Introduction
Construction industry is one of the major sources of revenue to the government of India. It is very imperative for each and every entrepreneur to plan his service tax well in advance. Before starting any project professional consultation on applicability of various taxes needs to be understood. In an effort to do that today I am writing this article on service tax applicability on construction projects.
Construction activities are broadly taxed in the following manner under the service tax law
1. Construction of residential complex
2. Construction services (industrial & commercial)
3. Works Contract services
There are major amendments to service tax law applicable from 01.07.2012 which saw the arrival of negative, mega exemption notification and so on. Certain aspects before 01.07.2012 has not been discussed herewith.
This article is only for education purpose. Not to be construed as an opinion. Seek professional help before taking any decisions based on this article.
There were number of issues on considering construction portion in a works contract or construction activity as a service. To remove ambiguity and to establish the intent of the government, an amendment has been made to make construction activity a declared service. Hence no questions can be asked upon whether it is a service or not.
Exemptions for certain activities
Only construction service is taxable and not sale of building. According to Section 66E(b) if all money is received by the service provider on obtaining completion certificate from the competent authority.
Exemption has been provided to following services:
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
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(a) |
a civil structure or any other original works meant predominantly for use other than for commerce, industry or any other business or profession; |
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(b) |
a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); |
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(c) |
a structure meant predominately for use as an establishment for following purposes: |
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♦ |
educational, |
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♦ |
clinical, |
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♦ |
an art or cultural establishment. |
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(d) |
canal, dam or other irrigation works |
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(e) |
pipeline, conduit or plant for |
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♦ |
water supply |
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♦ |
water treatment, or |
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♦ |
sewerage treatment or disposal; or |
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(f) |
A residential complex predominantly meant for self-use or the use of employees their employees or other persons specified in Explanation 1to clause (44) of section 65B of the said Finance Act. |
Construction of specified structures are exempt as well
Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:
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(a) |
road, bridge, tunnel, or terminal for road transportation or for use by general public; |
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(b) |
a civil structure or any other original work pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana; |
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(c) |
a building owned by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961) and meant predominately for religious use by general public. |
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(d) |
a pollution control or effluent treatment plant, located as a part of a factory; or |
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(e) |
a structure meant for funeral, burial or cremation of deceased. |
Construction of following original works are also exempt
Services by way of construction, erection, commissioning, or installation of original works pertaining to :
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(a) |
an airport, port or railways, including monorail or metro; |
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(b) |
a single residential unit otherwise than as a part of residential complex; |
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(c) |
low cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the 'Scheme of Affordable Housing in Partnership' framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India. |
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(d) |
post-harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or |
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(e) |
mechanized grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages. |
CONSTRUCTION OF RESIDENTIAL COMPLEX SERVICE
There is lot of debate on choosing the right method of service tax for builders of residential complex. One chooses to go by the works contract method by claiming deduction of land and material, and the other chooses this service. In our opinion construction of residential complex is more apt for the following reasons.
a. Construction of residential complex is also a works contract but there is movement of title by way of registration, which is absent in case of a normal works contract.
b. Since there is a specific category available one has to choose it over a general category.
General model of construction industry is as follows
1. A builder having money and expertise approaches a landowner.
2. The landowner agrees to give his land on joint development.
3. The builder constructs the building and transfers a part of it in return for the land transferred by the landowner.
Service tax applicability on transactions
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No. |
Particulars |
Applicability |
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1. |
Transfer of land by landowner to the builder |
Not Taxable |
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2. |
Sale of flats either through or without sale agreement and receipt of advance by the builder before obtaining completion certificate. |
Taxable |
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3. |
Sale of flats either through or without sale agreement and receipt of advance by the landowner before obtaining completion certificate. |
Taxable |
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4. |
Sale of flats by builder or landowner after obtaining completion certificate provided whole consideration is received after obtaining such certificate. |
Not Taxable |
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5. |
Transfer of flats by builder to landowner |
Taxable |
Suggested scheme of taxation
1. As soon as development agreement is registered and plan sanction is obtained, raise a bill on the landowner for the portion of building to be transferred.
2. The value for that purpose can be considered at the guidance value prevailing on the date of joint development in such area.
3. The same has to be paid to the government by the builder.
4. The Landowner has to collect service tax on any sale of his share of building upto the date of obtaining Completion certificate.
5. The Landowner can claim CENVAT credit of the tax paid to the builder based on the invoice raised by them.
Abatement – Notification No.26/2012-ST – Sl No.12.
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No. |
Particulars |
Abatement |
Taxable |
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1. |
For a residential unit satisfying both the following conditions:
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75% |
25% |
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2. |
For other than above |
70% |
30% |
Conditions for claiming abatement
a. No CENVAT credit of inputs
b. Value of land is included in the consideration
However there is no restriction on claiming CENVAT credit on Capital goods used in construction of the project and the input services used in the project.
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