- Circular no. 80/10/2004-S.T., dated 17-9-2004 (relevant extract)
- Circular F. No. B1/6/2005-TRU, dated 27-7-2005 (extract)
- Letter F.No. B1/16/2007-TRU, dated 22-5-2007
- Circular no. 116/10/2009-S.T., dated 15-9-2009
- Relevant extract of ministry’s Circular letter D.O.F. no. 334/1/2010-TRU, dated 26-2-2010
- Circular no. 123/05/2010-ST, dated 24-5-2010- applicability of service tax on laying of cables under or alongside roads and similar activities.
- F. (D.R.) Order no. 1/2010, dated 22-6-2010
- Relevant extracts of letter D.O.F. no. 334/03/2010-TRU, dated 1-7-2010
- Circular No. 80/10/2004-S.T., dated 17-9-2004 (Relevant Extract)-
13.1 Services provided by a commercial concern in relation to construction, repairs, alteration or restoration of such buildings, civil structures or parts thereof which are used, occupied or engaged for the purposes of commerce and industry are covered under this new levy. In this case the service is essentially provided to a person who gets such constructions etc. done by a building or civil contractor. Estate builders who construct buildings/civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers. However, if such real estate owners hire contractor/contractors, the payment made to such contractor would be subjected to service tax under this head. The tax is limited only in case the service is provided by a commercial concern. Thus service provided by a labourer engage d directly by the property owner or a contractor who does not have a business establishment would not be subject to service tax.
13.2 The leviability of service tax would depend primarily upon whether the building or civil structure is ‘used, or to be used’ for commerce or industry. The information about this has to be gathered from the approved plan of the building or civil construction. Such construction which are for the use of organizations or institutions being established solely for educational, religious, charitable, health, sanitation or philanthropic purposes and not for the purposes of profit are not taxable, being non-commercial in nature. Generally, Government buildings or civil constructions are used for residential, office purposes or for providing civic amenities. Thus, normally Government constructions would not be taxable. However, if such constructions are for commercial purposes like local Government bodies getting shops constructed for letting them out, such activity would be commercial and builders would be subjected to service tax.
13.3 In case of multipurpose buildings such as residential-cum-commercial construction, tax would be leviable in case such immovable property is treated as a commercial property under the local /municipal laws.
13.4 The definition of service specifically excludes construction of roads, airports, railway, transport terminals, bridge, tunnel, long distance pipelines and dams. In this regard it is clarified that any pipeline other than those running within an industrial and commercial establishment such as a factory, refinery and similar industrial establishments are long distance pipelines. Thus, construction of pipeline running within such an industrial and commercial establishment is within the scope of the levy.
13.5 The gross value charged by the building contractors include the material cost, namely, the cost of cement, steel, fittings and fixtures, tiles etc. Under the Cenvat Credit Rules, 2004, the service provider can take credit of excise duty paid on such inputs. However, it has been pointed out that these materials are normally procured from the market and are not covered under the duty paying documents. Further, a general exemption is available to goods sold during the course of providing service (Notification No. 12/2003-S.T.) but the exemption is subject to the condition of availability of documentary proof specially indicating the value of the goods sold. In case of a composite contract, bifurcation of value of goods sold is often difficult. Considering these facts, an abatement of 67% has been provided in case of composite contracts where the gross amount charged includes the value of material cost (Refer Notification No. 15/2004-S.T.,dated 10-9-2004). This would, however, be optional subject to the condition that no credit of input goods, capital goods and no benefit (under Notification No. 12/2003-S.T.) of exemption towards cost of goods are availed.
- Circular No. B1/6/2005-TRU, dated 27-7-2005(extract)
14.1 Construction of new buildings or civil structures used for commercial or industrial purposes and repair, alteration or restoration activities of such buildings and civil structures was already liable to service tax since 2004. In this year’s budget, such construction service has been renamed as ‘commercial and industrial construction service’ under section 65(25b) of the Finance Act, 1994 and renovation of a commercial or industrial building or civil structure has now been specifically included within the purview of service tax.
