on property taxes paid

Posted on January 11, 2012 by Team STO

Taxes are the contribution of the citizens to the process of nation building. Although taxes are a necessity, the manner and collection of taxes decides its intensity. Renting of Immovable property have been subjected to service tax from 01.06.2007. The levy of Service Tax on renting of immovable property haven’t been a smooth ride neither for the Government nor for the trade. The Delhi High Court vide their ruling dated 18.04.2009 in the case of Home Solution Retail India Ltd. Vs. UOI and others (STO 2009 Del 825) held that renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Fearing loss of face, the government rushed in an amendment to the Section 65(105)(zzzz) of the Finance Act, 1994 with retrospective effect during introduction of Budget 2010. This amendment substituted the words “in relation to renting of immovable property” with words “by renting of immovable property or any other service in relation to such renting” in Section 65(105)(zzzz). This retrospective amendment is also under challenge before the judicial forums and the final decision is awaited. The vindictive attitude of the government in introducing the amendment with retrospective effect have prompted majority of the rental income earners, who have reconciled to this levy, to pay Service Tax on such income without awaiting the outcome of the challenge in the judicial forums.

Valuation of any taxable service is decided in terms of Section 67 of the Finance Act, 1994 read with the Service Tax (Determination of Value) Rules, 2006. These provisions provide that if the service is for a consideration in money, the value of taxable service shall be the gross amount charged by the service provider for the services provided or to be provided and in cases where the service is for a consideration not wholly or partly in money, the value of taxable service shall be equal to the gross amount charged by the service provider for provision of similar service to any other person as sole consideration and shall not be less than the cost of provision of such service. It is an established principle that taxes cannot be subjected to further taxes.

In the case of renting of immovable property service Notification No. 24/2007-Service Tax, dated 22-5-07 provides for exemption of property tax levied on the immovable property by the local authority from the gross taxable value. Any amount such as interest, penalty paid to the local authority by the service provider on account of delayed payment of property tax or any other reasons cannot be treated as property tax for the purpose of this exemption and hence, deduction of such amount from the gross amount charged is not allowed. In cases of payment of property tax for multiple years, only the proportionate tax for the rental period shall be excluded from the rental amount.

There may be a situation where property tax for a particular period is paid after the Service Tax for that period is deposited with the treasury, preventing deduction of property tax paid from rental at the time of payment of Service Tax. In such cases, Rule 4C of the Service Tax Rules, 1994 provides for self-adjustment of excess Service Tax paid without any limit. This provision permits deduction of property taxes paid from the income received from renting of the immovable property, within one year from the date of payment of property tax for such period. No deduction of property taxes paid during the last one year for past period is possible if service tax was not being levied and paid on the rental income received from such property for such past period. The details of such adjustment need to be intimated to the Superintendent of Central Excise having jurisdiction over the service provider within a period of 15 days from the date of such adjustment. This provision although provides for a small yet welcome concession to the tax payers, fail to match the deductions permissible to such rent income earners in the Income tax provisions, which even permits for a fixed deduction of cost of repairs of such property on annual basis.

This provision which was introduced in the Service Tax Rules on 22.05.2007 indicates that the law makers realise and understands that the local authorities levy and collect property taxes on annual basis and therefore adjustment of such taxes cannot be possible while discharging service tax on monthly or quarterly basis.

The notification and the provision of Service Tax rules certifies that immovable properties are subjected to levy of taxes by local authorities and also indicates the awareness of the Central Government of such levies. Although this provision is a welcome step towards avoidance of levy of taxes on taxes, it also adds fuel to fire to the dispute concerning the jurisdiction of the Central Government to seek taxes on a subject which is kept outside the scope of its levy by the constitution. This provision also provides a glimmer of hope to the litigants involved in the protracted litigation before the Delhi High Court and Supreme Court of India challenging the constitutional validity of the levy of taxes on renting of immovable property on the ground that such levy being a state subject falls outside the scope of Central Government.

