Construction of Residential Complex

September 19, 2016   admin  Service Wise Implications
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  • Important Definition

The term has not been defined, however, the scope has been included in declared services.  However, in declared services, it is provided that the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure

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  • Accounting Code 

Such codes are no longer statutory but used for statistical purpose for the purpose of registration and for payment of tax as specified vide Circular No.165/16/2012 –ST dated 20.11.2012:

 

Tax Collection of Service Interest and penalties on such service
00440334 00440335

  • Provisions relating to Negative List

Construction of Residential Complex services are not included in the Negative List as specified under Section 66D of the Finance Act, 1994.  Rather, construction has been included as declared services as under:

  • 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.

Explanation.— For the purposes of this clause,—

  • the expression “competent authority” means the Government or any authority authorised 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:––

(A)   architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or

(B)   chartered engineer registered with the Institution of Engineers (India); or

(C)   licensed surveyor of the respective local body of the city or town or village or development or planning authority;

the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure;

  • Provisions relating to exemptions

  1. General Exemption
  • Small Service Provider

Vide Notification No 33/2012-ST, dated 20.06.2012 – Exemption to Small service providers having taxable turnover of less than 10 Lakhs and providing services other than by way of under a brand name.

  • Import of Technology

Vide Notification No. 14/ 2012-ST, dated March 17, 2012 – Exemption in respect of Taxable service involving import of technology, from so much of service tax, as is equivalent to the extent of amount of R&D Cess payable on the said transfer of technology under the provisions of section 3 of the Research and Development Cess Act, 1986. 

  • To Foreign Diplomatic missions and their personnel

Vide Notification No 27/2012-ST, dated 20.06.2012 – Exemption for all the taxable services provided by any person, for the official use of a foreign diplomatic mission or consular post in India, or for personal use or for the use of the family members of diplomatic agents or career consular officers posted therein.

  • Services by TBI or STEP

Vide Notification No 32/2012-ST, dated 20.06.2012 – All taxable services provided by TBI or STEP have been exempted

  • Services provided to SEZ

Vide Notification No 40/2012-ST, dated 20.06.2012, all taxable services received by a Unit located in a Special Economic Zone (SEZ) or Developer of SEZ for the authorized operations, has been exempted from the levy of whole of the service tax.

  1. Specific Exemption

No Specific Exemption had been granted by the government in case of Construction of residential Complex Services.  Prior to 01.4.2015, construction etc activities provided to government for 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.  The exemption has been deleted w.e.f. 01.402015.

However, 102 has been inserted in Finance Act, 1994 to provide retrospective relief in case of following contracts:

Section Particular of Services Period for which exemption granted
102 Taxable services of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of non commercial civil structure or original works, structures meant for education, arts, clinical establishment, residential complex meant for persons specified in 65B(44) or their employees when provided to Government, local authority or a governmental authority in case of contracts entered prior to 01-03-2015 01.04.2015-29.02.2016

  • Provisions relating to Valuation and Abatement

Section 67 read along with Service Tax (Determination of Value) Rules, 2006 provides the manner of determining the value of taxable services on which services tax should be levied.

In respect of Construction of residential complex services, when consideration for such services do not include value of land, then the same is to eb valued as per provisions of Rule 2A of Determination of Value Rules as provided for works contract:

Type of Works Contract Options Manner of computation of service tax
Original Works

(a) “original works” means-

(i)  all new constructions;

(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

In other cases Service tax shall be payable on 40% cent of the total amount including such gross amount.

 

in case of works contract, not covered under sub-clause (A), including works contract entered into for,—

(i)  maintenance or repair or reconditioning or restoration or servicing of any goods; or

(ii)  maintenance or repair or completion and finishing services such as glazing or plastering or floor and wall tiling or installation of electrical fittings of immovable property, service tax shall be payable on seventy per cent of the total amount charged for the works contract.

Service tax shall be payable on

70% of the total amount charged for the works contract

Further, abatement has been provided when value of land is included in consideration for construction services like sale of constructed villas etc.  Relevant clause reads as under:

Vide Notification No. 26/2012 dated June 20, 2012 as amended vide Notification No. 9/2013 dated May 8, 2013 (superseding Notification No. 2/2013), the abatement and conditions thereof are provided as follows:

“12. Construction of a complex, building, civil structure or a part thereof, intended for a 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;
(a) for a residential unit satisfying both the following conditions, namely:–

 

(i) the carpet area of the unit is less than 2000 square feet; and

(ii) the amount charged for the unit is less than rupees one crore;

25 (ii) The value of land is included in the amount charged from the service receiver.”
(b) for other than the (a) above. 30

Notification No. 26/2012, dated June 20, 2012 has granted abatement on the above mentioned services subject to the following conditions:

(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.

