Sunday, August 26, 2012

Service Tax: Important Points for Builders & Contractors in the Real Estate Market

The real estate market has been growing rapidly in India for the past one decade. Many residential hubs are being developed not only in and around Delhi NCR, but also at other places in the country, claiming to provide affordable homes to fit the budget of each category of customers and investors. The recent changes in the Service Tax laws to be applicable w.e.f. 1st July 2012 have brought some points to be noted by the real estate developers, builders and contractors engaged in this industry, so that they ensure proper compliance of law.


Service Tax was leviable on construction activities under the following three categories of services until 30-06-2012:
·         Commercial or Industrial Construction Services with effect from 10-09-2004
·         Construction of Complex Services with effect from 16-06-2005
·         Works Contract Services with effect from 01-06-2007.

However, with effect from 01-07-2012 all activities related to construction fall within the purview of the following “Declared Services” under Section 66E of the Act:

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.
Section 66E (h): Service portion in the execution of a works contract.

With effect from 01.07.2012, the following definition of “Works Contract” as given in Section 65B (54) of the Act is applicable:

"Works Contract" means 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, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

The above definition reveals that scope of works contract has increased immensely, as it now applies to both movable and immovable properties.

Exemption to certain construction activities 

Certain construction activities have been exempted by virtue of entry no. 12, 13 and 14 of Notification No. 25/2012 dated 20-06-2012 with effect from 01.07.2012.
·      Entry No. 12, inter alia, grants exemption to 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 civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession, a historical monument, archaeological site, a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment. Services covered by this entry are exempted only if these services are provided to the Government or Local Authority or Governmental Authority.
·         Entry No. 13, inter alia, grants exemption to services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a road, bridge, tunnel, or terminal for road transportation for use by general public, a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana. In order to avail exemption under entry no. 13 the status of service recipient is insignificant-be it Government, a Local Authority or a Governmental Authority or any other person.
·         Entry No. 14 inter alia, grants exemption to Services by way of construction, erection, commissioning, or installation of original works pertaining to an airport, port or railways, including monorail or metro, a single residential unit otherwise than as a part of a residential complex, Low-cost houses upto 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. The scope of exemption granted vide entry no. 14 is restricted because it does not cover completion, fitting out, repair, maintenance, renovation or alternation of original works pertaining to any of the specified structures, immovable properties, machineries or equipments.

Exemption to sub-contractor

Exemption has also been provided with effect from 01-07-2012 vide Entry No. 29(h) of Notification No. 25/2012 to sub-contractor providing services by way of works contractor to another contractor providing works contract services which are exempt. This exemption was also available until 30-06-2012 vide. Circular No. 147/16/2011 dated 21-10-2011.

Illustrative list of services in relation to Construction Activities which have become taxable w.e.f. 1st July 2012
1.       Construction of Boundary Wall
2.       Construction of Parking Area
3.       Services in respect of Cutting of Plots and Development of colonies received by builders
4.       Construction of Residential Complex of units ranging between 2-12 units (more than one unit)
5.       Construction of Private Roads
6.       Construction Services provided to Non-Commercial organisation in respect of buildings which are used for other than Religious Purpose
7.       Services provided in respect of Construction of hospitals to any person other than Government or Governmental Authority or Local Authorities
8.       Services provided in respect of Construction of buildings to be used for the purpose of Education to any person other than Government or Governmental Authority or Local authorities

Valuation of service portion in execution of a works contract w.e.f. 1st July 2012

Substituted Rule 2A(i) of Service Tax (Determination of Value) Rules, 2006, inter alia, provides that the value of service portion in the execution of a works contract is the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. Alternatively, under foregoing Rule 2A (ii), the aforementioned value will be determined as under:
S. No.
Purpose of the Works Contract
Percentage of total amount deemed as Value of service portion of the Works Contract
Execution of Original Works
Maintenance or Repair or Reconditioning or Restoration or Servicing of any goods
Any purpose other than:
(A) & (B) above, including Maintenance, Repair, Completion and Finishing Services [such as Glazing, Plastering, Floor and Wall-Tiling, Installation of Electrical Fittings] of an immovable property

Notification No. 26/2012 dated 20th June 2012 states the relevant abatement scheme, under which there is an abatement of 75% offered in the abovementioned service, details of which are as under:

Description of taxable service
Percentage of Taxable portion
Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority
  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.
The rate of abatement in this case has been kept the same as was prior to 1st July 2012.