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Vision 2012 : Old wine, New bottle

Posted on January 4, 2012 by Team STO

You have to learn the art of not giving something and still pretend to give a lot, from none other than the CBEC. A notification which runs more than a dozen pages, ends up giving nothing. Tax laws all over the world are based on two golden principles viz., the law should be just and compliance easy. In India both these principles are given a bye while formulating any law. The law makers feel that easier the compliance of any law the greater is the chances of default and vice-a-versa. The makers of law operate on the cardinal principle that if the law provides for return of any benefit to the general public, the quantum of benefit should be inversely proportional to the ease and speed at which such benefit can be availed. If a simplified procedure is proposed to be put in place which provides for a faster and easier manner in availing the benefit, the full quantum of the benefit need not be extended.

The need to provide for refund of service tax paid on input services to exporters was felt by the Central Government as late as in the year 2007. The scheme was first formulated vide Notification No. 41/2007-S.T., dated 06.10.2007. The said notification has seen many amendments and was finally superseded by Notification No. 17/2009-S.T., dated 07.07.2009. CBEC have also done their bit by clarifying on various related issues to ease the process of granting refund of Service Tax, but have not been able to root out all the causes of confusion. These circulars issued by CBEC have time and again emphasized that the Central Government is committed to help the exporters by providing easy and fast refund of Service tax paid on input services used in export of dutiable goods or taxable output services, but have cut a sorry figure by being silent spectators to the gross insubordination of its field formations by their failure to implement such clarifications in letter and spirit. The viewing of refund claims by the field formations in narrow compass has also resulted in multiplication of litigations and has also prompted the appellate formations to step in and provide welcome relief to the exporters.

Having realized that all schemes, procedures and clarifications meant to deliver easier and faster refunds to the exporters have come to naught, the Board by issue of Circular No. 149/18/2011 dated 16.12.2011 had recently come up with a simplified scheme for electronic refund of service tax to exporters on the lines of duty drawback. This scheme provided an option to exporters to avail electronic refund based on the ‘schedule of rates’ through ICES system from the Customs authorities or for routing refund from Central Excise/Service Tax formations on the basis of documents. It was clarified in the circular that the schedule of rates for availing electronic refund will be notified shortly.

Recently, Notification No. 52/2011-S.T., dated 30.12.2011, which was issued superseding the earlier Notification No. 17/2009-S.T., dated 07.07.2009 to provide the option of electronic refund or routine refund to the exporters, clarifies that in case of electronic refund based on schedule of rates, service tax paid on the specified services eligible as refund under this exemption shall be calculated by applying the rate specified for goods of a class or description, in the Schedule, as a percentage of the FOB value of the said goods. For this purpose the exporter needs to register his Central Excise Registration Number or Service Tax Code along with bank account number with the customs and the refund shall be credited directly to the bank account of the exporter. The refund is granted based on % of FOB value and it ranges from 0.03% of FOB value to 0.20% of FOB value, but no clarity is available how such percentages have been determined. In many cases the notification provides a very negligible % of FOB for calculation of the refund amount, that the exporters is left high and dry and have no option but to resort to the age old method of claiming refund before the Central Excise/Service Tax authorities based on his documents. As the thumb rule goes, the input services cost contribution in cases of exports vary between 5-10% of the CIF value. Thus by simple arithmetic, the service tax factor should be to the tune of 0.5 to 1.5 %, however the one offered by the government in the instant notification is peanuts when compared to the actual.

The notification provides for a second alternative of claiming refund from the Central Excise/Service Tax authorities. Under this process the exporter shall file a claim for refund of service tax paid on the specified service to the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may be, having jurisdiction over the factory of manufacture. With the introduction of the schedule of rates, the exporters have to swallow the bitter truth that there is no respite for them in the new scheme. They have to either settle for a lesser refund against the Service Tax paid on input services used for export by opting for the electronic refund route or go through the tedious procedure of manual refund and get entangled in rejections and litigations. It seems the Central Government lacks benevolence when extending support to their foreign exchange earners. This schedule of rates is nothing but a show of lack of will power of the Central Government to match their intentions with actions and seems to convey the message that they want to be on the winning side in either situations. This is nothing but old wine in new bottle, since the exporters, from their experience in the past, are aware of the perils associated with never ending procedure.

