A. MEGA EXEMPTION FOR CONSTRUCTION OF SINGLE RESIDENTIAL UNIT
Introduction
Food, clothing and shelter are the basic necessities of human life. As a social incentive measure, the Government has granted exemption from service tax in respect of services by way construction of a single residential unit if it is designed for residential purposes of one family. Entry No 14(b) of Mega exemption Notification No 25/2012-ST dated 20.06.2012 grants exemption from service tax for services by way of construction of single residential unit.
Entry No 14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,-
(b) a single residential unit otherwise than as a part of a residential complex.
In Entry No 14(b), the important point to be noted is that the exemption is granted only for construction, erection, commissioning or installation of original works. There is no exemption for completion, fitting out, repair, maintenance, renovation, or alteration of a single residential unit.
Contract given by land owner
Owner of land generally gives contract for construction of residential unit to one contractor who carries out all the works related to construction and hand over the completed house which is usable by the owner as agreed in the contract.
For example - The contractor carries out all the work like Earth work excavation (i.e. ground levelling), foundation, basement, superstructure, roofing, partition wall, basic flooring, electrical wiring, door and window fitting, plastering, floor and wall tiling, painting, fencing, construction of swimming pools, interior decorations and other fittings and similar services.
Generally, the owner of land does not give contract for different stage of construction to different contractors. i.e. ground levelling to one contractor, construction of foundation and basement to another contractor, roofing to another, partition wall to another etc. He will give the whole contract of construction to one contractor and relax.
Real intention of giving exemption
The real intention behind granting this exemption is that one house with basic facilities is the necessity of life and common people should not be burdened with extra cost by way of service tax. So this exemption is not for any luxuries forming part of a house. Only those construction activities which are needed to construct a house with basic facilities are exempted from service tax. Financially well people instead of putting ordinary paint may paint their house with costly paints, they can fit more costly showy designed electrical fittings, and they can afford more costly interior designing work. These luxuries should not be eligible for exemption.
So there is a need to identify a border on those activities which are necessary to build a house with basic facilities. Otherwise, any luxurious work can be included in the contract. That border or break is the completion certificate granted by competent authorities. So all those activities which are mandatory to get a completion certificate should be considered as basic construction activities and are eligible for exemption under entry 14(b) of mega exemption. All those activities which are not essential to get a completion certificate are completion and finishing services and luxurious services. So no exemption should be granted for those activities.
It is to be noted that the exemptions under entry no 14 is not available for completion, fitting out, repair, maintenance, renovation or alteration services. But if we see entry no 12, 12A and 13 of mega exemption, the Government has granted exemption for completion, fitting out, repair, maintenance, and renovation or alteration services.
Entry No 12: 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-
Entry No 12A: 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-
Entry No 13: Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-
So all those services from earth excavation to door and window fittings in the example given above are eligible for exemption under Entry No 14 (b) of mega exemption because they are essential to get completion certificate. All those services from plastering to other fittings and similar services are not eligible for exemption under Entry No 14(b) because they are not mandatory to get a completion certificate and can be carried out at any time even after getting completion certificate.
B. MEGA-EXEMPTION FOR SUB-CONTRACT WORK RELATED TO CONSTRUCTION OF SINGLE RESIDENTIAL UNIT
Introduction
In construction industry, the original contractor generally does not carry out all the work on his own. He will allot some portion of work to another contractor who is called as sub-contractor who carries
out work on behalf of main contractor.
Sub-contractor always has this question in their mind. “Why should I (subcontractor) pay service tax since main contractor is already paying service tax? I am not liable to service tax” The answer is NO. Taxable event is different from person to person and subcontractor is liable for Service tax. Now another question comes to the mind of subcontractor. Main contractor is exempted from service tax. He has sub-contracted the work to me. Since main contractor is exempted, should subcontractor also be exempted from service tax? The answer is still NO.
Clause 1 of Section 66F of the Act, says that, reference to a service shall not include reference to a service which is used for providing main service.
Section 66F
(1) Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service. Take our example. Here the main contractor is providing services by way of construction of single residential unit. Main contractor is exempted under entry no 14(b). Assume main contractor obtained consulting engineering service related to construction of single residential unit. Can consulting engineer say that I have given this service to a main contractor who is providing exempt service, so I am not liable to service tax? Can the main contractor say to consulting engineer that don’t add service tax in your bill, because the advice provided by you is used by me for providing services by way of construction of single residential unit which is exempted from service tax? The answer is NO. Because of Section 66F.
