PPT ON CONSTRUCTION SERVICE 1

Construction connected Services  Commercial or Industrial Construction Service  Construction of complex service  Works Contract Service  Erection, commissioning or installation services  Architects’ services  Management, maintenance or repair services  Interior decorators’ services  Consulting engineering services  Legal Service  Real Estate Agency Service  Site Formation and Clearance, excavation & Earthmoving & Demolition Service  Preferential Location or Development 2

Interlinked Construction Services  The relevant taxable service categories for the real estate industry are as follows Categories Construction of Complex Services Erection Commissioning Works Contract Commercial or Industrial Construction 3

Works Contract Services EPC - EPC - Turnkey projects including engineering, procurement and construction or commissioning 4

Alternatives Available Alternatives 1)Single Consolidated Contract 2)Consortium Contract 3)Split Contracts 5

Structure PROJECT OWNER EPC Contractor One Composite contract comprising of the following activities Offshore supply Onshore supply Offshore service Onshore service Civil works 6

Development in Law by pronouncement of Judicial decisions, Interpretation, Clarification, Explanation in Construction Activity  Erection commissioning installation service came into service tax net on 01/07/2003  Construction services was brought under service tax net W.E.F 10/9/2004 by insertion of clauses (25b) in section 65(105) of the Finance Act 1994  Renamed as commercial and industrial construction from 16/6/2005 in order to distinguish it from its brother Construction of Complexes introduced on 16/6/2005  Fine tuned by many addition and expansion  Construction Services are not pure services  It is a composite contract divisible or may not be divisible  It involves transfer of property which attract Vat or Sales tax 7

Other Judicial Pronouncements  Reheja development corporation case -3STR337 (SC) has clarified the activity under taken by builder for construction /building for or on behalf of the customer for consideration in cash or deferred payment is covered under work contract and not under sale since Karnataka Sales tax act has got separate head for works contract sale  But later the SC for the same facts in the L&T case, 2008(12)S.T.R 257(S.C) referred the matter to the larger bench  The above decisions prompted subsequent Amendment in service tax and vat laws  CBE&C vide number 80/10/2004 S.T dated 17/9/2004 has clarified that estate builder (who get such construction done ) are not covered under the ambits of construction services 8

… Cont  V/DGST/22/ Audit / Misc./1/2004/ Mumbai the 16 th February since the builder constructed for prospective customer he provide service and he is liable for service tax  Reheja ‘s case distinguished Assotech Reality private limited vs. State of UP 2007 (7) STR 129 (All SC)  In 2007 CBE&C circular, builder are not liable for payment of service tax  Circular number 96/7/2007 dated 23/08/2007 clarified that pre existing contracts as on 01/06/2000 shall continue to be classified under the same category of taxable service in which they were classifiable at the time of initiation of the contract  Hare Krishna Developers 2008 (10) STR 341 (AAR) pronounced in its advance ruling that builders are liable for payment of Service tax 9

… Cont  In 2008 more number of judicial decision gave contradictory pronouncements but by and large holding that sale of flats are not liable for payments service tax  In 2009 circular number 108/02/2009-S.T date 29/1/2009 clarified that builder are not liable for payment of service tax  In 2010 explanation inserted in Sec 65(105)(zzzzh) and in sec 65(105)(zzq) with effect from 01/07/

Judicial Decisions  Service tax is payable only on the Service portion  BSNL case 2 STR161(supreme court ) recoginised the principle that service tax and vat tax are mutually exclusive and one cannot overlaps others territory. SVT can be levied on service portion and vat can be levied on material portion in the composite contract  Image Creative Pvt ltd 9 STR 337 (supreme court )recognize or authorize the artificial division to levy vat and service tax on the respective portion of the composite contract.  In AP H.C A.P. Aksh Broad Band Ltd V. Commercial Tax Officer, Jubilee Hills Circle, Hyderabad and Others (41 VST 129) (AP) Once the goods are incorporated in the execution of works contract, transfer of property in goods takes place When goods are supplied or used in execution of works contract by a dealer there shall be deemed to be transfer of property in such goods and it would be a sale. 11

… Cont  The law permits deduction of material portion either by way of abetment of 67% vide notification number 1/2006 or by way of material sold or supplied in performing the contract by notification number 12/2003 for the above 3 categories  But abatement of 67% benefit is not available where the taxable services provided are the only completion and finishing services referred in Sec 65 (25b) (c )  For availing the abatement of 67%, the gross amount charged shall include the value of goods and materials supplied or provided (Including free Supplies)  Both the above notification are intended to provide relief for goods and material supplied while providing services one by way of actual and other by way of adhoc deduction 12

 Works contract service was introduced on 1/6/07  Work contract include all the above three service and has created controversy in classification and taxability method of service tax  CBEC vide its letter No B1/16/2007 TRU, dated 22/05/2007 Various trade industry associations have raised apprehension in respect of classification of a contract either under the newly introduced works contract service or erection, commissioning or installation and commercial or residential construction services. Contracts which are treated as Works Contract for the purpose of levy of VAT / Sales tax shall also be treated as Works Contract for the purpose of levy of Service tax. This is clear from the definition under 65 (105) (zzzza) … Cont 13

 Works Contract was not actually an insertion of new service but merely a valuation mechanism provided for specific taxable services which per force included the value of goods also  Rule 2A was inserted in the Service tax (Determination of Value) Rules 2006 allowing exclusion of value of goods and VAT as per VAT or Sales Tax Returns  As an alternative to the above, Works Contract (Composition scheme for payment of SVT) Rules 2007 was introduced.  The Composition tax is to be paid on the entire contract value by the Service Provider (Previously2%, now 4%, + Ed.Cess) … Cont 14