14.2 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.
14.3 Construction of pipeline or conduit has been included within the purview of service tax. Thus, the construction of long distance pipeline which was earlier excluded from the coverage of construction services would now be liable to service tax. Repair, alteration, renovation or restoration of pipeline or conduit would now be liable to service tax. This levy would also be applicable for such activities performed on the old pipeline or conduits constructed before this levy has come into force.
14.4 At present, services rendered for construction of commercial or industrial buildings is taxable. However, construction of roads is not liable to service tax. A point has been raised that if a commercial complex is constructed which also contains roads whether the value of construction of roads would be liable to service tax.
14.5 If 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.
14.6 When services provided under a contract consist of a number of different elements, a view has to be taken on the basis of the facts and circumstances of each case as to whether the service provider has made a single overall supply or a supply of different services which are to be treated differently.
- Letter F.No. B1/16/2007-TRU
8.4 Construction of ports is specifically exempted from levy of service tax under commercial or industrial construction service [section 65(25b)] vide Notification No. 16/2005-Service Tax, dated 7-6-2005. Construction of ports under the newly introduced commercial or industrial construction service provided in relation to the execution of works contract under section 65(105)(zzzza) has also been exempted. Accordingly, Notification No. 16/2005-Service Tax, dated 7-6-2005 has been rescinded and a combined Notification No. 25/2007-Service Tax, dated 22-5-2007 has been issued exempting commercial or industrial construction service, and services provided in relation to the execution of works contract, provided to any person by any other person in relation to construction of a port or other port. However, services such as completion and finishing, repair, alteration, renovation, restoration, maintenance or repair provided in relation to existing port or other port shall be outside the scope of this exemption and hence, leviable to service tax.
- Circular No. 116/10/2009-S.T., dated 15-9-2009
On a reference being received by the Board, two following issues were examined for a clear understanding of facts. The first is regarding leviability of service tax on construction of canals for Government projects.
- As per section 65(25b) of the Finance Act, 1994 “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 joiner 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 –
(i) used, or to be used, primarily for; or
(ii) occupied, or to be occupied, primarily with; or
(iii) engaged, or to be engaged, primarily in, commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.
- Thus the essence of the definition is that the “commercial or industrial construction service” is chargeable to service tax if it is used, occupied or engaged either wholly or primarily for the furtherance of commerce or industry. As the canal system built by the Government or under Government projects, is not falling under commercial activity, the canal system built by the Government will not be chargeable to service tax. However, if the canal system is built by private agencies and is developed as a revenue generating measure, then such construction should be charged to service tax.
- The second issue is about Government taking up construction activity of dams, buildings or infrastructure construction etc. through EPC (Engineering Procurement & Construction) mode. The said service is covered under section 65(105)(zzzza) of Finance Act, 1994. The said section itself excludes works contract in respect of dams, roads, airports, railways, transport terminals, bridges and tunnels executed through EPC mode. Hence works contract in respect of above works even if done through EPC mode are exempt from payment of service tax.
- Relevant Extract of Ministry’s Circular Letter D.O.F. No. 334/1/2010-TRU),dated 26-2-2010
- Service tax on construction services
8.1 The service tax on construction of commercial or industrial construction services was introduced in 2004 and that on construction of complex was introduced in 2005.
8.2 As regards payment made by the prospective buyers/flat owners, in few cases the entire consideration is paid after the residential complex has been fully developed. This is in the nature of outright sale of the immovable property and admittedly no service tax is chargeable on such transfer. However, in most cases, the prospective buyer books a flat before its construction commencement/completion, pays the consideration in installments and takes possession of the property when the entire consideration is paid and the construction is over.
