The revenue and the builders have always been at
dispute when comes to leviability of service tax on the consideration received
in advance by the builders/developers from the prospective buyers of immovable
property to be constructed.
After the negative list regime the 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 has been declared to be
a service liable to service tax. However, if the entire consideration from the
prospective buyer is received after
issuance of completion certificate by competent authority then it is outside
the purview of declared service.
Statutory
Provisions: The relevant statutory provision u/s
66E relating to declared services is 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,—
(I) 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;
(II) the expression "construction" includes additions, alterations,
replacements or remodelling of any existing civil structure;”
Manner
of valuation: Since the construction activity includes
two elements i.e. material and labour element, therefore an abatement/exemption
for the material part is required for arriving at the service element. Notification No. 26/2012-ST dated 20.06.2012 provided for similar
abatement/exemption. This Notification has also been amended from time to time.
Entry No. 12 of the abovesaid Notification provides the percentage of valuation
of services in such cases of construction activities.
Earlier, such builders were allowed abatement of 75%
when the value of land was part of transaction in respect of construction of
building intended for sale to prospective buyers with a condition that CENVAT
credit benefit is allowed only in respect of input services and capital goods.
The
notification No. 26/2012 has been amended from time to time. W.E.F. 01-03-2013
Notification No. 26/2012 was amended to
provide for the reduced rate of abatement for high ended homes and flats from
75% to 70% on the ground that in such cases component of ‘service’ is greater.
Therefore, w.e.f 01-03-2013, exemption of 75% was
made applicable only in respect of the residential unit having carpet area upto
2000 square feet or where the amount charged in respect of such unit is less
than rupees one crore. Thus if either of the conditions was satisfied,
abatement of 75% was available.
However, Again w.e.f 08-05-2013, the Government has amended
entry No. 12 Notification No.
26/2012-ST, whereby the percentage of exemption has been retained as it was
made applicable w.e.f. 01-03-2013, but now the exemption related to residential
unit is made applicable by applying both condition in respect of carpet area
and the value of residential unit together.
Thus, now the current position is that to claim
exemption at the rate of 75% both the
conditions should be satisfied i.e. carpet area of residential unit should be
less than 2000 square feet and the amount charged for such unit should also be
less than Rs. 1 crore.
It should be noted that the Conditions of CENVAT
credit remains unchanged till date.
The
manner of valuation at different times is given as below:
From
01.07.2012 to 28.02.2013
Description of taxable service
|
Abatement
(%)
|
Taxable value
(%)
|
CENVAT
availability
|
||
Capital Goods
|
Input
|
Input service
|
|||
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
|
75
|
25
|
Yes
|
No
|
Yes
|
From 01.03.2013 to
07.05.2013
Description of taxable service
|
Abatement
(%)
|
Taxable value
(%)
|
CENVAT
availability
|
||
Capital Goods
|
Input
|
Input service
|
|||
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) for residential
unit having carpet area upto 2000 square feet or where the amount charged is
less than rupees one crore;
(ii)
For other than the (i) above.
|
75
70
|
25
30
|
Yes
|
No
|
Yes
|
From
08.05.2013 onwards:
Description of taxable service
|
Abate-ment
(%)
|
Taxable value
(%)
|
CENVAT
availability
|
||
Capital Goods
|
Input
|
Input service
|
|||
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) for residential
unit having carpet area is less than 2000 square feet and where the amount charged is
less than rupees one crore;
(ii)
For other than the (i) above.
|
75
70
|
25
30
|
Yes
|
No
|
Yes
|
It is important to note here that Explanation C has
been inserted in the Notification No. 20/2012-ST wherein it has been provided
that The amount charged for the service shall
include the fair market value of all goods and services supplied by the
recipient(s) in or in relation to the service, whether or not supplied under
the same contract or any other contract, after deducting-
(i)
|
the amount charged for such goods
or services supplied to the service provider, if any; and
|
|
(ii)
|
the value added tax or sales tax,
if any, levied thereon:
|
Provided that the
fair market value of goods and services so supplied may be determined in
accordance with the generally accepted accounting principles.
The implications of the above explanation are that
if any goods are supplied by the contractee to the builder-contractor free of
cost or at lesser price than the fair market value of such goods, then for the
purpose of calculating taxable value, gross amount charged shall include fair
market value of such goods supplied after deducting the price charged for such
goods and VAT, saes tax if any levied thereon.
Why
Construction of residential apartments/complexes is declared as service
separately from the works contract service: It
is notable here that construction of a complex, building, civil structure when
consideration is received in advance from prospective buyers has been declared
as a service separately from the works
contract service. The valuation rules in both the above declared services are
separate.
The question at this junction which comes to mind is
why services provided by builder are not
works contract services, why they have been declared as services
separately from the works contract services.
In K. Raheja
Development Corporation vs State of Karnataka AIR 2005 SC 2350 Supreme Court held that construction of
residential apartments or complexes would be a works contract if agreement is
entered into with the prospective buyers for the sale of such apartments and
complexes and payment towards it is received in advance fully or partly, before the completion of the same.
Although the Judgement of the Supreme Court in K
Raheja case was doubted in the subsequent case of Larsen & Toubro Limited v
State of Karnataka 2008 (12) STR 257 (SC) and the matter was referred to the
larger bench of the Supreme Court, but until the final verdict of the larger
bench of the SC, decision in K. Raheja case still holds the ground.
The service element in the services provided by the
builders exists obviously because of the reason that it is a works contract, as
two elements are involved in the construction activity i.e material element and
service element.
Therefore it
is difficult to understand why a separate entry was required to be declared as
service u/s 66E for levy of service tax on builders apart from the works
contract service and why separate valuation rules are required when both the
services are of same nature.
However, in para 2.6.2 of Education Guide it is
stated by giving an example that a builder carrying out an activity for a
client wherein a flat is constructed by the builder for the client for which
payments are received in instalments and on completion of the construction
title in the flat is transferred to the client, involves two elements namely
provision of construction service and transfer of title in immovable property.
The two activities are discernibly separate.
The above example hints at the intention of the legislature
that the Central Government does not treat construction of building intended for
sale to prospective buyers as a works contract but a separately declared
service, in such case the question would be why State Governments should
consider such activity as works contract and claim VAT on the material portion
of such activity.
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