BUILDER’SSERVICE TAX

UNDER NEW REGIME OF TAXATION

INTRODUCTION OF NEGATIVE LIST APPROACH TO TAXATION OF

SERVICES All the services specified in the

“Negative List” shall remain outside the scope of service tax net.

All other services, except those specifically exempted by the Govt. by way of notification, would be chargeable to service tax.

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INTRODUCTION OF NEGATIVE LIST APPROACH TO TAXATION OF

SERVICES

This new approach to service tax has been made effective from 01.07.2012

A detailed guidance note on its operationalisation has been placed on the website of service tax.

The name of the booklet is “Service Tax Educational Guide” and contains 150 pages.

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INTRODUCTION OF NEGATIVE LIST APPROACH TO TAXATION OF

SERVICES

In order to smoothly transform from old provisions to new provisions, New sections 65B, 66B, 66C, 66D, 66E & 66F have been introduced.

The old sections are made non applicable from 01.07.2012, as the new sections have been made operational.

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BRIEF ABOUT SERVICES TAX AMENDMENTSThere were previously 116 services under the

service tax net.The government has now shifted from positive

list to negative list approach.Let us see what is the total of all services

under the proposed new “Regime” Negative List of services – 17 nos Declared Services - 09 nos Exempted Services - 34 nos Sub clauses under above- 80 nos Total Services - 140 Nos

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NEW SECTIONS Section 65B contains all the definitions. Section 66B is the new charging section for

service tax. Section 66C deals with the determination of

place of provision of service. Section 66D contains the negative list of

services. Section 66E lists the declared services. Section 66F list the principles of interpretation

of specified descriptions of services or bundled services.

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OTHER IMPORTANT POINTSMentioning of proper accounting codes for

various services is not relevant in the new regime of service tax w.e.f. 01.07.2012.

All service tax hence forth will be paid on a single accounting code.

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DEFINITION OF “SERVICE”Service means any activity carried out by a

person for another for consideration, and includes a declared service, but should not include:

An activity of transfer of title in goods or immovable property, by way of sale, gift or in any other manner;

Transaction in money or actionable claims; Service provided by an employee to his

employer in the course of employment; Fees Taken in any Court or tribunal.

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CONTINUED Now it is settled law in terms of

judgments of Courts that a works contract can be segregated into a contract of sale of goods and that of provision of service. This entry signifies that service portion in works contract shall be levied to service tax. Further clause (b) of Section 66E specifies separately for Complex definition

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NEW DEFINITION OF COMPLEX“residential complex” means any complex

comprising of a building or buildings, having more than one single residential unit.

The previous definition consists of 12 residential units is no more available to builders w.e.f 01.07.2012.

Competent Authority for issue of completion certificate if now the local authority only.

However, personal house constructed by Individuals with the help of contractor will still be out of the purview of service tax.

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SERVICE TAX –COMPLETED COMPLEX OR NOT (LEVY OF TAX)

genuine problems being faced by Builders was delay in obtaining completion certificate from Government Authorities which makes them liable for service tax

Service Tax( Removal of Difficulty) Order, 2010:certain professionals like Architect, Chartered Engineer and Licensed Surveyor were also made competent authority continue

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CONTINUED This new provision shall result in

genuine hardships by builders since it takes much of time to obtain completion certificate from Government Authorities

This clause needs to be reconsidered in light of practical difficulties.

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WC-DISPUTE MINIMISED WEF 1-7-12 Before 01.06.2007 when works

contract service was introduced Construction industry was subject to different categories of service viz. Commercial or industrial construction service construction of complex service errection and commissioning & installation service etc.

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CONTINUED PAGE 1 Although these separate categories are still in

effect but their practical utility was nullified on introduction of  works contract service as most of the service providers involved in composite contract used to classify themselves under works contract service. Even then many of clarifications were continued to be issued in respect of those separate service classification ignoring works contract service which has resulted into number of litigations, recent of them is deemed service tax on builders w.e.f. 01.07.2010.

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CONTINUED PAGE 2 But with introduction of negative list,

all of such unnecessary and illogical disputes will be reduced. Under negative list concept all activities related to construction /real estate and respective abatements will be governed by single so called most famous word works contract which has been defined under new Section 65B(54) as under

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DEFINITION OF WORKS CONTRACTWorks Contract means a contract wherein

transfer of property in goods involved in the execution of such contracts is leviable to tax as sale of goods and such contract is for the purpose of carrying out constructions, erections, commissioning, installations, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land.

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WC- NO CHANGES,BUT SCOPE ENHANCED

But there may be one issue in question that nowhere in the definition any reference of residential complex has been made. One can take a stand that construction of complex is not covered under the definition although complex is also in the nature of works contract. For sake of clarity if legislative intent is to include the same in definition of works contract it would be   beneficial to specifically mention the same as is present in earlier/present definition so as to be on safer side. 17

THE NEW CHARGING SECTIONSection 66BThere shall be levied a tax at the rate of twelve

percent on the value of all services other than those services specified in the negative list provided or agreed to be provided in the taxable territory by one person to another and collected in such a manner as may be prescribed.

