Works Contract. CA Sandesh Mundra

Transcription

1 Service Tax Construction / Works Contract

2 Old vs New

3 Old Unresolved Issues Works Contract Applicability and Payment Free Issue Material Classification Service tax on residential complex Police Housing Matters EPC Sub-contractors (23/8/07) / Jayprakash / SEZ

4 New Law

5 SERVICE ReDEFINED Section 65B (44) defines Services as: any activity carried out by a person for another for consideration and includes a declared service. not to include: Transfer intitleof: il Goods (Kone Elevators Issue) Immovable Property (Sale of Plots) By way of sale/gift or in any manner Transaction in Money or Actionable Claim Employment service provided by an employee to employer Fees payable to court/tribunal 5

6 Definition to of Declared ed Service Why Services are Declared?. The following activities have been specified in section 66E as declared service: 1. Construction o of a complex, building, civil cv structure or a part thereof, eo including cud ga complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority; 2. Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software; 3. Service portion in execution of a works contract; (Payment on Gross Value?) 4. Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity. 6

7 1.Services by Government or a local authority 2.Trading of goods 3.Any process amounting to manufacture or production of goods 4.Transmission of electricity by an electricity transmission utility. 5.Service by way of access to a road or a bridge on payment of toll charges; 7

8 Mega Exemption 8

9 EXEMPTED SERVICES VIDE NOTIFICATION NO 25/2012 ST (w.e.f ) Entry No 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) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession; (b) 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); (c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; (d) canal, dam or other irrigation works; (e) pipeline, conduit or plant for (i) water supply (ii) water treatment, or (iii) sewerage treatment t t or disposal; or (f) 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; 9

10 Critical Issues Exemption only if services are provided to Govt / LA / GA Civil Structure for commercial use not covered Use of Term Pre-dominantly vs Exclusively l or Solely Absence of Term Pre-dominantly Canal, dam and Other Irrigation Works

11 Contd Entry 13. Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,- (a) a road, bridge, tunnel, or terminal for road transportation for use by general public; (b) a civil ilstructure t or any other original i works pertaining i to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana; (c) 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; (d) a pollution control or effluent treatment t t plant, except located as a part of a factory; or a structure meant for funeral, burial or cremation of deceased; 11

12 Critical Issues General Public defined in Explanation Status of Service Recipient is immaterial What are the activities that would fall under road construction (by way)? E.g. Soil Stabilisation, Excavation Charitable Trust Religious Use Pollution Control / Effluent Treatment Part of Factory

13 Contd Entry 14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,- (a) an airport, port or railways, including monorail or metro; (b) a single residential unit otherwise than as a part of a residential complex; (c) 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 durban Poverty Alleviation, Government of findia; (d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or (e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages; 13

14 Critical Issues Only Original Works Completion, Fitting, Alteration, Renovation, Repair & Maintenance Not covered. Status of Service Recipient not material Specified Infra Projects covered Port/Airport/Rail Single Residential Unit Carpet Area Non-Mechanised Food Grain Handling System

15 Contd Entry 25. Services provided to Government, a local authority or a governmental authority by way of - (a) carrying out any activity it in relation to any function ordinarily il entrusted t to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation;or or (b) repair or maintenance of a vessel or an aircraft; Entry 39. Services by a governmental authority by way of any activity in relation to any function entrusted to a municipality under article 243 W of the Constitution. 15

16 What is Governmental Authority set up by an act of the Parliament or a State Legislature; established with 90% or more participation by way of equity or control by Government; and carries out any of the functions entrusted to a municipality under article 243W of the Constitution. Ub Urban planning /R Regulation of fland-use / economic and social ldevelopment. / Roads and bridges. / water supply / Public health, sanitation conservancy / Fire services / Urban forestry, protection of the environment and promotion of ecological aspects / Safeguarding g the interests of weaker sections / Slum improvement and upgradation / Urban poverty alleviation / Provision of urban amenities and facilities such as parks, gardens, playgrounds / Promotion of cultural, educational and aesthetic aspects / Burials and burial grounds; cremations, cremation grounds; and electric crematoriums / Cattle pounds; prevention of cruelty to animals / Vital statistics including registration of births and deaths / Public amenities including street lighting, parking lots, bus stops and public conveniences / Regulation of slaughter houses and tanneries.