However, w.e.f 01-04-2016, single abatement percentage @ 70% has been provided in respect of Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority.

 

Levy of Service Tax on Free of cost material provided by Contractee

It has been always a dispute that while taking benefit of Valuation Rules or abatement, the value of free goods supplied by contractee be added to the consideration receveid by the asseessee to arrive at true value of service portion in the contract.  i.e. to say that the arrangement of provision of free material of goods provides extra benefit to contractor as the intent of law was to provide abatement / value determination from total value of contract.  However, the matter has been decided by Larger Bench in the case of of Bhayana Builders P. Ltd. v CST, Delhi (Tribunal – LB) wherein Hon’ble Tribunal examined the scope of Section 67 as under:

“(iv) The expression “consideration” occurring in the U.P. Imposition of Ceiling on Land Holdings Act, 1961 fell for consideration in Ku. Sonia Bhatia v. State of U.P. and Others – AIR 1981 SC 1274 the Court explained that since the expression “consideration” was not defined in the U.P. Act, its meaning as derived from the definition of the expression in Section 2(d) of the Contract Act, 1872 could be considered. After considering the definition of the expression in the Contract Act and referring to Black’s Law Dictionary; other dictionaries, English judgments and Corpus Juris Secundum, the Supreme Court held that : the in escapable conclusion that follows is that consideration means a reasonable equivalent for other valuable benefit passed on by the promisor to the promisee or by the transfer of to the transferee.

(v) Clearly, Section 67 of the Act deals with valuation of taxable services and intends to define what constitutes the value received by the service provider as “consideration” from the service recipient for the service provided. Implicit in this legislative architecture is the concept that any consideration whether monetary or otherwise should have flown or should flow from the service recipient to the service provider and should accrue to the benefit of the later. “Free supplies”, incorporated into construction (cement or steel for instance), even on an extravagant inference, would not constitute a non-monetary consideration remitted by the service recipient to the service provider for providing a service, particularly since no part of the goods and materials so supplied accrues to or is retained by the service provider. Wherever a monetary consideration is charged for providing the taxable service and no non-monetary consideration forms part of the agreement between the parties, it is clause (i) that applies and the value of the taxable service would in such case be the gross amount charged by the service provider and paid by the service recipient.

(vi) In Intercontinental Consultants and Technocrats Pvt. Ltd. v. Union of India – 2013 (29) S.T.R. 9 (Del.), the Delhi High Court was essentially considering a challenge of the validity of Rule 5 of the Service Tax (Determination of Value) Rules, 2006. This provision was challenged to the extent it includes reimbursement of expenses in the value of taxable services for the purpose of levy of service tax. Apart from the challenge to its constitutionality, the provision was challenged on the ground that it is ultra vires the provisions of Sections 66 and 67 of the Act. The High Court held that Section 66 of the Act levies tax only on the taxable services; that this is an inbuilt mechanism to ensure that only the taxable service shall be evaluated under the provisions of Section 67; that on construing the provisions of Sections 66 and 67(1)(i) together and harmoniously, it is clear that the value of taxable service shall be the gross amount charged by the service provider; and nothing more and nothing less than the consideration paid as a quid pro quo for the service can be brought to charge. The High Court further held that the common thread that runs through Sections 66 and 67 and 94 (the Rule making power), manifests that only the service actually provided by the service provider can be valued and assessed to tax. The High Court concluded that the provisions of Rule 5(i) of the valuation Rules are repugnant to Sections 66 and 67 of the Act since the provision purport to tax not, what is due from the service provider under the charging section, but seeks to extract something more from him by including in the valuation of the taxable service other expenditure and costs which are incurred by the service provider in the course of providing taxable service.