Earlier there was an absolute bar on availment of CENVAT credit. However, after 1st July 2012, CENVAT credit in respect of capital goods and input services (as defined under rule 2 of CENVAT Credit Rules, 2004) has been allowed. It is to be noted that CENVAT credit in respect of inputs shall not be allowed.

Capital goods                                    CENVAT credit available
Input services                                    CENVAT credit available
Input goods                                       CENVAT credit NOT available

As per definition Of ‘Input Service’ under Rule 2(l) of Cenvat Credit Rules, 2004, credit of service tax paid in respect of following services can be availed and utilized only for paying service tax on such ‘specified services’:
·         Service portion in execution of works contract and Construction Services (includes commercial or industrial construction service, maintenance or repair service)
·         Construction of Complex Service including deemed construction service (as listed under Section 66E-Declared Service)

In simple terms, the nature of input service and output service should be similar.

In case of other input services viz. Manpower supply, legal consultancy, telephone bills, GTA service (up to place of removal), banking or financial services etc., credit can be taken on such services if they are used in providing output service (works contract/construction of complex service).

For example,
A Builder is engaged in providing service of construction of building/flats. Further, the Builder sub-contracts the work of construction to another contractor. In this case Builder is providing output service of works contract/construction of complex service and at the same time availing input service of works contract from contractor. Therefore, the Builder can take the Cenvat Credit on input service and utilize the same in paying its tax liability only for works contract service, maintenance or repair or construction of complex service.

Net Savings for Developers
After 1st July 2012, the developers shall continue to charge service tax from their customers however; they will now avail CENVAT credit on capital goods and input services, thus making their liability to deposit service tax lesser. The developers will now save an amount equivalent to the CENVAT credit availed.

A residential flat is sold by a developer for Rs. 50 lakhs, including land value. Service tax will be calculated on 25% of the sale value @12.36%, which will come to Rs. 1,54,500. This amount will be charged by the builder from his customer.

The developer can claim CENVAT credit on capital goods and input services used by him. Assuming that input capital goods used and input services received to construct the flat are worth Rs. 12 lakhs, CENVAT credit available to the developer @12.36% is Rs. 1,48,320. Therefore, the developer/builder will be required to pay only the balance amount of Rs. 6,180 towards service tax. 

Claim of Cenvat Credit: Whether on due basis or payment basis?
As per Rule 4(7) of Cenvat Credit Rules, 2004, Cenvat Credit in respect of input service shall be allowed on or after the day on which invoice or bill is received, and not on payment basis (as was the case earlier).
This is subject to the following condition:
Ø  payment of value of input service and service tax shall be made within three months of the date of invoice or bill.
If the payment is not made within the prescribed period, Cenvat Credit taken earlier on accrual basis shall be reversed and it can be taken back once payment is made.

Renting of Immovable Property as Output Service
Cenvat Credit of service tax paid on services of Works Contract, Construction of Complex Service, maintenance or repair service cannot be taken and used in paying service tax on ‘renting of immovable property service’ because these services are actually used in construction of immovable property and not directly used in provision of such renting services.

The validity of such disallowance stands because ‘Immovable property’ is neither a ‘good’ nor ‘service’ and cannot be taxed. Even Cenvat Credit Rules, 2004 do not allow the taking of credit in such situation. (Read with Circular No. 98/1/2008 dated 04.01.2008).

Whereas, credit on other input services can validly be taken and utilized accordingly.

Summary of CENVAT Credit
CENVAT Credit on Input Service
Whether CENVAT Credit can be taken against Output Service
Works Contract (including maintenance or repair)
Construction of Complex
Renting of Immovable Property
Works Contract
Man Power Supply
Professionals/Legal Consultancy
Telephone Bills
Other Services


The scope of service tax on construction activities has been enlarged with effect from 01.07.2012 because many services which were hitherto outside the tax net, have become taxable with the exception of construction, erection, commissioning or installation of original works pertaining to low-cost houses as mentioned above. On the other hand, CENVAT Credit in respect of “input services” and “capital goods” has been allowed to builders with effect from 01.07.2012. The Valuation of Works Contract Services under substituted Rule 2A of Valuation Rules, 2006 will affect adversely the specified service providers in specific cases.