17 Contd Clause 29 h Services by sub contractor providing services by way of Works Contract to another contractor providing works contract service which are exempt 17

18 Taxability of Sub contractors VAT Excise Service Tax

19 Works Contracts Redefined

20 Work Contract Valuation A new valuation rule is being introduced : Rule 2A(i) Actual Labour Where the value has not been determined d as per above :- Rule 2A(ii) Presumptive Labour

21 Valuation of WCS w.e.f Where works contract is for Value of the service portion shall be A) Execution of Original Works 40% of the total amount charged for the works contract. B) Maintenance or repair or reconditioning or restoration or servicing of any goods 70% of the total amount charged including such gross amount. C) In case of other works contract not covered by (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property 60% the total amount charged for the works contract. 21

22 Valuation of WCS w.e.f "Original works" means i. all new constructions ii. all types of additions and alternations to abandoned or damagedd structures t on land thatt are required to make them workable iii. erection, commissioning or installation of plant, machinery or equipment or structures, whether prefabricated or otherwise. 22

23 Valuation of WCS w.e.f Wherethevalueofgoodsorservices supplied free of cost is not ascertainable, the same shall be determined on the basis of fair market value of the goods or services that have closely available resemblance. No CENVAT Credit in respect of duties or cess paid on inputs used in or in relation to the works contract shall be availed. In other words, Cenvat Credit of Duty paid on Capital goods and Service tax paid on Input services is eligible. 23

24 WORKS CONTRACT - SOME ISSUES 연 Whether the works contractor has an option of paying service tax on a gross contract value or he has to go only by following two options given in Rule 2A of Valuation Rules : specific valuation method [as prescribed U/R 2A(i)] presumptive valuation [as prescribed U/R 2A(ii)] 연 If option of paying full tax on gross contract value is permissible, whether service provider can claim Cenvat of inputs? 연 Whether in above case, service recipient can claim full Cenvat of input service tax paid to works contractor? 10

25 WORKS CONTRACT - SOME ISSUES 연 What will be the applicable rate of Service tax in respect of following finishing and completion contracts for new construction: Plastering Tilling Painting Electrical Plumbing Carpentry 연 Whether site formation and clearance contractor can charge Service tax claiming rebate for new constructions? 연 Whether free material supplied by client or material supplied at concessional value is to be included in value of works contract services (Bhayana Builders Judgement) 연 If value of such free material is includible, whether VAT component paid by client on purchase of said goods is also to be included din the value of works contract service? 11

26 Reverse (Gear) Charge Works Contract Refund Option for Recepient

27 Service tax on Builders 12/5/

28 Construction of complex services

29 Chronology of Happenings before the leviability Karnataka High Court - K Raheja Allahabad HC - Assotech Reality 2008 (Set Aside by SC) Advance Ruling Hare Krishna Guwahati HC Magus Construction Pvt Ltd 2008 CBEC Circular Dated K Raheja Reaffirmed

30 Construction of Complex There is no bifurcation between residential or commercial complex. Non-taxability for 12 or less than 12 residential units is done away with. Non-taxability for residential units for personal use is done away with. Redevelopmentith hit Hence, construction of each and every unit whether residential or commercial is taxable. 30

31 Recent Circular No. 151/2/2012 / Dt Two broad business models in the construction of residential complex :- The undivided share of land (UDS) or the UDS along with a semi finished structure would first be sold to the flat buyer, which is a transaction of sale of immovable property. Further, a construction agreement would be entered to construct the flat of specified description between the builder and purchaser. An agreement to sell the flat will be entered into and the consideration would be received in instalments. After completion of construction, the flat would be sold and registered in the name of the purchaser.

32 Joint Development Transaction Issue In some agreements, the consideration Is service tax applicable on towards land is discharged by way of such allotment? If yes, then allotment of flats to the land owners. how to quantify the consideration?

33 Redevelopment Projects Transaction Issue The builder/developer makes new flats Under this model, the with same or different carpet area for builder/developer receives original owners of flats and additionally may also be involved in one or more of the consideration First from society, who transfer development rights following: over the land The second (i) construct some additional flats for sale to others; category consist of buyers of flats other than the society/members. (ii) arrange for rental accommodation or rent payments for society members/original owners for stay during the period of re-construction; Generally, they pay by cash.

