SERVICE TAX ON CONSTRUCTION ACTIVITIES – SOME THOUGHTS TO PORE OVER
There are circumstances where the real intentions of the Government cannot be calibrated. It seems that with a mission to create sources of revenue, the decisions of the Government contradict it's stand on transactions of similar nature.
Let us look at these two developments in the taxation front.
Sec.194C of IT act has been suitably amended to include only ‘Contract for Work’. The words ‘ but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer’ form an ample narrative. This follows that when a company issues a ‘Work order’, Sec194C is automatically applicable whether or not the work is carried out as per specifications of the person giving the order. The purported stand is Contract for Sale is different from a Contract for Work or Service. The emphasis or focus is rightly placed on ‘Transfer of Ownership’. There is no contradiction with the Sale of Goods act, 1930 which says that transfer happens when parties intend to do so and rightly the parties in this case do not intend to sell if it is a contract for Work.
Now let us look at the Service tax pronouncement of Budget 2010. With effect from 1.7.2010 Service Tax is levied upon Sale of Commercial or Industrial constructions or residential complex, if any money is received before the grant of completion certificate. Here it is deemed that there is no contract for sale (although if there exists one) but a Contract for Service. Any receipt of consideration before the completion of transfer of property’ would tantamount to ‘Service’, if certificate of completion is received from the competent authority. As an ice breaker, even ‘Chartered Engineers’ have been included in the list of competent authorities to reduce time consumption. If it is not a deemed Contract for service, then we can also argue that, service tax is still leviable on Self service albeit the consideration would have been received in advance! (Of course, this has already been outrageously debated by many authors in the history of this levy)
A parallel analysis of the Transfer of Immovable Property act 1882 reveals that, the transfer of ownership or Sale happens only on registration of document irrespective of whether consideration is fully paid or not. Hence, the severity increases that, though ‘Transfer of ownership’ has occurred as per the parent act, there is no sale element whatsoever. A completion certificate is primarily an authentication for ‘Building as per Approved plan’ which permits the ‘Owner’ (not necessarily the ultimate buyer)to avail the utility services such as Electricity and Gas. At the outset, it is difficult to deduce the reason for introducing this certificate requirement. It cannot be definitely to evidence transfer of ownership. Works contract cases are anyway not covered by the above amendment. What is intended to convey is, the same principle enshrined in the new Sec.194C, which should hold well in taxing transfer of Immovable Properties, has been ignored completely. It seems that once if tax revenue is budgeted, the Government can pierce the conventions or principles to achieve the target.
I would like to present a supplementary observation in this case. We know that there is a composition scheme for Builders to pay Service tax on 25% on Gross receipts or 33% on Gross receipt excluding the value of Land (Abatement Ntn. 1/2006). What follows is, if the Builder has to pay Service tax based on the above rule for want of completion certificate, then better he refrain from collecting more than 25% or 33% of the Gross Bill amount before certified completion. This is because if he collects more than this limit he will end up paying more Service tax than warranted.
To explain the above statement giving a numerical example, for e.g. the Estimated Gross bill value upon completion is Rs.1000/-
25% of the above value : Rs. 250/-
Service tax @10.3% on the above : Rs. 25.75/-
If suppose he had received 30% Bill value already before the grant of completion certificate, he would have actually paid a service tax of Rs. 30.90/- (1000*30%*10.3%). Thus, from Builder’s perspective there might be a cost escalation of Rs.5.15/- since he cannot avail Cenvat credit against this Service tax paid under composition scheme. Though for the Buyer this amount is available as Cenvat Credit.
An appropriate remedy could be only to explicitly postpone the collection of Service tax (similar to Excise Duty) on payment of the Final Bill which could wipe out the allegations surrounding ‘Service tax on self service’ or treatment of a Contract of Sale as a Contract for service.
Hope the Government decides things carefully in future.
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