It was later clarified that Education Cess will continue.

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OTHER IMPORTANT NOTIFICATIONS

Notification no. 30 & 45Lists the following services, the service tax on

which will be paid by the service receiver: Works Contract Services (New) Any service imported from outside India.

Services of directors other than under employer employee relationship like sitting fees, commission, remuneration etc.

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VALUE OF SERVICES Rule 2A of Service Tax Valuation Rules calculate the value of transfer of

property in goods involved in the execution of works contract (either taking the value as considered for VAT purpose or ascertaining on actual basis) and deduct the same from Gross amount charged for works contract

If above is not acertained, then value as per following table 20

VALUE OF TAXABLE SERVICE FOR REAL ESTATE INDUSTRY

Type of Works Meaning Value as % of Total Amount

Original Works It will include all new construction and all types of additions, and alterations etc.

40% 25% in case amount inclusive of value of land

Other Works It means works other than original works including completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings

60%

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SERVICE TAX LIABLILITY (i) Total amount = Gross Amount+Value of all goods supplied free of cost (ii) No credit of excise duty paid on any

goods which are transferred  shall be allowed,

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OTHER IMPORTANT NOTIFICATIONS

Service tax under reverse mechanism Con’td…

Business Entity means any person ordinarily carrying out any activity relating to industry, commerce or any other business. (vide scope and covers all persons)

Services of Provided By ReceiverRenting or Hiring of Motor Vehicle;Supply of Manpower;Works Contract & Security Services

Any Individual, HUF, Proprietary Firm, Partnership Firm or AOP

Company or a Body Corporate

Any Service Any person located outside India

Any Person Located in India

Director Services Director of the Company

Company or a Body Corporate

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OTHER IMPORTANT NOTIFICATIONSExcept for the services mentioned below, in all other

services, the service receiver will pay 100% of the service tax.Taxable Service % of service

tax to be paid by Service Provider

% of service tax to be paid by Service Receiver

Renting or Hiring of motor vehicle on abated value

60% 40%

Supply of Manpower for any purpose

25% 75%

Services by way of Works Contract 50% 50%Security Services 25% 75%

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OTHER IMPORTANT NOTIFICATIONS

Notification no. 43 dated 02.07.2012No sooner has the Government implemented

the service tax under the new regime, notification for extending the levy of service tax on certain services have been published.

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CENVAT TO WC AND BUILDERS WEF 1-7-2012

Prior to 01.07.2012, service providers paying service tax after availing the abatement provisions were not allowed to avail any CENVAT credit.

w.e.f 01.07.2012, the CENVAT credit rules have been amended and service providers covered under works contract and builders services would be allowed to avail CENVAT credit on input services and capital goods.

(Notification no. 26/2012-ST dt. 20.06.12)

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25% SCHEME WITH CENVAT.WEF 1-7-2012. BENEFIT TO BUILDERS TO REDUCE COST In negative list regime, activity

undertaken by developers after including in declared service in clause (b) of section 66E of Finance Act, 1994.

Relevant abatement scheme as given in Sr. 12 of table given in Notification No. 26/2012 dated 20.06.2012 is as under:

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Sl. No. Description of taxableservice

Percentage of Taxable portion

Conditions

12 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

25% (i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004.(ii)The value of land is included in the amount charged from the service receiver.

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BENEFIT IN THE FORM OF CENVAT CREDIT:

Prior to 01.07.2012 also, rate of abatement was same i.e. 75% and taxable portion was 25% of gross amount (including land cost). However, earlier there was absolute bar on availment of CENVAT Credit.

 However, now, CENVAT Credit in respect of capital goods and input services (as defined under rule 2 of CENVAT Credit Rules, 2004) has been allowed w. e. f. 01.07.2012. (CENVAT credit in respect of inputs shall not be allowed). Continue

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CONTINUED CENVAT Credit in respect of capital goods

and input services (as defined under rule 2 of CENVAT Credit Rules, 2004)has been allowed. But,CENVAT credit in respect of inputs shall not be allowed)

 Usually, developers get the construction done from a construction contractor who charges service tax from developers in respect of construction services provided to developers. Continue

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CONTINUED Now, CENVAT Credit in respect of

capital goods and input services (including construction service received which is a substantial expenditure) shall be allowed.

 Now, developer shall continue to charge service tax from their customers, however, they will now avail CENVAT Credit and deposit lesser amount

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OTHER IMPORTANT POINTSCriteria for availing CENVAT credit in respect of

input services w.e.f 01.04.2011Immediate credit on receipt of invoice,Payment of invoice to be made within a period

of three months from the date of issue.Reversal of credit if payment is not made

within the stipulated period. Credit can be taken again for such cases on the

basis of actual payment.In cases of service tax paid on reverse charge

basis, credit can be taken on the date of payment.

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