LEVY OF SERVICE TAX LEVY OF SERVICE TAX Pradeep. K Mittal Member Central Council of The Institute of Company Secretaries of India, New Delhi Advocate Delhi High Court

Commercial or Industrial Construction Service According to Section 65 of Finance Act,1994, the terms “Commercial or Industrial Construction service”Means- a)Construction of a new building or a civil structure or a part thereof ; or b)Construction of pipeline or conduit ; or

c)Completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering,wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

d)repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, Which is (a) used, or to be used, primarily for ; or (b) occupied, or to be occupied, primarily with ;or (c) engaged,or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such service provided in respect of roads, airports, railways, transport terminals, bridges tunnels and dams.

SCOPE OF TAXABLE SERVICE SCOPE OF TAXABLE SERVICE The construction services provided by a Developer or Builder or Contractor to any person in relation to new construction,repairs,alteration or restoration of buildings, civil structures or parts thereof which are used,occupied or engaged for purpose of commerce and industry is subject to payment of Service Tax. However, self construction, no Service Tax. ============================================

a) Residential Buildings, offices of government,and all other non commercial buildings and structures. b) Constructions of Roads, Airports, Railways, transport terminals, bridges, tunnel and dams are excluded from this category of service c) Construction of Houses, Schools, temples, Government building for non-commercial purposes etc. would not be covered under this category of service. EXCLUSIONS:

Further, if the building is both for residential and commercial purposes, service tax is payable in case such immoveable property is treated as commercial property by the local/Municipal authority. (CBEC Circular & FAQ JUNE,06) (CBEC Circular & FAQ JUNE,06) ======================================

In order to construct, erect and develop any Building, Factory, Malls, Office Complex, Flatted Factories and other immoveable properties meant to be let out for commercial purposes, the developer, builder or contractor has to purchase cement, steel, construction materials, electrical equipments, generators, electrical, fittings, sanitary pipes and fittings, sliding windows,doors,glasses,tiling, paints,grills etc.

Besides the above, the developer/contractor also avail the services of various professionals like Architects,Chartered Engineers, RCC consultants, security services, Consulting Engineer, Interior designer etc. The Contractor would be raising a consolidated bill or running account bills from time to time for such construction services. The gross amount charged by any person providing the taxable service in relation to commercial or industrial building is the taxable value.

When the consideration is partly in money and partly in terms of supply of cement, steel or other materials, the gross value shall be total of such monetary consideration and money equivalent of the other non monetary consideration. It is quite likely that non-monetary consideration could not be ascertained, gross amount charged by the same service provider for providing similar services shall be taxable value.

The Notification No.15/2004 dated (now substituted by Notification No.1/2006 dt ) says that taxable service provided by a commercial concern to any person in relation to construction service is exempt from service tax leviable under Section 66 of the Finance act,1994 as is in excess of Service Tax Calculated on a value which is equivalent to 33% of the gross amount charged.

Further the Notification says that abatement to the extent of 67% of the gross value of the taxable services would be allowed provided the gross amount charged is inclusive of the value of the goods and materials supplied or provided or used for this service and the service provider does not avail the benefit under CENVAT credit scheme or the benefit of Notification No.12/2003 –ST dated

SERVICE TAX PAID ON VARIOUS SERVICES AVAILED FOR PROVIDING CONSTRUCTION SERVICE In order to construct, erect and develop any Building, factory, Godown, Flats, Malls, Office Complex, Flatted Factories and other immoveable properties meant to be let out for commercial purpose, the developer /contractor has to purchase cement, steel, construction materials, electrical equipments, generators, electrical fittings, sanitary pipes and fittings, sliding windows, doors, glases, tiling, paints, grills etc.

Besides the above, the developer/contractor also avail the services of various professionals like Architects, Chartered Engineers, RCC consultants, security Services, Consulting Engineer, Interior designer, Electrical Engineer, AC Engineer etc.

The Question that arises for consideration is as to whether the assessee will the entitled to avail the Cenvat Credit of the excise duty paid on purchase of construction material i.e. cement, steel, electrical equipments, generators, sanitary pipe fittings, sliding windows, glasses, tiling, paints, grills etc. and service tax paid to various professionals like architects, RCC consultants, security services, consulting engineer, interior designer etc.

HOW SERVICE TAX TO BE CALCULATED HOW SERVICE TAX TO BE CALCULATED If the gross value works out to Rs. 1 Crore, the service tax at the applicable rate would be payable at Rs.33 Lacs (Rs.1,00,00,000 minus Rs.67,00,000). The abatement of 67% is subject to the condition that the Builder/ Developer/ Contractor does not avail the benefit under CENVAT credit scheme or the benefit of Notification No.12/2003 –ST dated The option to avail 67% is optional. One can pay the Service Tax on the full gross value of the contract (without availing the 67% abatement ) and can avail the Cenvat Credit on (a) capital goods (b) inputs and (c) input services. If the gross value works out to Rs. 1 Crore, the service tax at the applicable rate would be payable at Rs.33 Lacs (Rs.1,00,00,000 minus Rs.67,00,000). The abatement of 67% is subject to the condition that the Builder/ Developer/ Contractor does not avail the benefit under CENVAT credit scheme or the benefit of Notification No.12/2003 –ST dated The option to avail 67% is optional. One can pay the Service Tax on the full gross value of the contract (without availing the 67% abatement ) and can avail the Cenvat Credit on (a) capital goods (b) inputs and (c) input services.