Here, reference to a service (here service by way of construction of single residential unit) shall not include reference to a service (here consulting engineering service) which is used for providing main service (here service by way of construction of single residential unit).
It has to be appreciated that the wording used in the exemption are service by way of construction. The service provided by consulting engineer is service in relation to construction of single residential unit. It would not automatically lead to the classification of services being provided by the consulting engineer to main contractor as an exempt service.
Exemption to sub-contractor work contract service under mega exemption
Entry no 29(h) of Mega exemption notification has specially granted exemption to sub-contractors providing work contract service to another contractor providing work contract services which are exempt. So a sub-contractor can also enjoy the exemption enjoyed by the main contractor [here 14(b)] through Entry 29(h).
Entry No 29: Services by the following persons in respective capacities—
(h) subcontractor providing services by way of works contract to another contractor providing works contract services which are exempt
The points which are important in this entry are
1. Service is by the sub-contractor
2. Service provided by sub-contractor is work contract service (that is involvement of both material and labour. Pure labour contract is not work contract service)
In our example (see the example quoted above), the main contractor is a work contractor, who is providing service by way of construction of single residential unit. The contract is a single contract, starting from earth levelling to final fittings and other service. Assume that he is allotting some portion of his work to others.
Analysis of this exemption in the following different context.
Context 1: Contract between main contractor and earth levelling contractor/electrician (assume pure labour)
Context 2: Contract between main contractor and sub contractor (Subcontractor constructing 1 out of 3 houses) (i.e. Subcontracted whole of one work)
Context 3: Contract between main contractor and sub-contractor (Subcontractor doing wall partition and base flooring) (Sub contracted part of one work)
Context 4: Contract between main contractor and painter (Whether pure labor contract or work contractor)
Context 5: Direct contract between house owner and electrician
Context 6: Contract between main contractor and electrician (Electrician here is a work contractor)
Context 1 - Contract between main contractor and earth levelling contractor/ electrician (assume pure labour) (Electric contract can be sometimes works contract. In this context, he is providing only labour service)
Main contractor has sub-contracted, earth leveling work/electric work to another contractor which is purely a labor contract. There is no material element involved. The contractor who is doing earth leveling/electric work is not eligible to enjoy exemption of entry 14(b) through entry 29(h) because; he is not work contractor, but a pure labour contractor. Entry 29(h) is available only for work contractor.
Context 2 - Contract between main contractor and sub-contractor (Subcontractor constructing 1 out of 3 houses) (i.e. Sub-contracted whole of one work)
Suppose the main contractor has obtained contract from three different parties for construction of single residential unit at three different places. And the main contractor wholly sub-contracted construction of one house to another contractor. The sub-contractor is eligible to enjoy mega exemption entry 14(b) through entry 29 (h).
Here the subcontractor is also providing service by way of construction of single residential unit. The sub-contractor is a work contract. Not just pure labor contractor.
Sub- contractor has to do all the works from ground levelling to finishing. He entirely swallows the work of main contractor. The service of sub-contractor is same as that of main-contractor. That is service by way of construction of single residential unit. Only difference is, main contractor is doing for three houses. Sub-contractor is doing it for one house.
Context 3 - Contract between main contractor and sub-contractor (Subcontractor doing wall partition and base flooring) (Subcontracted part of one work)
Suppose the main contractor has obtained contract for construction of three houses. He did ground leveling, foundation, basement, superstructure, roofing of first house. That is he did the skeleton work of house. Now he sub-contracted the work of wall partition and base flooring to another contractor.
Assume that here the sub-contractor is a work contractor.
Here the work of sub-contractor is not service by way of construction of residential unit, but it is service in relation to construction of residential unit. So by simply applying section 66F, the subcontractor is not eligible to enjoy mega exemption entry 14(b).
But the sub contractor is doing works contract and is providing service to main contractor who is exempt under entry no 14(b) of mega exemption. So he is entitled to enjoy the benefit of entry no 14(b) through entry no 29 (h).
Context 4 - Contract between main contractor and painter (Whether pure labour contract or Work contractor)
Painting work is not an essential criterion for getting a completion certificate from competent authority. Also, painting cannot be considered as essential thing for construction of house. Even without painting the walls, one can occupy house, though house does not look neat. The essential items for a house for getting completion certificate is that basic structure should be as per plan, door should be fitted for safety, electrical wiring should be complete, plumbing and proper drainage work should be complete among other things. Only after getting completion certificate, one can apply for electricity and water connection. Painting is not essential item. Whether the house owner paints his house with just primer or with costly wall putty, or with weather proof paint or with fire retardant paint, is not at all a criterion for getting completion certificate. Works that can be carried out even after getting completion certificate like completion and finishing services are not eligible for mega exemption under entry no 14(b).
