Service Tax issues on Construction of Residential Complex

Types of Services in Real Estate Transactions Construction Service Works Contract Service Architect Service Auction of Property Engineering Service Erection, Commissioning & Installation Service Interior Decorator Real Estate Agent & Consultants Management Repair and Maintenance Site Preparation Service Renting of Immovable Property Commercial Residential

Types of Service Providers in Real Estate Transactions Builders Own land, own Construction Sale Developer Develop for Land Owner Joint Agreement Contractor Construction for Builders Works Contract Following Type of activities by above Service Providers Construction of Flats/ Offices/ Shops Developing Residential Townships. Construction of independent Villas. Sale of Plots (Developed/ Undeveloped)

Abatement from Service Tax in Real Estate Sector

Abatement of Service Tax in Real Estate Sector Description Abatement Taxable Value CENVAT CREDIT AVAILABILITY INPUTS INPUT SERVICES CAPITAL GOODS Construction of a complex related services falling u/s 66E(b)- (a) Residential Unit :- (i) with Carpet Area less than 2000 sq ft. & (ii) Amount Charged less than Rs.1 Crore for each unit. [Both conditions must be satisfied] 75% 25% NO YES (b) Any other case :- (i) Commercial units, OR (ii) Residential units having Carpet Area of 2000 sq ft. or more, OR (ii) Residential units priced above Rs.1 Crore or more. [Any of the above cases (i) to (iii) ] 70% 30%

Valuation of Services Related to Real Estate Transactions

Valuation of Services related to Real Estate Transactions Valuation of Construction Service Gross Amount charged (including value of Land) + FMV of goods / services received from service recipient (excluding taxes) - amount charged by service recipient (excluding taxes). Valuation of Works Contract Service As Per Rule 2A of Service Tax (Determination of Value) Rules, 2006 Other - Gross Amount Charged

Works Contract: Valuation & Taxation

Works Contract: Valuation & Taxation What is Works Contract For execution of a contract Transfer of property in goods on which sale tax is leviable and; such contract is for the purpose of carrying out Construction Installation Repair Maintenance Completion Erection Commissioning Fitting out Renovation & Alteration In Relation of : any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

Works Contract: Valuation & Taxation Specified Taxable Percentage Service Tax Determination of Value Rules, 2006 Rule 2A: Determination of Value of Service Portion in the Execution of a Works Contract Option - I Gross amount Charged Less: Value of property in goods transferred, VAT Option – II Total Amount Charged X Specified Taxable Percentage

Works Contract: Valuation & Taxation Rule 2A : Option – I Gross Amount charged (GAC) for Works Contract xxxxx Less: Value of property transferred in goods xxx Taxable Value xxxx Note: VAT or Sales Tax shall be excluded from GAC. Value of transfer of property in goods shall be the value taken for VAT purposes. Value of Works Contract Shall include: Labour charges Payment to sub-contractor for labour and services; Planning, designing and architect’s fees; Hire charges for machinery and tools Cost of Consumables such as water, electricity, fuel Cost of establishment of the contractor relatable to supply of labour and services; Other similar expenses; and Profit earned by the service provider relatable to supply of labour and services.

Works Contract: Valuation & Taxation Rule 2A : Option – II Where Value Cannot be ascertained as per Option-I then value shall be worked out as under: S. No. Nature of contract Taxable Value 1. Execution of Original Works 40% 2. Execution of contract for maintenance, repair, reconditioning or servicing of any goods 70% 3. Other works contracts not covered by 1 & 2 above (including completion and finishing services such as glazing, plastering, installation of electrical fittings of an immovable property). 60% 1. Original works means All new constructions; All types of additions and alterations to abandoned or damaged structures to make them workable; Erection, commissioning or installation of plant, machinery or equipment whether pre-fabricated or otherwise. 2. Total amount means the gross amount charged plus the value of any material supplied under the same contract or any other contract. Where supply is free of cost, value shall be determined on FMV. 3. No input tax credit of excise duty paid on goods, property transferred in execution of works contract. However taxes paid on capital goods and input services will be available.