Input Input "Input" means- (i) all goods, except light diesel oil, high speed diesel oil and motor spirit, commonly known as petrol, used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not and includes lubricating oils, greases, cutting oils, coolants, accessories of the final products cleared along with the final product, goods used as paint, or as packing material, or as fuel, or for generation of electricity or steam used in or in relation to manufacture of final products or for any other purpose, within the factory of production;

“ (ii) all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service; Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Explanation 1.- The light diesel oil, high speed diesel oil or motor spirit, commonly known as petrol, shall not be treated as an input for any purpose whatsoever. Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer; Explanation 2.- Input include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer;

Input service Input service "Input service" means any service,- (i) used by a provider of taxable service for providing an output service; or (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal, and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as

accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal

Input Service Inward freight Inward freight Telephone installed at factory Telephone installed at factory Courier charges for procurement of materials Courier charges for procurement of materials Advertisement and sale promotion Advertisement and sale promotion Bank charges at factory Bank charges at factory Construction, repair and maintenance of factory and office Construction, repair and maintenance of factory and office Royalty paid on trademark & technical know-how Royalty paid on trademark & technical know-how Fees of chartered accountant for designated services Fees of chartered accountant for designated services Air travel & other charges Air travel & other charges

LEVY OF SERVICE TAX ON RENTING OF IMMOVABLE PROPERTY The person who has given the premises on lease or on some other arrangement) under this category of service would also be entitled to the benefit of Cenvat credit in respect of the inputs, capital goods and input services, in terms of the provisions of Cenvat Credit Rules,2004.

Though, the scope of availing such Cenvat credit on inputs and capital goods is very much limited, there is enormous scope for availing Cenvat Credit on various input services, such a commercial/industrial construction services, insurance services, repairs and maintenance services, architects services, interior decoration services, etc

As explained earlier the Service Provider, i.e,.Contractor/Developer/Builder will not be entitled to take Cenvat Credit on excise duty paid for procuring various construction materials such as cement, Steel, Electrical Equipment, Sanitary Pipe Fittings,Sliding Widows, Glasses, tiling,paints, grills etc. and also while availing various taxable services of professionals is the Service Tax has been paid

either (i) after availing benefit of abatement of 67% of gross value or on composition scheme,i.e 2% (now after budget 4% ) since the basic condition is that no Cenvat Credit is permissible. However, the Principal would be well within its right to take the Cenvat Credit in respect of the service tax charged by the Service provider in his running account bills raised from time to time.

However, the Department has now issued a Circular No.98/1/2008-ST.dated (2008) S.T.R. C43. The levy of Service tax on various construction related services (commercial/ industrial construction service, residential construction service,etc) is always beset with lot of practical complications, due to the unique nature of this industry and the nuances of this new levy, compounded by half baked instructions issued by the CBEC, in the guise of “clarifying “. The recent attempt of the CBEC to “clarify” would beat all its siblings, in terms of its utter disregard to the legal provisions and portrayal of lack of even elementary knowledge of the subject.

The clarification appears to be in blatant violation of the statutory provisions. The definition of the terms” input service” as per Rule 2(1) of the CCR,2004 refers to “ service used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises”In other words, if a manufacturer builds a factory (which is nothing but an immovable property),

and avails the above input services, he is entitled to take Cenvat Credit of the service tax paid on such input services, notwithstanding the fact that no excise duty is paid on the “factory as such.Similarly, if any other service provider builds his premises, he is very much entitled for taking Cenvat Credit of these input services, notwithstanding the fact that his premises is neither “goods “ now “services” the present clarification has been drafted, in total disregard to the above statutory provision.

Notwithstanding the circular issued by the Department, there is hardly any doubt that the Principal would be entitled to avail/earn the Cenvat Credit of Service Tax paid on the Running Account Bills raised by the Builder/Contractor for constructing the Building, Malls, Commercial Complex and other immovable properties. Notwithstanding the circular issued by the Department, there is hardly any doubt that the Principal would be entitled to avail/earn the Cenvat Credit of Service Tax paid on the Running Account Bills raised by the Builder/Contractor for constructing the Building, Malls, Commercial Complex and other immovable properties.

The Service tax so paid by the Principal on the aforesaid Running Account bills can be utilized for payment of Service Tax on taxable service of Renting of Immovable Property,i.e, Malls, shopping Complex, office Complex, commercial Complex and other immoveable property put to commercial use.

Scope of Commercial or Industrial Construction Service Scope of Commercial or Industrial Construction Service Post construction completion and finishing services such as glazing, plastering, painting, floor and wall tiling,wall covering and wall papering, wood and metal joinery and carpentry, especially if undertaken as an isolated or stand alone contract, are also specifically included. Thus post construction completion and finishing services are specifically included in the definition of commercial or industrial construction services.

It the contract for construction of commercial complex is a single contract and the construction of road is not recognized as a separate activity as per the contract, then the service tax would be leviable on the gross amount charged for construction including the value of construction of roads. It the contract for construction of commercial complex is a single contract and the construction of road is not recognized as a separate activity as per the contract, then the service tax would be leviable on the gross amount charged for construction including the value of construction of roads.

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