8.3 In some cases the initial transaction between the buyer and the builder is done through an instrument called ‘Agreement to Sell’. At that stage neither the full consideration is paid nor is there any transfer in ownership of the property although an agreement to ultimately sell the property under settled terms is signed. In other words, the builder continues to remain the legal owner of the property. At the conclusion of the contract and completion of the payments relating thereto, another instrument called ‘Sale Deed’ is executed on payment of appropriate stamp duty. This instrument represents the legal transfer of property from the promoter to the buyer.
8.4 In other places a different pattern is followed. At the initial stage, instruments are created between the promoter and all the prospective buyers (which may include a person who has provided the vacant land for the construction), known as ‘Sale Of Undivided Portion of The Land’. This instrument transfers the property right to the buyers though it does not demarcate a part of land, which can be associated with a particular buyer. Since the vacant land has lower value, this system of legal instrumentation has been devised to pay lesser stamp duty. In many cases, an instrument called ‘Construction Agreement’ is parallely executed under which the obligations of the promoter to get property constructed and that of the buyer to pay the required consideration are incorporated.
8.5 These different patterns of execution, terms of payment and legal formalities have given rise to confusion, disputes and discrimination in terms of service tax payment.
8.6 In order to achieve the legislative intent and bring in parity in tax treatment, an Explanation is being inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly. This would only expand the scope of the existing service, which otherwise remain unchanged.
- Circular No. 123/05/2010-ST, dated 24-5-2010
Disputes have arisen in some parts of the country regarding applicability of service tax on certain activities such as shifting of overhead cables to underground on account of renovation/widening of roads; laying of electrical cables under or alongside roads/railway tracks; between grids/sub-stations/transformers the distribution points of residential or commercial complexes and such activities as electrification of railways, installation of street lights, traffic lights, flood lights. This clarification takes into account the taxability of different activities taking into account the scope of all services (such as site formation/excavation/earth-moving service, commercial or industrial construction services; erection, commissioning or installation services; or works contract service) that are presently taxable as well as those which are covered under the Finance Act, 2010.
- Scope of certain taxable services in brief :
(i) ‘Commercial or industrial construction services’, in brief, cover construction of and the completion, finishing, repair, alteration, renovation, restoration or similar activities pertaining to buildings, civil structures, pipelines or conduits. Therefore, only such electrical works that are parts of (or which result in emergence of a fixture of) buildings, civil structures, pipelines or conduits, are covered under the definition of this taxable service. Further, such activities undertaken in respect of roads, railways, transport terminals, bridges, tunnels and dams are outside the scope of levy of service tax under this taxable service.
(ii) Under ‘Erection, commissioning or installation services’, the activities relevant to the instant issue are (a) the erection, commissioning and installation of plant, machinery, equipment or structures; and (b) the installation of electrical and electronic devices, including wiring or fitting therefor. Thus, if an activity does not result in emergence of an erected, installed and commissioned plant, machinery, equipment or structure or does not result in installation of an electrical or electronic device (i.e. a machine or equipment that uses electricity to perform some other function) the same is outside the purview of this taxable service.
(iii) ‘Works contract’ incorporates the inclusions and exclusions of the aforementioned two taxable services (amongst others) and it is the nature of the contract (i.e. a contract wherein the transfer of property in goods involved is leviable to a tax as sale of goods) rather than the nature of activities undertaken, that distinguishes it from the previously stated taxable services. Thus, even in the case of ‘works contract’ if the nature of the activities is such that they are excluded from aforesaid two services then they would generally remain excluded from this taxable service as well.
(iv) ‘Site formation and clearance, excavation, earth-moving and demolition services’ are attracted only if the service providers provide these services independently and not as part of a complete work such as laying of cables under the road.
- The taxable status of various activities, on which disputes have arisen.