 Explanation inserted in commercial or industrial service and complex service but the same was not inserted in work contact service.  Explanation inserted –for the purpose of this sub clause, construction of a complex which is intended for sale, wholly or partly,by a builder or any person authorized by the a 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 authorized by the builder before the grant of completion certificate under any law for the time being in force ) shall be deemed to be service provider by the builder to the buyer  After this introduction all developers /builders are brought under the service tax net and sale of flat made by them before the complete construction shall attract service tax … Cont 15

Common definition of Services ParticularsCOCC I CECIWC a) Construction of Residential complex…..  b) Completion and finishing……  c) Repair, alteration…..  d) Construction of new building…..  e) Erection, commissioning and Installation….  16

… Cont  Option available to builder for Assessment under the following categories viz CIC, CCC, WC through either by Notification 12/2003 S.T (sale or supply of material with documentary proof) (or) Abetment of 67%wide notification number 1/2006(non availment of cenvat on input goods ) (or) Abetment of notification 29/2010 dated 22/06/2010 (non availment of cenvat on input goods and land is include in gross value ) Works contract regular method or Works Contract composition method 17

… Cont  Composition scheme under Works Contract can be availed only excise of option.  Opting of option available for each contract  Once if it is opted, the same shall not be revoked.  SVT is to be paid on Gross amount  Gross Amount Includes Labour charges for execution of the works Amount paid to a sub contractor for labour and services Charges for planning, designing and architect fees Charges for obtaining on hire or otherwise, machinery and tools used for execution of the Works contract Cost of consumables such as water, electricity, fuel, used in the execution of works contract Cost of establishment of the contractor relatable to supply of labour and services Other similar expenses relatable to supply of labour and services and Profit earned by service provider relatable to supply of labour and services 18

… Cont  Notification no 23/2009 ST dated 7/7/09 Include all value of Goods and Services in relation to executing the WC whether supplied under any other contract for consideration or otherwise Less : VAT tax Less: Cost of Machinery and equipment used Declared value of WC is not less than the Gross amount chargeable to WC  Free supply / provision of material also included  Prior to 7/7/2009, gross amount does not include value of material supplied by contract 19

Service Tax Calculation (Options) ServicesCOC, CIC, ECIWC ParticularsAbatement (1/2006 dt ) Supply of Mat. 12/2003 dt VAT assessment 29/2007, rule 2A dt ( ) Composition scheme (32/2007 dt ) Gross ValueBill Value of Sp to Sr (-)SVT Bill Value of Sp to Sr (-) SVT Bill Value of Sp to Sr (-) SVT Bill Value of Sp to Sr (-) SVT Deductions: 1.Material Adhoc ded. Of 67% Inv. ValueValue of Material assed under VAT Nil 2.VAT Tax  3.Cenvat on CG  4.Cenvat on Ipg  5.Cenvat on IS  Ass.ValueXXX Tax rate10.3% 4.12% 20

Notes  Vide notification No 1/2011, dated 01/03/2011 a new sub rule (2a) has been inserted in rule 3 of the Works Contract Composition Rules o Restricted use of 40% of SVT paid on following Input Services ECI CIC COC  Above restriction not applicable Where the Service Provider has availed abatement vide notification number 1/2006 Where the Service provider charge service tax on full value by not claiming CENVAT Credit on Inputs,  Adhoc abatement deduction of 75% is available if land is included along with the bill value vide notification n0 29/

Interplay between VAT and SVT 22

VAT and Service Tax  Construction activities attract both VAT and service tax: oVAT on material appropriated in the course of construction oService tax on construction services  In theory, there is no overlap between the two levies: oVAT not applicable on value of labour/ services oService tax exempt on value of goods supplied  However, there may be an overlap where contractor required to pay VAT and/ or service tax on notional value, (Composition Scheme)  VAT on 80% of contract value (assuming ad-hoc deduction of 20% towards labour/ services) oService tax on 33% of contract value (available under exemption notification)  VAT and service tax are separate and independent levies. Therefore, possibility of overlap between the two levies in certain cases cannot be ruled out. 23

Comparison of Composition Scheme both in VAT & SVT Basic of comparisonComposition scheme under Service tax Composition scheme under VAT ApplicabilityAvailable on contract to contract basis Available on year to year basis. Time for exercise of option Prior to payment of service tax By 30 th April of the relevant financial year. Value on which tax to be charged Service tax to be charged on the gross amount for provision of taxable services. VAT to be charged on the total turnover including the turnover of exempted goods. 24

…. Cont Cenvat credit/ Input tax credit Cenvat credit in respect of input services and capital goods can be availed. However, credit of duty paid on inputs cannot be availed. Input tax credit (i.e. VAT paid on purchases of goods including capital goods) cannot be availed. Availment of Cenvat credit Service recipient can avail Cenvat credit of service tax paid to the service provider Contractee cannot avail input tax credit. Disclosure in invoice Service tax 2% or 4% as the case may be) has to be shown separately in the invoice. VAT charged under composition scheme (at concessional rate of tax) cannot be shown separately on the invoice. 25

Taxes on Real Property ParticularsSale tax / VAT apply?SVT Apply? Sale of Real Property  Construction Activity  ( On material appropriated to WC)  ( On construction services) 26

CA. P. Sankaran M.Com, FCA, DISA (ICAI) Ganesh & Sankaran Chartered Accountants 26, Govindu Street, T.Nagar, Chennai – E- Mail : 27