(vii) In the light of the clear Legislative text, the unambiguous provisions of Sections 66 and 67 of the Act and in the light of the judgment in Intercontinental Consultants and Technocrats Pvt. Ltd. (supra), the conclusion is compelling and inviolable that the value “free supplies” by a construction services recipient, for incorporation in the constructions would not constitute a non-monetary consideration to the service provider nor form part of the gross amount charged for the services provided. Whether the legislature may enact that the value of “free supplies” should be included in the value of the service provided for levy of tax; and within its legislative competence, is an aspect that is speculative for the nonce and outside the purview of either the substantive appeals or the issue referred to us. In this view of the matter it is not necessary to consider the contention on behalf of the assessees that an interpretation that Section 67 of the Act enables or mandates inclusion of the value of goods and materials incorporated into construction services (whether provided by the service provider or as a free supplies by the service recipient) would render the legislative provision unconstitutional, since value of the goods incorporated being sale of goods would be liable to sales tax, an area within the legislative competence of State, the value of goods sold would thus be beyond the legislative competence of Parliament for levy of tax on such sale; consequently could not also constitute the value of taxable services. Ld. Counsel placed reliance on the judgment in M/s. Gannon Dunkerley and Co. and Others v. State of Rajasthan and Others – (1993) 1.”

In conclusion, the Hon’ble Court held that “from the several aids to interpretation, referred to (supra) we are compelled to conclude that goods and materials, supplied/provided/used by the service provider for incorporation in the construction, which belong to the provider and for which the service recipient is charged towards the value of such supply/provision/use and the corresponding value whereof was received by the service provider, to accrue to his benefit, whether independently specified as attributable to the specific material/goods incorporated or otherwise, would alone constitute the gross amount charged.”

Thus, it was held that free of cost material provided by Contractee would not for part of Gross valuation for the purpose of applying valuation /abatement.

  • Provisions relating to Cenvat Credit

The Credit is available to the service provider of the duty or tax paid on ‘capital goods’, ‘inputs’ and ‘input services’. Since all the services relating to erection, commissioning and installation are taxable, the provider of service will get the credit of excise duty paid on capital goods, input and service tax paid on input services as defined in Cenvat Credit Rules, 2004.  However, restriction of Cenvat Credit when inputs and input services are incorporated in civil and immovable structures has to be examined.

  • Provisions relating to point of taxation

As per Rule 3 of Point of Taxation Rules, 2011, the point of taxation shall be-

  1. Time when the invoice for the service provided or to be provided is issued. As per Rule 4A of Service Tax Rules, invoice shall be issued within 30 days from the date of completion of service. In case invoice is not issued within 30 days from the completion of service, the point of taxation shall be the date of completion of service.
  2. In case where the person providing the service receives payment before the time specified above, the date of receipt of payment shall be the point of taxation.

If the period of providing the service is more than 3 months, it will be considered as continuous service as defined in rule 2(c) of Point of Taxation Rules, 2011. Accordingly, proviso to rule 3 of Point of Taxation Rules will apply for determining date of the completion of service.

  • Provisions relating to Place of Provision of Service Rules, 2012

The Place of Provision of Service Rules, 2012 contains different rules for different nature of services. Since Construction services are required to be performed in relation to immovable property, Rule 5 of Place of Provision Rules, 2012 is relevant for this category of service is as follows:

Rule 5:   The place of provision of services provided directly in relation to an immovable property, including services provided in this regard by experts and estate agents, provision of hotel accommodation by a hotel, inn, guest house, club or campsite, by whatever, name called, grant of rights to use immovable property, services for carrying out or co-ordination of construction work, including architects or interior decorators, shall be the place where the immovable property is located or intended to be located.

Thus if the property is located within taxable territory, services shall be taxable, else not.

  • Provisions relating to reverse charge

If services of Construction services qualifies as works contract, liability on recipient of services has been provided as under:

 

Description of Service Service Provider Service Recipient % of service tax payable by the person providing service

 

% of service tax payable by the person receiving the service

 

In respect of services provided or agreed to be provided in execution of  works contract

 

Any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons located in the taxable territory To any business entity registered as body corporate located in the taxable territory 50% 50%

 

In other cases, Construction service is not included under the mechanism of Reverse Charge. Hence, the person providing the service shall be the person liable to pay service tax.