Based on the foregoing, the following would be the tax status of some of the activities in respect of which disputes have arisen,—
||Shifting of overhead cables/ wires for any reasons such as widening/renovation of roads
||Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
||Laying of cables under or alongside roads
|Not a taxable service under any clause of sub-section (105)of section 65 of the Finance Act, 1994
||Laying of electric cables
between grids/sub-stations/ transformer stations en route
|Not a taxable service under any clause of sub-section (105)of section 65 of the Finance Act, 1994
||Installation of transformer/ sub-stations undertaken independently
||Taxable service, namely erection, commissioning or installation services [section 65(105)(zzd)]
||Laying of electric cables up to distribution point of residential or commercial localities/
|Not a taxable service under any clause of sub-section (105) of section 65 of the Finance Act, 1994
||Laying of electric cables
beyond the distribution point of residential or commercial localities/complexes
|Taxable service, namely commercial or ‘industrial construction’ or ‘construction of complex’ service [section 65(105)(zzq)/(zzzh)], as the case may be
||Installation of street lights, traffic lights, flood lights, or other electrical and electronic
providing electric connections to them
|Taxable service, namely erection, commissioning or
installation services [section
electrification along the
|Not a taxable service under
any clause of sub-section (105)
of section 65 of the Finance
- The conclusions drawn above are essentially general in nature and would have to be applied in an individual case depending upon its facts and circumstances. The pending disputes/cases maybe decided based on the clarifications contained in this Circular.
- F. (D.R.) ORDER NO. 1/2010, dated 22-6-2010
In exercise of the powers conferred by sub-section (1) of section 95 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, hereby makes the following Order, namely :—
- (1) This Order may be called as the Service Tax (Removal of Difficulty) Order, 2010.
(2) This Order shall come into force on the 1st day of July, 2010.
- For the purposes of sub-clauses (zzq) and (zzzh) of clause (105) of section 65 of the Finance Act, the expression ‘authority competent’ includes, besides any Government authority,—
(i) architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or
(ii) chartered engineer registered with the Institution of Engineers (India); or
(iii) licensed surveyor of the respective local body of the city or town or village or development or planning authority; who is authorised under any law for the time being in force, to issue a completion certificate in respect of residential or commercial or industrial complex, as a precondition for its occupation.
- Relevant Extracts of Letter DoF No. 334/03/2010-TRU, dated 1-7-2010
- Construction services:
6.1 In the Finance Act, changes have been made in the construction services, both commercial construction and construction of residential complex, using ‘completion certificate’ issued by ‘competent authority’. Before the issuance of completion certificate if agreement is entered into or any payment is made for sale of complex or apartment in residential complex, service tax will be leviable on such transaction since the builder provides the construction service. Completion certificate issued by a Government authority was prescribed as demarcation by introducing an Explanation in the Finance Act. During the post budget discussions, it was pointed that practice regarding issuance of completion certificates varies from State to State. Considering the practical difficulties, the scope of the phrase ‘authority competent’ to issue completion certificate has been widened by issuing an order for removal of difficulty (Refer M.F. (D.R.) Order No. 1/2010, dated 22nd June, 2010). Completion certificate issued by an architect or chartered engineer or licensed surveyor can be now taken to determine the service tax liability.
6.2 After the Budget was introduced views were expressed that the tax liability on construction sector has been tightened at a time when the sector was recovering after recession. After considering the issue, abatement available for construction of industrial or commercial complex and also residential complex has been prescribed as seventy five per cent. This means now tax incidence will be the rate of service tax applied on twenty five per cent of gross value of commercial or residential complex or unit, broadly representing the service component in the construction, subject to conditions (Refer Notification No. 29/2010-Service Tax, dated 22nd June, 2010). Importantly seventy five per cent abatement will be applicable only if the gross value of commercial or residential complex or unit includes cost of land. Otherwise the existing rate of abatement of 67% would continue to apply.
Exemption has been provided for construction of residential complex service, when the same is rendered as part of Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Rajiv Awaas Yojana (Refer Notification No. 28/2010-Service Tax, dated 22nd June, 2010). These are flagship schemes of the Government of India to provide shelter for the poor and the disadvantaged and hence taxable service of construction of complex in the context of these two development schemes have been kept out of the ambit of service tax.