34 Service Tax on Registration & Stamp Duty Charges: Transaction Registration and Stamp Duty (RSD) is paid to the revenue authorities, the builder only passes through the same to the revenue authorities. Issue Whether service tax is chargeable on RSD so passed through to the revenue authorities?

35 Service Tax on GEB, Legal & Other charges: Transaction GEB, legal and other charges are Whether service tax is applicable on collected from customers. These are these items? mentioned in the sale deed. Legal work is done by in house team of lawyers. Further, GEB and Legal charges are recognized as revenue in the books. Issue

36 Point of Taxation for builders Deemed service of Sale of Flat Would qualify as CSS. Date of advance received or date of invoice (demand letter) agreement to sale payment from date of event specified e.g. defined based upon construction completion of first slab.. activity Issuance of Invoice mandatory Deemed service of sale of flat payment defined based upon fixed dates Construction Contract Certified vs Uncertified Would qualify as CSS. Date of advance or date of payment milestone in agreement in absence of invoice raised in 30 days. Would qualify as CSS. Date of RA bill if issued within 30 days from date of completion of services. 12/5/2013 SKJ 36

37 Allowability of Cenvat Credit As per new abatement e t scheme, e, unlike the erstwhile notification no. 01/2006-ST, Cenvat Credit of input services is allowed in most of the output services covered in the abatement notification. Accordingly, if abatement t of 75% is fixed for construction of complex, previously no cenvat credit was allowed; however, now input is being allowed against the abated value of construction of complex. 37

38 Cenvat Credit Related Issues Definition of Input Service Input service means any service, - Used for providing an output service / manufacture of final product and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service and. but excludes services, used for- (a) construction of a building or a civil structure or a part thereof; or (b) laying of ffoundation or making of structures t for support of capital goods, except for the provision of one or more of the specified services; or services are used primarily for personal use or consumption of any employee.

39 3.1 Services specifically excluded under clause (A) If used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods * Architect Services [Section 65(105)(p)] * Port Services [Section 65(105)(zn)] * Other Port Services [Section 65(105)(zzl)] * Airport Services [Section 65(105)(zzm)] * Commercial or Industrial Construction [Section 65(105)(zzq)] * Construction of Residential Complex [Section 65(105)(zzzh)] * Works Contract Service [Section 65(105)(zzzza)] These specified services will be eligible for Cenvat credit only if used for any of these Specified Services. e.g. Architect Service will be eligible as input service if used for Port Service or Construction Service or Works Contract Service.

40 Giving both taxable and exempt services In such cases, the manufacturer/service provider has following four options w.e.f (a) Maintain separate inventory and accounts of receipt and use of inputs and input services Rule 6(2) of Cenvat Credit Rules. (b) Pay amount equal to 6% of value of exempted goods/services Rule 6(3)(i). (c) Pay an amount equal to proportionate Cenvat credit attributable to exempted goods / services as per Rule 6(3A) Rule 6(3)(ii) (d) Maintain separate accounts for inputs and pay amount as determined under rule 6(3A) in respect of input services - Rule 6(3)(iii) -

41 Option has to be exercised in respect of all exempted goods manufactured and all exempted output services provided. The option once exercised shall not be changed in remaining part of financial year Explanation ItoRule6(3) - reiterated in para 2 of CBE&C Circular No. 868/6/2008- CX dated

42 Meaning of exempted services As per rule 2(e) of Cenvat Credit Rules, exempted services means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken. Explanation For removal of doubts, it is hereby clarified that exempted services includes trading [Words in italics inserted w.e.f ] Services on which no tax is payable are also exempt services unlike goods. It has been clarified that export of service will not be treated as exempted service - para 6 of CBE&C Circular No. 868/6/2008-CX dated

43 Calculation of 'value' for purposes of rule 6(3) and 6(3A) (a) in the case of a taxable service, when the option available under the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 has been availed, shall be the value (b) in case of trading, shall be the difference between the sale price and the purchase price of the goods traded or 10% of CGOS which is higher.

44 They are deciding, what to pay VAT or Service Tax

45 Any Queries on Service Tax