  • Taxability as settled by precedents / Circulars / Trade notices

ActivityWhether falls within the scope of present serviceReference
Activities undertaken by builders for construction of flat/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under the works contract and not under the saleM/s Raheja Development Corporation Vs State of Karnataka
Individual residential units constructedNoMacro Marvel Projects Ltd V CST (2008) 17 STT 479
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 and similar services done in relation to a residential complex, whether or not newYesCircular F.No. B1/6/2005-TRU, dated 27-7-2005 (extracts
If no other person is engaged for construction work and the builder/ promoter/ developer undertakes construction work on his own without engaging the services of any other person, then in such cases in the absence of service provider and service recipient relationship, the question of providing taxable service to any person by any other person does not arise.NoLetter F.No. 332/35/2006 - TRU, dated 1-8-2006
Residential complex constructed by an individual, intended for personal use as residence and constructed by directly availing services of a construction service provider, is not liable to service taxNoClarified vide F.No. B1/6/2005-TRU, dated 27-7-2005, that
Any service provided by the seller/builder in connection with the construction of residential complex till the execution of sale deed would be in the nature of ‘self-service’NoCircular No. 108/02/2009-ST, Dated 29-1-2009
Supply of RMCNoCircular No 601/38/2001-CX, dated 20.11.2001
Tripartite agreement between owner of land, developer and purchaserYesRohan Builders Ltd V CST, Bangalore - 2009 (13) STR 56
Finishing services of old residential complexYesF.No. B/16/2005 TRU, dated 27.07.2005
Contractor constructing complex for a builder / promoter /developerYesCircular No. 96/7/2007-Service Tax dated 23-8-2007
Construction of residential complex service under specified Yojna or schemeNoLetter DOF NO. 334/03/2010-Tru dated 1-7-2010

  • Related Circulars and Notification

  • 2005-TRU, dated 27-7-2005
  • Circular F. No. V/DGST/22/Audit/Misc./1/2004, dated 16-2-2006
  • Ministry’s Letter F.No. 332/35/2006 – TRU, dated 1-8-2006
  • Circular No. 108/02/2009-ST, Dated 29-1-2009
  • Circular no. 96/7/2007-ST, dated 23-8-2007,as amended by Circular no. 98/1/2008-ST, dated 4-1-2008
  • Relevant extract of ministry’s Circular letter D.O.F. No. 334/1/2010-TRU, Dated 26-2-2010
  • F. (D.R.) ORDER NO. 1/2010, dated 22-6-2010
  • Relevant Extracts of Letter DoF No. 334/03/2010-TRU, dated 1-7-2010
  • Trade Notice No. 1/2011, dated 15-2-2011, Issued by Pune Commissionerate
  • Circular No. 108/02/2009 – Service Tax dated 29-1-2009
  • Circular No. 601/38/201-CX dated 20-11-2001
  • Circular F.No. B1/6/2005-TRU, dated 27-7-2005 (extracts)

13.1 Any service provided or to be provided to any person, by any other person, in relation to construction of complex is taxable under sub-clause (zzzh) of section 65(105) of the Finance Act,1994.“Construction of complex” has been defined under clause (30a) of section 65 of the Finance Act, 1994. “Residential complex” has been defined under clause (91a) of section 65 of the Finance Act, 1994.

13.2 Construction of new building or civil structures used for commercial or industrial purposes and repair, alteration or restoration activities of such buildings or civil structures is liable to service tax since 2004. In this year’s budget the construction of new residential complex or a part thereof is also covered under service tax. The term of “construction of complex” is defined under section 65(30a) of the Finance Act, 1994. It covers,—

  • construction of a new residential complex
  • completion and finishing services in relation to a residential complex, whether or not new
  • repair, alteration, etc. in relation to residential complex, whether or not new.

13.3 This service would generally cover construction services in respect of residential complexes developed by builders, promoters or developers. Such residential complexes are normally constructed after obtaining approval of the statutory authority for their layout. For the purpose of this levy, residential complex means,—

(i)    a building or buildings located within a premises;

(ii)   total number of residential units within the said premises are more than twelve;

(iii) having common area;

(iv) having common facilities or services; and

(v)   layout of the premises has been approved by the appropriate authority.

Common area would include roads, staircases and other similar areas where residents of the residential complex have easement rights. The list of facilities prescribed is merely illustrative and not exhaustive. Some residential complexes may also contain other facilities such as market or shopping complex, schools, security, banks, gymnasium, health club, sports facilities, power back up and the like.