50% 50% Works Contract: Valuation & Taxation Works Contract Service Service Tax Liability under Partial Reverse Charge Works Contract Service Service Provider Service Recipient Individual HUF Firm AOP Business Entity Registered as Body Corporate Service Liability to Deposit Service Tax 50% 50%

CENVAT Credit in Real Estate Transactions

Basic rule of CENVAT Credit for service provider Capital Goods Provider of Output Service can avail CENVAT Credit Used for Providing Output Service Inputs Input Services

Basic rule of CENVAT Credit for service provider Requirement for availing CENVAT Credit Input Services & Capital Goods are used for provision of taxable service Possession of Proper duty paying documents Documents must contain all particulars as per Rule 4A of ST Rules, 1994 CENVAT Credit on capital Goods – upto 50% in C/Y, balance 50% in next year.

Basic rule of CENVAT Credit for service provider On the basis of Invoice issued by Service Provider Joint Charge Quantum of CENVAT Credit available On the basis of Challan

Service Tax Issues in Real Estate Transactions

Service Tax Issues in Real Estate Transactions Service of Vehicle Parking General Public Private Taxable Rental Sale of Space Cover under Mega Exemption Taxable under renting Construction service (3.09% / 3.708%) Covered vehicle parking / open vehicle parking

Service Tax Issues in Real Estate Transactions Issue of Preferential Location Charges Any location having extra advantage which attracts extra payment over and above the basic sale price. Examples: Direction Sea Facing, Park Facing, Corner Flat Floor First Floor, Top Floor Vastu Having the Bed Room in a Particular Direction Number Lucky Numbers Status of Taxability No Separate consideration Separate Consideration Covered by construction service 12.36% on Gross Amount No abatement

Service Tax Issues in Real Estate Transactions Issue of Surrender/ Cancellation/Transfer/Buy-Back of Flat by Buyer to another person before its completion Status of Taxability Builder/Developer would be eligible for adjustment of excess payment under rule 6(3) of the Service Tax Rules, 1994 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. Cancellation Charges : Cancellation Charges would fall under declared service Section 66E (e) of Finance Act, 1994 i.e. Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act, these charges will attract Service Tax at the full rate w.e.f. 1-7-2012. Transfer of flat before its completion – Mere transfer of right by the previous owner to subsequent owner. No service is provided. Buy-back of flat – No service. Builder can make adjustment of service tax u/r 6(3).

Service Tax Issues in Real Estate Transactions Issue of Assured Return Assured Returns are given by the builders to the investor who invest in their under construction project & they are mostly for commercial projects. Mode of Payment : Give monthly returns to the investors on the amount paid by the investor as down payment by means of post dated cheques till such time the building is ready. Service Tax implications of Assured Return- In case of Builder:- It is an expenses for builder- No service tax. In case of customer :- Assured return represents a consideration for providing services by way of extending deposits/ loans / advances. Covered by Negative List of Services (66D(n)(i)). Hence not taxable.

Service Tax Issues in Real Estate Transactions Issue of Administrative Charges/ Transfer Charges / Restoration Charges Status of Taxability Prior to 1-7-2012 On or after 1-7-2012 Department’s view that it is taxable under “Real Estate agent’s service”. Matter sub-judice. Any activity carried out by a person for another for consideration falls within the ambit of term “Service” – Full Rate 12.36%

Service Tax Issues in Real Estate Transactions CENVAT Credit availed on Brokerage invoice – Later on Flat cancelled by the buyer. Status of Taxability Brokerage amount not recoverable from broker. Brokerage amount recoverable from broker. CENVAT Credit availed need not be reversed. Reverse CENVAT Credit availed.

Service Tax Issues in Real Estate Transactions Reverse Charge Issues There is no exemption limit in the case of Reverse Charge. Even Re.1/- liability is to be discharged Even if the SP is not registered with department than RC liability is to be discharged by SR. POT is the date of payment to input Service provider, provided the payment is made within 6 months from the date of invoice.

Service Tax Issues in Real Estate Transactions Other Issues Interest Free Maintenance Security (IFMS) – Taxable @ 12.36% if non refundable otherwise NIL rate. Club Membership Fees taxable @ 12.36%. Power Backup taxable @ 3.09% / 3.708% as applicable. EEC / FFC taxable @ 3.09% / 3.708% as applicable. Lease Rent not taxable if recovered from buyer on actual payment basis otherwise fully taxable.

Service Tax Issues in Real Estate Transactions Other Issues Interest income on delayed payment from Customers: No service Tax. Transfer Charges: Full rate of Service Tax. Other Charges collected @ 425/- per sq ft like (Lease Rent / Car Parking Charges / Club Membership / Power back up / EEC / FFC / etc) taxable @ full rate 12.36%.

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