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Construction Services [Sec 66E(b)]
Construction Services [Sec 66E(b)]

Declared Services Page

INTRODUCED: With Effect From 1st July 2012
 
Contents
Definition
Scope
Clarification
Valuation
Service Tax Exemptions
Service Tax Specific Exemptions
Relevant Notifications / Circulars
 
 
DEFINITION:

According to Section 65B (22) "declared service" means any activity carried out by a person for another person for consideration and declared as such under section 66E.

According to Section 66E (b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority.

Explanation.- For the purposes of this clause,-

(I) the expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:

(A) architect registered with the Council of Architecture constituted under the Architects Act, 1972; or (20 of 1972.)

(B) chartered engineer registered with the Institution of Engineers (India); or

(C) licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(II) the expression "construction" includes additions, alterations, replacements or remodeling of any existing civil structure

As per the new definition of “works contract” introduced in Section 65 B (54) of the Finance Act, 1994, such contract would include

“a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land”

 
SCOPE:
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Construction includes additions, alterations, replacements or remodeling of any existing civil structure, of a complex, building, civil structure or a part thereof, including a complex or building wholly or partly intended for sale to a buyer. Construction is a declared service, under Section 66 E of the Finance Act, 1994 attracting the levy of service tax.

This declared list entry covers the services provided by builders or developers where building complexes, civil structure or part thereof are offered for sale but the payment for such building or complex or part thereof is received before the issuance of completion certificate by a competent authority. In case of sale of complex or building if the entire consideration is received after issuance of completion certificate, no service tax is required to be paid.Completion certificate is issued by any authority authorized to issue completion certificate under any law. In case of non requirement of such certificate from such authority, the Completion certificate can be obtained from a registered architect or chartered engineer or licensed surveyor.

 
CLARIFICATION:
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1. What is 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 certificate of completion by a competent authority.

This service is already taxable as part of construction of residential complex service under clause (zzzh) of sub-section 105 of section 65 of the Act and as part of service in relation to commercial or industrial construction under clause (zzq) of sub-section 105 of section 65 of the Act. This entry covers the services provided by builders or developers or any other person, where building complexes, civil structure or part thereof are offered for sale but the payment for such building or complex or part thereof is received before the issuance of completion certificate by a competent authority.

2. What would be the liability to pay service tax on flats/houses agreed to be given by builder/developer to the land owner towards the land /development rights and to other buyers. If payable, how would the services be valued?

Here two important transactions are identifiable: (a) sale of land by the landowner which is not a taxable service; and (b) construction service provided by the builder/developer. The builder/developer receives consideration for the construction service provided by him, from two categories of service receivers: (a) from landowner: in the form of land/development rights; and (b) from other buyers: normally in cash.

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.

In a recent judgement passed by the Mumbai High Court in the case of Maharashtra Chamber of Housing Industry and Others v. Union of India [STO 2012 Mum 429] has upheld the Constitutional validity of levy of service tax, under clauses (zzzh) and (zzzzu) of section 65, on similar construction services provided by a builder.

Value, in the case of flats given to first category of service receiver will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.

3. What would be the service tax liability in the following model – land is owned by a society, comprising members of the society with each member entitled to his share by way of an apartment. Society/individual flat owners give ‘No Objection Certificate’ (NOC) or permission to the builder/developer, for re-construction. The builder/ developer makes new flats with same or different carpet area for original owners of flats and additionally may also be involved in one or more of the following: (i) construct some additional flats for sale to others; (ii) arrange for rental accommodation or rent payments for society members/original owners for stay during the period of reconstruction; (iii) pay an additional amount to the original owners of flats in the society.

Under this model, the builder/developer receives consideration for the construction service provided by him, from two categories of service receivers. First category is the society/members of the society, who transfer development rights over the land (including the permission for additional number of flats), to the builder/developer. The second category of service receivers consist of buyers of flats other than the society/members. Generally, they pay by cash.

Re-construction undertaken by a building society by directly engaging a builder/developer will be chargeable to service tax as works contract service for all the flats built now.

4. When a certain number of flats are given by the builder/developer to a land owner in a collaborative agreement to construct, lieu of the land or development rights transferred, will such transferee be required to pay service tax on further sale of flats to customers?

Yes. The service tax will be required to be paid by such transferee if any consideration is received by him from any person before the receipt of completion certificate.

5. What would be the service tax liability on conversion of any hitherto untaxed construction /complex or part thereof into a building or civil structure to be used for commerce or industry, after lapse of a period of time?

Mere change in use of the building does not involve any taxable service. If the renovation activity is done on such a complex on contract basis the same would be a works contract as defined in clause (44) of section 65B service portion, which would also be taxable if other ingredients of taxability are present.

6. What would be the service tax liability on Build- Operate – Transfer (BOT) Projects?

Many variants of this model 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, 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 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 provision of service take place usually at three different levels: firstly, between Government and the concessionaire; secondly, between concessionaire and the contractor and thirdly, between concessionaire and users.

At the first level, Government 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. Such services provided by the “Government’ would be in the negative list entry contained in clause (a) of section 66D unless these services qualify as ‘support services provided to business entities’ under exception sub-clause (iv) to clause (a) of section 66D. ‘Support services have been defined in clause (49) of section 65B as ‘infrastructural, operational, administrative, logistic marketing or any other support of any kind comprising functions that entities carry out in the ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of movable or immovable property, security, testing and analysis’. If the nature of concession is such that it amounts to ‘renting of immovable property service’ then the same would be taxable. The tax is required to be paid by the government as there is no reverse charge for services relating to renting of immovable property. In this model, though the concessionaire is undertaking construction of a building to be used wholly or partly for furtherance of business or commerce, 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. However, if 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. Service tax would be leviable on the taxable services provided by the concessionaire to the users if the ingredients of taxability are present.