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Works Contract Service not so wonderful

Posted on December 28, 2011 by Team STO

Service Tax laws in India are at a nascent stage and the process of evolution continues. The introduction of Works Contract Service from 01.06.2007 is a classic example that the authorities are still in fire fighting mode and lacks long term vision. A spate of judgments by various legal forums holding that composite and undivided contracts providing for supply of goods as well as for provision of service cannot be vivisected into two parts for levy of Service tax on services provided there under, have necessitated the need to come out with Works Contract Service which provides for levy of service tax on such undivided contracts.

As per the definition of Works Contract Service, where there is a transfer of property involved during the course of service, which is leviable to tax as sales of goods, such services will attract tax. This service restricts its scope to contracts for carrying out erection, commissioning or installation, commercial or industrial construction, construction of residential complex and turnkey projects including Engineering Procurement and Construction or Commissioning (EPC) projects. Works contract in respect of specified infrastructure projects namely roads, airports, railways, transport terminals, bridges, tunnels and dams are specifically excluded from the scope of the levy.

Taxable value under this service is that part of the value of the works contract which is relatable to services provided in the execution of a works contract. Such value is to be determined on actual basis based on the records maintained by the contractor. As per Rule 2A of Service Tax (Determination of Value) Rules, 2006, Service tax is required to be paid on the gross value minus value of goods &/or materials transferred to the service receiver. The value of goods and/or materials transferred shall be the value on which ST/VAT is paid. The tax at the full rate i.e. 10.3% needs to be paid on the value of Works Contract minus value of goods and/or materials transferred. Since the value on which Service Tax is paid is excluding the value of goods &/or materials transferred to the Service receiver, Cenvat credit on such goods or materials are not available to the Service provider as per Circular No. 98/1/2008-S.T., dated 04.01.2008. Notification No. 12/2003-S.T., dated 20.06.2003 also permits exclusion of value of goods and materials sold during the provision of service, while deciding the taxable value of the services provided.

Along with introduction of Works Contract Service the government has also come out with the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. This scheme was introduced to ease the difficulties faced by contractors who are not in position to determine the value of services provided in the composite contract. Under this composition scheme, the contractor is only required to pay 4% on the gross value of the works contract as service tax as against the normal rate of 10%. This gross value should include the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise and the value of all the services that are required to be provided for the execution of the works contract, but excluding the cost of machinery and tools other than hire charges. Even if separate contracts are entered into by the contractor, one for supply of goods and one for provision of service, the composition scheme, provides for payment of tax @ 4 % on the gross value which is inclusive of the value of both such contracts. But this scheme comes with a rider which prohibits availment of Cenvat credit on capital goods, inputs and input services.

The option to pay tax under the composition scheme needs to be exercised prior to payment of service tax in respect of the said works contract and the option so exercised will be applicable for the entire works contract and cannot be withdrawn until the completion of the said works contract.

The Works Contract Service as well as the composition scheme comes with so many riders, notable among them being prohibition in availment of Cenvat credit and payment of tax on value of goods received free of charge or cost by the contractor from their principal for execution of contract. Although the purpose of its introduction from the government point of view stands sufficiently satisfied, these laws neither provides procedural ease nor extends any monetary relief to the trade. The composition scheme as in its present state, is beneficial to only those contracts where the value of goods supplied is nominal when compared to the value of services provided. The time is not very far when the Works Contract Service as well as the composition scheme will face judicial review in High Courts and Supreme Court. Only the future will tell whether the government will have to again come out with its fire fighting apparatus and amend the laws to neutralize the effect of adverse rulings of courts.

