Service tax on construction

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

02 February 2016 I have little doubt regarding the service tax applicability on construction business.

1) Is there an option with builder to go with Notification 26/2012 @ 75% or 70% abatement on gross value including the value of the land. OR

2) With notification 24/2012 wherein as per Rule 2A(i) or 2A(ii)

As there are two business models in this industry whereby

1) Builder will sale undivided share in land to buyer and enter into construction agreement on the same.
2) Builder will enter into agreement for sale on the completion of construction and collecting installment from the buyer at predetermined intervals.

My questions are :

1) Do i have an option as builder to chose notification in 24 or 26 ?

2) On the basis of above business models, if the 1st model is in existence, as a builder can i opt for notification 24/2012 as such model is purely works contract ?

3) And if 2nd model is in existence, can as builder i opt for notification 26/2012, as its agreement for sale including land also foe which my Gross Revenue charged would include Land value also ?

Suresh Ramaswamy

Suresh Ramaswamy (Expert)
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02 February 2016 There is an option available with the builder depending on the model. If there is a separate agreement for sale of land and a second agreement for development, depending on the clauses in the agreement, the service rendered is either a Works Contract (usually since it an agreement for supply of both materials and labour) or pure labour contract wherein the materials are supplied by someone else and the promoter just constructs the house. In this case it would be supply of manpower, which is neither beneficial to the builder or the purchaser.

Where the promoter opts for a separate agreement for developing the land and constructing the building under Works Contract the promoter is liable to pay service tax on 35% of the contract i.e. the service recipient is liable to pay service tax on 50% of the contract value after a 30% rebate under Reverse Charge Mechanism. The Service Provider is liable for payment of the other 50%.

In case there is an agreement to sell a constructed flat along with the land value there is rebate available of 75% or 70%. Here there is an added advantage that once the construction is technically complete,a completion certificate can be obtained from the competent authority and say 10% of the finishing can be done after the completion. In that case the liability to service tax is only till the receipt of the completion certificate.

Personally I feel the promoter benefits most by following Notification 26/2012 and not 24/2012.

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Querist : Anonymous

Querist : Anonymous (Querist)

03 February 2016 Thank you sir,
I want to clarify that if builder opts for notification no 26/2012 and has received part payment after the certificate of completion, then do the service tax liability arise ?

Also I want to know, that builder has outsourced construction part to contractor and contractor again to sub contractor, then whether the contractor - sub contractor are required to pay service tax and if yes, then is builder is eligible to claim cenvat credit for the same ?

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Suresh Ramaswamy

Suresh Ramaswamy (Expert)
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03 February 2016 As per the provisions of Notification No. 26/2012 and the clarifications, any payment received after issue of completion certificate by the competent authority is additional work for individual flat owners and not part of the project. Hence such amount is not subject to service tax.

As per the provisions of Notification No: 30/2012 in case of Works Contract, the service recipient is liable to pay 50% of the service tax under Reverse Charge Mechanism. Since the valuation of works Contract has an inbuilt abatement of 30% of the invoice value, no CENVAT Credit can be availed, irrespective of whether the construction work has been outsourced / sub contracted.