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. Such commission would be a consideration for taxable service and liable to service tax.

7. If the builder instead of receiving consideration for the sale of an apartment receives a fixed deposit, which it converts after the completion of the building into sales consideration, will it amount to receiving any amount before the completion of service.

This may be a colorable device wherein the consideration for provision of construction service is disguised as fixed deposit, which is unlikely to be returned. In any case the interest earned by the builder on such fixed deposits will be a significant amount received prior to the completion of the immovable property. As clarified at serial no. 5 of the table in point no 2.3.2 interest in such cases would be considered as part of the gross amount charged for the provision of service.

8. In certain States requirement of completion certificate are waived of for certain specified types of buildings. How would leviability of service tax be determined in such cases?

In terms of Explanation to clause (b) of section 66E in such cases the completion certificate issued by an architect or a chartered engineer or a licensed surveyor of the respective local body or development or planning authority would be treated as completion certificate for the purposes of determining chargeability of service tax.

9. If the person who has entered into a contract with the builder for a flat for which payments are to be made in 12 installments depending on the stage of construction and the person transfers his interest in the flat to a buyer after paying 7 installments, would such transfer be an activity chargeable to service tax?

Such transfer does not fall in this declared service entry as the said person is not providing any construction service. In any case transfer of such an interest would be transfer of a benefit to arise out of land which as per the definition of immoveable property given in the General Clauses Act, 1897 is part of immoveable property. Such transfer would therefore be outside the ambit of ‘service’ being a transfer of title in immoveable property.

Valuation:

The Rule 2A (i) (c) of The Service Tax (Determination of Value) Rules, 2006, (Valuation Rules) as amended provides for determination of the taxable value in respect of construction service. As per this provision in case of works contracts entered into for execution of original works, service tax shall be payable on forty per cent of the total amount charged for the works contract. The term original work is defined in the Valuation rules as:--

(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 case of works contracts entered into for maintenance or repair or reconditioning or restoration or servicing of any goods, service tax shall be payable on seventy percent of the total amount charged for the works contract.

In case of other works contracts including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property, service tax shall be payable on sixty percent of the total amount charged for the works contract.

The term “total amount” means the sum total of gross amount for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of works contract, whether or not supplied under the same contract or any other contract, after deducting the amount charged for such goods or services and the value added tax and sales tax levied thereon. The fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.

 
SERVICE TAX EXEMPTIONS:

Certain exemptions to services in relation to construction are available, such as:-

1. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of :–

(a) a civil structure or any other original works meant predominantly for used other than commerce, industry, or other business or profession. The exemption is available for a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession. The significance of the word predominantly is that benefit of exemption will not be denied if the building is also incidentally used for some other purposes if it is used primarily 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 (24 of 1958).

(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment. Construction of hospitals and educational institutes for the government, local authority or governmental authority are not taxable, whereas if the construction is for others, tax will be required to be paid.

(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 like Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member or any person who holds any post in pursuance of the provisions of the Constitution in that capacity or a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee.

2. Services 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. Construction of roads which are not for general public use e.g. construction of roads in a factory, residential complex etc would be taxable.

(b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana.

(c) a building owned by a Charitable entity registered under Section 12 AA of the Income tax Act, 1961(43 of 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 or

(e) structure meant for funeral, burial or cremation of deceased;

3. Services by way of construction, erection, commissioning or installation of original works pertaining to:-

(a) an airport, port or railways, including monorail or metro; Repairs and maintenance of airport, ports and railways are liable to service tax and the same will be available as input tax credit to railways, port or airport authority, if other conditions are met.

(b) a single residential unit otherwise than as a part of a residential complex. Single residential unit is defined and means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family. If each of the floors of a house is a single residential unit in terms of the definition, the house would attract service tax. If the title of each of floors is capable of being transferred to another person by mutation in land/ municipal records, both the floors may be considered as separate single residential units.

(c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India.

(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes or

(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages.

 
ABATEMENT:
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Notification No. 09/2013-S.T., dated 08-05-2013

Description of Taxable Service

Taxable %

Abatement %

Conditions

Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,-

(a) for a residential unit satisfying both the following conditions, namely:–

(i) the carpet area of the unit is less than 2000 square feet; and

(ii) the amount charged for the unit is less than rupees one crore;

(b) for other than the (a) above

 

 

25

 

 

30

 

 

75

 

 

70

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004;



(ii) The value of land is included in the amount charged from the service receiver.”.

Conclusion :

1. Abatement if available only if value of land is included.

2. Abatement of 75% is available to residential unit only if carpet area of the unit is less than 2000 sq.ft. AND the amount charged for the unit is less than ruppes one crore.

3. For Commercial Constructions and in case of units where any of the above condition is not fulfilled then abatement available will be of 70% only.

4. Cenvat Credit of Inputs will not be available.

5. Cenvat Credit of Input Services and Capital Goods will be available subject to Cenvat Credit Rules, 2004.

 
RELEVANT SERVICE TAX NOTIFICATIONS:
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Service Tax Notification No. 24/2012-S.T., dated 06-06-2012

Service Tax Notification No. 25/2012-S.T., dated 20-06-2012

Service Tax Notification No. 26/2012-S.T., dated 20-06-2012

Service Tax Notification No. 09/2013-S.T., dated 08-05-2013

 
RELEVANT SERVICE TAX CIRCULARS/INSTRUCTIONS/TRADE NOTICES:

Taxation of Services - An Education Guide dated 20.06.2012

 

 
 

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