Service Tax on Real Estate (Practical Aspect)

This article aims to discuss few essential issues that require to be addressed in light to the changes brought by negative list provisions, the jeopardy created by the board’s circulars and complexity of structures adhered to in this industry. Broadly the article shall cover the aspects as mentioned hereinafter: – (Strictly relevant to real estate only)

Declared Service

“Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include certain activities specifically excluded from the definition. {Section 65B(44)}

Declared service simply means deemed service. Relevant inclusions in deemed service are as under:

-         Renting of immovable property

-         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.

Ø “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non requirement of such certificate from such authority, from any of the following, namely:––

◊ Architect registered with the Council of Architecture constituted under the Architects Act, 1972

◊ chartered engineer registered with the Institution of Engineers (India)

◊ licensed surveyor of the respective local body of the city or town or village or development or planning authority

Ø “construction” includes additions, alterations, replacements or remodeling of any existing civil structure.

-         Service portion in the execution of a works contract.

Ø As per Section 65B(54), “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 moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

Ø Importantly the ambit of works contract has been increased significantly by including movable property also.

Cenvat Provisions

-         Cenvat of works contract/construction input service is restricted as is continued from FY 2011-12.

-         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 (termed as ‘specified service’) can be availed and utilized only for paying service tax on such ‘specified services’

Ø Service portion in execution of works contract and Construction Services (includes Commercial or industrial construction service, maintenance or repair service)

Ø Construction of Complex Service including deemed construction service (as listed under Section 66E- Declared Service)

Ø Simply, the nature of input service and output service should be similar.

Ø 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.

Ø In case of other input services Credit can be taken on such ‘services’ if they are used in providing output service and duly in compliance with definitions of input services and Rule 6.

-         In case of Non reverse charge mechanism the credit of the entire tax paid on the service received by the service receiver would be available to the service recipient subject to the provisions of the CENVAT Credit Rules 2004. The credit of tax paid by the service provider would be available on the basis of the invoice subject to the conditions specified in the CENVAT Credit Rules 2004.

-         In case of Reverse charge provisions(partial / complete), The credit of tax paid by the service recipient under partial reverse charge would be available on the basis on the tax payment challan, again subject to conditions specified in the said Rules.

Negative list / Exemptions / Abatements

Negative List (Section 66D)

-         Trading of goods

-         Selling of space or time slots for advertisements other than advertisements broadcast by radio or television. (Say a real estate company does online advertisement on internet (viz facebook / google adwords) it shall not be liable to taxes).

-         service by way of access to a road or a bridge on payment of toll charges

-         services by way of renting of residential dwelling for use as residence. (Not of commercial Interest)

-         services by way of  extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount. (Importantly, since this is common in real estate business, Rule 6 (CENVAT reversal) implications must be taken care of).

Mega Exemption (Notification 25/2012 dated 20.6.2012)

-         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 –

Ø a civil structure or  any other original works meant predominantly for  use other than for commerce, industry, or any other business or profession.

Ø a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958).

Ø a structure meant predominantly for use  as (i) an educational, (ii) a clinical, or  (iii) an art or cultural establishment

Ø canal, dam or other irrigation works

Ø Pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment or disposal.

Ø a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Act.

-         Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:-

Ø a road, bridge, tunnel, or terminal for road transportation for use by general public

Ø a civil structure or  any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana

Ø a building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public

Ø a pollution control or effluent treatment plant, except located as a part of a factory; or

Ø  a structure meant for funeral, burial or cremation of deceased.

-         Services by way of construction, erection, commissioning, or installation of original works pertaining to:-

Ø an airport, port or railways, including monorail or metro

Ø a single residential unit otherwise than as a part of a residential complex.

◊ ”single residential unit” means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family.

◊ “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit.

◊ By above two definitions, it is aptly clearly that is not beneficial to commercial builders.

Ø low- cost houses up to 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.

Ø post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes

Ø mechanised food grain handling system, machinery or equipment for units  processing  agricultural produce as food stuff excluding alcoholic beverages.

-         Sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt.

Abatements/Valuation

-         Valuation of service portion in execution of a works contract

Ø  Works contract has been defined in clause (54) of section 65B of the Act. Typically every works contract involves an element of sale of goods and provision of service. It is a well settled position of law, declared by the Supreme Court in BSNL‘s case [2006(2) STR 161 (SC)], that a works contract can be segregated into a contract of sale of goods and contract of provision of service. With a view to bring certainty and simplicity the manner of determining the value of service portion in works contracts has been provided in Rule 2A of the Service Tax (Determination of Value) Rules, 2006. In order to align this rule with the new system of taxation of services based on the negative list the old Rule 2A has been replaced by a new rule by the Service Tax (Determination of Value) Second Amendment Rules, 2012. The new provisions have been explained in this note.

Ø  Two Ways to do valuation :- First, Actual Way,

Ø  Second Way, :- Simplistic way,

# total amount = Gross amount + FMV of Goods supplied – Sales tax – FMV of Goods received.

$ Original Works means – all new constructions  OR  all types of additions and alterations to abandoned or damaged structures on land

that are required to make them workable OR erection, commissioning or installation of plant, machinery or equipment or structures,

whether pre-fabricated or otherwise.

% Cenvat of Input service and Capital Goods available.