 

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Xmas pseudo gift: Electronic refund of Service Tax

Posted on December 21, 2011 by Team STO

More the merrier. The truth is that it is never enough, irrespective of whatever facility the government may extend to the trade , there is always a scope for more . The Government of India in true spirit of its unconditional support to exporters have come out with a scheme offering refund of Service Tax paid on specified services used for export of goods covered under Notification No. 17/2009-S.T., dated 07.07.2009 by electronically filing the refund claim. This refund of accumulated Cenvat Credit on input services is a very important component in the economics of this industry. But there seems to a catch . Grass is greener on the other side. Sometimes , what we get to see is not what we eventually achieve.

The scheme was first announced by the Honourable Finance Minister in his Budget Speech. The excerpts from his budget speech recognising the difficulties faced by the exporters and which led to formulation of this scheme was

“There have been considerable difficulties in the sanction of refunds, relating to tax paid on services used for export of goods. I propose to shortly introduce a scheme for the refund of these taxes on the lines of drawback of duties in a far more simplified and expeditious manner”.

The Circular No. 149/18/2011-S.T., dated 16.12.2011 issued by the Central Board of Excise and Customs, New Delhi has introduced this scheme in lines of the duty drawback procedure presently available to exporters. With the introduction of this new scheme, exporters now have a choice: either they can opt for electronic refund through ICES system, which is based on the ‘schedule of rates’ or they can opt for refund on the basis of documents, by approaching the Central Excise/Service Tax formations.

To obtain benefit under the new electronic STR scheme, which is based on the ‘schedule of rates’, an exporter: (i) should have a bank account and also a central excise registration or service tax code number and the same should be registered with Customs ICES using ‘Annexure –A’ Form;(ii) should declare his option to avail STR on the electronic shipping bill while presenting the same to the proper officer of Customs. The ‘schedule of rates’, to be notified shortly, rates are specified for goods of a class or description. An exporter, who wishes to obtain electronic STR, should express his option by mentioning in the shipping bill, chapter/subheading number at the first two digits or four digit levels specified in the schedule of rates, as applicable to the export goods declared in the shipping bill. This chapter/sub heading number should tally with RITC code mentioned in the Shipping Bill against the export goods. Eligible refund amount of service tax paid on the specified services used for export of goods declared in the shipping bill will be calculated electronically by the ICES system, by applying the rate specified in the schedule against the said goods, as a percentage of the FOB value.

Exporters who do not like to obtain electronic STR on the basis of ‘schedule of rates’, but wish to opt for claiming STR on the basis of documents, through the Central Excise / Service Tax field formations should declare chapter/subheading number as 9801 in the electronic Shipping Bill. An exporter who wants to get the chapter/sub heading number amended, for any reason, can get the same carried out through the ICES service centre by filing an amendment request. Exporters can track the status of their refund claim and details of refund amount through ICEGATE Document Tracking and Touch Screen Enquiry.

STR amount processed under the ICES will be disbursed through the branch of the authorized bank at each customs location. The STR amount in respect of individual exporters will be credited directly to the bank account of the exporter, in the authorized bank branch at a Custom location or to any core banking enabled banking account of the exporter, in any branch/bank anywhere in the country (through the NEFT/RTGS). For this purpose, the exporters are required to register with Customs, the Indian Financial Service Code (IFSC) of the bank branch in which the exporter wishes to receive the STR amount, the core banking enabled account number, bank name and address.

Merchant Exporters, who require a service tax code, can use Form A-2 provided in the Notification No. 17/2009-S.T., dated 07.07.2009 and obtain the same from jurisdictional central excise or service tax by following the procedure prescribed in the notification. In respect of exporters who already have their bank accounts registered for receiving drawback amount, no new/separate account will be necessary for receiving service tax refund; but they should register their central excise registration or service tax code number with Customs ICES using Annexure-A Form, if they wish to opt for electronic STR. An exporter availing drawback scheme cannot have separate bank accounts for drawback and service tax refund.

Now it is for the government to expedite the schedule of rates for such refund. Hopefully the intentions of the government in resolving all issues related to the process of refund will get resolved by this circular. We hope that this pseudo Christmas gift from the FM Santa-clause is not just another empty surprise gift wrapped in attractive packing.

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