13.4 However, residential complex having only 12 or less residential units would not be taxable. Similarly, residential complex constructed by an individual, which is intended for personal use as residence and is constructed by directly availing services of a construction service provider, is also not covered under the scope of the service tax and not taxable.

13.5 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 and similar services done in relation to a residential complex, whether or not new, would be included as part of the construction activity of residential complexes for the purposes of levy of service tax.

13.6 The taxable service is the service provided in relation to construction of a residential complex. Service tax would be payable only on the gross amount charged by the service provider for the construction service provided and it would not include the cost of land and stamp duty paid for registration of land. However, Notification No. 18/2005-ST, dated 7-6-2005 provides option to avail abatement and pay service tax only on 33% of the gross amount charged, subject to  fulfillment of conditions specified in the Notification.

13.7 Repair, alteration, renovation or restoration of residential complexes would also be liable to service tax. Such services provided in relation to residential complexes which are in existence before the levy has come into force and are not new would also be liable to be taxed.

  • Circular F. No.V/DGST/22/Audit/Misc./1/2004, dated 16-2-2006

Service Tax was levied on “Commercial or Industrial Construction Services” and “Construction of Complex Services” w.e.f. 10-9-2004 and16-6-2005 respectively. Further the scope of “Commercial or Industrial Construction Service” was expanded w.e.f. 16-6-2005 so as to include completion and finishing services.

  1. The Board vide Circular No. 80/10/2004-ST, dated 17-9-2004has clarified that “Estate Builders” (i.e. who gets such construction done) are not covered under the ambit of these services. It is only the hired contractors engaged by these builders who are to be taxed. In other words Service Tax is leviable only on those contractors who are engaged in construction of new residential complexes, or completion and finishing services in relation to such complexes or repair, alteration/renovation or restoration of similar services in relation to residential complexes.
  1. The specific exclusion of Estate Builders in the case of “Commercial or Industrial Construction Service”, through a Circular dated 17-9-2004, appears to have been considered on account of sale of commercial complex by estate builders as a final outcome; although the definition under section 65(3aa) read with section 65(zzzh) of the Finance Act, 1994 does not provide for such exclusion. The definitions as provided under the Act, as referred supra, are wide enough to include all such activities of a builder.
  1. In a recent decision of Supreme Court in case of M/s. Raheja Development Corporation v. State of Karnataka [2005 NTC (Vol. 27)-243],the Hon’ble Court has clarified “that the activities undertaken by builders for construction of flat/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under the works contract and not under sale”.
  1. Considering the above decision, if the construction is undertaken by the builder for prospective customer under an agreement for sale and after construction, the rights in property have been transferred to the said prospective purchasers, the activity will amount to “work contract” or taxable service is covered under the Service Tax and not sale.
  1. Divergent practices are being reported by field formations and in most of the cases, builders are avoiding registration in view of CBEC Circular No. 80/10/2004-ST, dated 17-9-2004.Further, there is wide gap between the amount charged by builders from their customers for such work contract (sale) and the amount on which contractors are discharging their service tax liability. The various miscellaneous charges like cost of the land, development charges, maintenance charges, etc. are not included in the taxable value of services provided by the assessee.
  1. It is viewed that Circular No. 80/10-2004-ST, dated 17-9-2004, has no applicability with reference to “Construction of Complex Services” which was brought under service tax net only w.e.f. 16-6-2005, as an independent service. The definition of taxable service under section62(zzh) includes “Any service provided or to be provided to any person by any person in relation to construction of complex, and is wide enough to include estate builders.” In such cases, the tax liability is posed on both builders and hired contractors being independent service providers.
  1. It is noticed that in the construction business, different practices and financial arrangements concerning (a) promoters, developers and builders, (b) land owners (c) contractors, and (d)buyers exist. These practices influence the ‘taxable value’ under the construction of complex services. In all such situations, the taxable value under section 67 shall be the gross amount charged by the service provider (builder in this case) for such services provided or to be provided by him. This read with Notification No. 18/2005-ST, dated 7-6-2005entitles a builder/contractor an abatement of 67% on the gross amount charged, which shall include the value of goods and material supplied. Further, there is no deductions/exemptions provided for computation of such taxable value in the composite contract.
  1. The aforesaid view flows from the definition of the taxable service of construction of complex besides the judicial pronouncement listed above.
  1. The all India tax collection under the service head of ‘Construction of complex service’, is reportedly too low. Please initiate proactive measures to realize service tax on this service especially when only 43 days are now left in the current fiscal.
  1. Action taken on the above may be communicated to us with a copy to the Member (Service Tax) on weekly basis.
  • Ministry’s Letter F.No. 332/35/2006 – TRU, dated 1-8-2006

Please refer to your letter dated 21-6-2006 on the above subject.