Under Service Tax (Determination of Value) Rules 2006 as amended with effect from 1st October 2014 , Rule 2A(ii) category (B), standard deduction scheme, it is provided that service tax shall be payable on 70% of the total amount charged for the works contract, in the case of completion and finishing services. It is separately provided.
As per Notification No. 11/2014-ST dated 11.07.2014, w.e.f. 01.10.2010, In the Service Tax (Determination of Value) Rules, 2006, in rule 2A, in clause (ii), for sub-clauses (B) and (C), the following sub-clause shall be substituted, namely:-
“(B) 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 percent of the total amount charged for the works contract”.
Note - Painting is not generally possible without plastering of wall. Plastering itself is categorized in completion and finishing service. Thus painting is a completion and finishing service.
Service Tax (Determination of valuation) Rules, 2006 is not relevant to our topic. But what is intended to convey is that department here has listed what is included in completion and finishing service. Painting forms part of completion and finishing service. Even main contractor cannot enjoy exemption under entry no 14(b) in respect of painting work. So a sub-contractor (painter), whether he is a pure labour contractor or work contractor cannot enjoy exemption. He is not eligible to enjoy entry no 29(h) of mega exemption. The question of entry no. 29(h) even does not arise here.
Context 5 - Direct contract between house owner and electrician
Assume that the house owner, while giving contract for construction of his house to main contractor did not give contract for electric work. The house owner entered into a separate agreement with an electric contractor for wiring his house and fitting electrical items.
Here the electrician is not providing service by way of construction of the residential unit. Hence he is not eligible to enjoy mega exemption entry no 14(b).
Context 6 - Contract between main contractor and electrician (electrician here is a work contractor)
Here the main contractor has allotted the work of electrical wiring and fitting to another contractor. The question is whether the work done by electrician is eligible to take mega exemption. Here the work of electrician is not services by way of construction of residential unit, but it is service in relation to construction of residential unit. So by simply applying section 66F, the sub-contractor is not eligible to enjoy mega exemption entry 14(b).
Now whether the main contractor can tell electrician that, you are my subcontractor work contractor and you are eligible for exemption under entry no 29(h), because I am providing exempted service and please don’t charge service tax when you are rising bills on me.
Entry No 29(h) is speaking about sub-contractor and not outsourcer. Whether the work allotted to an electrician is to be considered as sub-contracting or outsourcing.
On analyzing the difference between sub-contract and outsourcing, it can be seen that contractors generally sub-contract his core activities and outsource his non-core activities. Generally, those works a person can do on his own, but cannot be done under a particular circumstance are subcontracted.
The work done by sub-contractor is known to and usually done by the main-contractor. It is the core activity of main contractor. Those activities a person cannot do on his own and don’t want to do on his own and which is not the core activity is outsourced to others.
Here the main contractor’s core activity is civil work. Generally, they are not specialized in doing electrical work. So he outsources the electrical work to specialized electric contractors. It cannot be called as sub-contracting. In the context 2 and 3 mentioned above, the main contractor is subcontracting his core activity. It cannot be called as outsourcing.
Since entry No 29(h) is speaking about only sub-contract and not outsource, the work done by the electric contractor to the main contractor being an outsourcing is not eligible to enjoy the exemption. Main contractor cannot insist electric work contractor not to charge service tax. The work done by sub-contractor in context 2 and 3 is sub contract and not outsourcing. Hence the sub-contractor is eligible for exemption.
Now a day both the terms “outsource” and “subcontract”, are used interchangeably. If one goes through the above table, the line of difference between these terms is also very thin. It is not sure, whether the exemption in Entry No 29 (h), was granted only to sub-contractors and not to outsourcers keep in view the hair line difference between sub-contractor and outsourcer.
Also it is not sure, whether the exemption in Entry No 29 (h) is allowable to both subcontractor and outsourcer, without giving any importance to their difference.
If Entry no 29(h), is allowable to both sub-contractors and outsourcers, in the context 6 explained above, the electrician is entitled to enjoy exemption mentioned in Entry 14(b) through entry 29(h) because the electrician here is undertaking work contract.
If the electrician as a subcontractor work contractor is entitled to enjoy exemption, why the same work is denied exemption solely because he is carrying out as a pure labor contract?
The author can also be reached at siva004@rediffmail.com
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