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Discriminative Approach in Taxing of Construction Sector
05 December, 2012 Ahmedabad :
Discriminative Approach in Taxing of Construction Sector

Taxing the construction Sector is again the hot topic doing rounds after introduction of Negative List based Service Tax. Budget 2012 has introduced Negative List based Service Tax wherein all the services except those specifically excluded in the Negative List or mentioned in Mega Exemption Notification are taxable. Prior to introduction of Negative List based Service Tax, Construction activities were taxed either under Commercial or industrial construction service or under Construction of residential Complex Service or under Works Contract Services. Different exemptions were available under these categories of services. Commercial or Industrial Construction Service and Construction of residential Complex Service enjoyed abatement from value at specified rates and the benefit of composition scheme was available to Works Contract Services. In Construction of Residential Complex Service, no tax was levied on any residential complex consisting of upto 12 residential units.

From 01.07.2012, Construction Services have been termed as a Declared Service under Section 66E (b) of the Finance Act, 1994. Although the new Service Tax Regime has not covered any service connected to Construction Sector under the Negative List, certain specified services in relation to construction find exemption from levy of Service Tax under the Mega Exemption Notification.

As per this Notification No. 25/2012 dated 20.06.2012, Services provided to the Government or Local Authority or Governmental Authority in relation to construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of civil structure or any other original works meant predominantly for use other than for commerce, industry or other business or profession, is exempted under this Notification. Such activities in relation to historical monument, archaeological site or remains of national importance, buildings used for education, art or culture, hospitals, educational institutes, canal, dam or other irrigation works, pipeline, conduit or plant for water supply or water treatment or sewerage treatment or disposal, are also exempted.

A residential complex predominantly meant for use of Government or Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities, are also exempted from Service Tax. Construction of road, bridge, tunnel, or terminal for road transportation for use of general public also enjoys the exemption under this Notification. Such construction activities pertaining to Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana or in respect of a building owned by a Charitable entity and meant predominantly for religious use or construction of a independent pollution control or effluent treatment plant or structure meant for funeral, burial or cremation of deceased, also are exempted under this Notification.

Such construction services in relation to original works pertaining to an airport, port or railways, including monorail or metro or services, a single residential unit (otherwise than as a part of a residential complex), low- cost houses sponsored by the Government, post- harvest storages for agricultural produce, cold storages, mechanised food grain handling system and machinery or equipment for agricultural produce processing, also finds exemption under this Notification.

Although the Mega Exemption Notification has provided exemption to construction services concerned with various public utility services, the sole beneficiary of such exemption would be the Government Contractors. It is a known fact that all the activities in relation to construction which finds exemption in the Notification are such activities which the Government do not undertake on their own, but are outsourced to EPC Companies in the tendering process. Since such Companies, as per the tender conditions are required to quote a lump cost for the project inclusive of all taxes and duties, the benefit of exemption from Service Tax would accrue to such Companies, with possibilities of such Companies passing on the exemption benefit to the Government non-existent. It is but evident that these exemptions would only contribute to fattening of the profit margins of such Companies, with no reduction expected in the project cost and ensuing cost cutting in capital expenditure of the Government.

It is a very sad state of affairs that the exemption from Service Tax to residential complexes having upto 12 units was withdrawn on introduction of the Negative List based Service Tax system. This benefit, which was advantageous to the common man, was presumably withdrawn for broadening the tax base and increasing revenue collections. However, while extending the benefit of exemption to public utility projects, the Government seems to have lost sight of their objective to propel the tax volumes. This discriminative approach of taxing the have-nots and supporting the affluent class of the society won’t help the cause of the present Government when they seek public referendum in the coming years.

Courtesy: From the desk of Monish Bhalla, Founder, www.servicetaxonline.com
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