  1. I have been directed to state the following relating to levy of service tax on “construction of complex” service falling under section 65(105)(zzzh) and “commercial or industrial construction” service falling under section 65(105)(zzq) of the Finance Act, 1994 :
Sr .

No.

Issue Legal Position

 

1. Is service tax applicable on Builder, Promoter or Developer who builds a residential complex with the services of his own staff and employing direct labour or petty labour contractors whose total bill does not increase 4.0 lacs in one F/Y?

 

 

In a case where the builder, promoter or developer builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of such residential complex, the contractor shall be liable to pay service tax on the gross amount charged for the construction services provided, to the builder/promoter/developer under ‘construction of complex’ service falling under section 65(105)(zzzh) of the Finance Act, 1994.

 

If no other person is engaged for construction work and the builder / promoter / developer undertakes construction work on his own without engaging the services of any other person, then in such cases in the absence of service provider and service recipient relationship, the question of providing taxable service to any person by any other person does not arise.

 

Service tax exemption for small service providers upto an aggregate value of taxable services of Rs. 4 lakhs provided in any financial year vide Notification No. 6/2005-Service Tax, dated 1-3-2005 is applicable for ‘construction of complex’ service also.

2. Again will service tax be applicable on the same, in case he constructs commercial complex for himself for putting it on rent or sale? Commercial complex does not fall within the scope of “residential complex intended for personal use”. Hence, service provided for

construction of commercial complex

is  leviable to service tax.

 

3. Will the construction of an individual house or a bungalow meant for residence of an individual fall in purview of service tax, is so, whose responsibility is there for payment? Clarified vide F.No. B1/6/2005-TRU, dated 27-7-2005, that residential complex constructed by an individual, intended for personal use as residence and constructed by directly availing services of a construction service provider, is not liable to service tax.

 

4. Is payment of service tax

a responsibility of service provider or of whom the service is provided?

 

As per section 68 of the said Act, in case of ‘construction of complex’ service falling under section 65(105)(zzzh) and ‘commercial or industrial construction’ service falling under section 65(105)(zzq) of the said Act, every person providing taxable service to any person shall be liable to pay service tax.

As per section 66A of the said Act, if the service is provided from outside India to a person in India, then in such cases service tax is required to be paid by the recipient of such service.

5. If it is applicable on the Real Estate Developers, a detailed guideline of tax calculation and date from which it will be applicable. If it is from retrospective effect, and the service provider has left the work and no payment is due for him, who will pay?

 

Notification No. 1/2006-Service Tax, dated 1-3-2006 provides for levy of service tax on 33% of the gross amount charged for the services provided or to be provided, subject to fulfillment of the conditions specified in the said Notification.

Service tax is leviable on,-(i) ‘commercial or industrial construction’ service falling under

section 65(105)(zzq) with effect from 10-9-2004, and (ii) ‘construction of complex’ service falling under section 65(105)(zzh) with effect from 16-6-2005.

 

  1. For any further clarifications, you may contact the jurisdictional officers with relevant facts, for appropriate guidance.
  • Circular No. 108/02/2009-ST, Dated 29-1-2009

Construction of residential complex was brought under service tax with effect from 1-6-2005.Doubts have arisen regarding the applicability of service tax in a case where developer/builder/promoter enters into an agreement, with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment. The ‘Construction of Complex’ service has been defined under section 65(105)(zzzh) of the Finance Act as ‘any service provided or to be provided to any person, by any other person, in relation to construction of a complex’. The ‘Construction of Complex’ includes construction of a ‘new residential complex’. For this purpose, ‘residential complex’ means any complex of a building or buildings, having more than twelve residential units. A complex constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex intended for personal use as residence by such person has been excluded from the ambit of service tax.

  1. A view has been expressed that once an agreement of sale is entered into with the buyer for a unit in a residential complex, he becomes the owner of the residential unit and subsequent activity of a builder for construction of residential unit is a service of ‘construction of residential complex’ to the customer and hence service tax would be applicable to it. A contrary view has been expressed arguing that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit, the transaction of sale is completed only after complete construction of the residential unit. Till the completion of the construction activity, the property belongs to the builder or promoter and any service provided by him towards construction is in the nature of self-service. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of ‘residential complex’ as defined for the purposes of levy of service tax and, hence, construction of it would not attract service tax.
  1. The matter has been examined by the Board. Generally, the initial agreement between the promoters/builders/developers and the ultimate owner is in the nature of ‘agreement to sell’. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter/builder/developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.
  1. All pending cases may be disposed of accordingly. Any decision by the Advance Ruling Authority in a specific case, which is contrary to the foregoing views, would have limited application to that case only. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.
  • Circular no. 96/7/2007-ST, dated 23-8-2007, as amended by Circular no. 98/1/2008-ST, dated 4-1-2008

 

Reference Code Issue Clarification

 

(1) (2)                 (3)

 

079.01/23.08.07 Whether service tax is liable under construction of complex service [section 65(105)(zzzh)] on builder, promoter, developer or any such person,—

 

(a) who gets the complex built by engaging the services of a separate contractor, and

 

(b) who builds the residential complex on his own by employing direct labour?

 

(a) In a case where the builder, promoter, developer or any such person builds a residential complex, having more than 12 residential units, by engaging a contractor for construction of the said residential complex, the contractor in his capacity as a taxable service provider(to the builder/promoter /developer/any such person) shall be liable to pay service tax on the gross amount charged for the construction services under ‘construction of complex’ service [section

65(105)(zzzh)].

 

(b) If no other person is engaged for construction work and the builder/promoter/ developer/any such person undertakes construction work on his own without engaging the services of any other person, then in such cases,—

(i) service provider and service recipient relationship does not exist,

(ii) services provided are in the nature of self-supply of services.

Hence, in the absence of service provider and service recipient relationship and the services provided are in the nature of self-supply of services, the question of providing taxable service to any person by any other person does not arise.

  • Relevant extract of ministry’s Circular letter D.O.F. No. 334/1/2010-TRU (Annexure B), Dated26-2-2010

 

  1. 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 apart 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.

 

  • 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 (32of 1994) (hereinafter referred to as the Finance Act), the Central Government, hereby makes the following Order, namely :—

  1. (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.

  1. 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

 

  1. 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, dated22nd 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 22ndJune, 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.

6.3 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.

  • Trade Notice No. 1/2011, dated 15-2-2011, Issued by Pune Commissionerate

“Construction of Complex Services” is defined as:—

Section 65(105)(zzzh) of the Act defines the taxable service as ‘any service provided or to be provided to any person, by any other person’ in relation to construction of complex.

  1. With effect from 1-7-2010 (the Finance Act, 2010), an Explanation has been inserted below sub-clause (zzzh) of section 65(105) to clarify that unless the entire consideration for the property is paid after the completion of construction (i.e. after issuance of completion certificate by the competent authority), 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.
  1. The Explanation reads as under—

“Explanation—For the purpose of this clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorized by the 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 by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer”.

  1. Representations have been received from trade requesting clarification particularly for advance payments for services of Construction of Residential Complex rendered after 1-7-2010 and also for service tax collected by builders even where no liability exists. It is hereby clarified that—

(a)   Where services of construction of Residential Complex were rendered prior to 1-7-2010no Service Tax is leviable in terms of Para 3 of Boards Circular number 108/02/2009-S.T.,dated 29-1-2009. The Service of Construction of Residential Complex would attract service tax from 1-7-2010. Despite no service tax liability, if any amount has been collected by the builder as “Service Tax” for Services rendered prior to 1-7-2010, the same is required to be deposited by the builder to the Service tax department. Builder cannot retain the amount collected as Service Tax.

(b)   For services rendered after 1-7-2010 for which payment has been or is made after1-7-2010, service tax is leviable and builder is liable to deposit the service tax to the service tax department. The only exception to this is provided within the parenthesis ( ) in the “Explanation” in Para 3.

(c)     For services rendered after 1-7-2010 for which payment was made prior to 1-7-2010, service tax has been exempted by the Govt. based on documentary evidence vide Notification No. 36/2010-S.T., dated 28-6-2010 as amended. Therefore, this benefit can be availed by builders on the basis of documentary evidence.

 

 

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