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CA Sandesh Mundra

Consult Us For Construction

Impact of Union Budget 2012 on the Construction Sector

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Budget is a tool of government which drives it past the journey of economic growth as well as economic misery. Each year the government brings in several new provisions changing the set tax laws and thereby impacting evryone either positively or negatively.

The Finance Minster has projected the economy to grow by 7.6 percent for the FY 2012-13 and the Budget proposal emphasizes on five focus areas to achieve the desired growth namely:

· Focus on domestic demand growth recovery

· Create conditions for rapid revival of high growth in private investment

· Address supply bottlenecks in agriculture, energy and transport sectors

· Intervene decisively to address the problems of malnutrition

· Address the problem of black money and corruption in public life

 

The Real Estate & Construction sector is an important component of the Service Sector which is evident from the figures of 2010-11 as below :-

 

Contribution of Real estate sector in GDP     - 10.6 percent

Contribution of Construction sector in GDP -  8.2 percent

 

Let us look at Budget 2012 from the impact that it seeks to have on the Real Estate and construction sector as and when it gets passed:-

  1. 1. Macroeconomic Impact

  1. 2. Service Tax Specific Proposals

2.1. Changes in Rates

2.2. Precautions to be taken by Service Receiver under the Reverse Charge Mechanism

2.3. Changes in  Rules

2.4. Old wine (with some remixes) in the New bottle  -  "Service"

2.5. Exemptions under the new regime – Post Budget

2.6. Exemptions under the current regime sought to be withdrawn

2.7. Amendments in old Law in favour of assessees (Including Retrospective Amendments)

3. Impact of Other Taxes


  1. Macroeconomic Impact

 

Following are the important budget proposals:

 

  • Efforts are continued to arrive at broad based consensus for allowing FDI upto to 51 percent in multi-brand retail. This would positively impact new construction of huge malls in the country.
  • During Twelfth Plan period, investment in infrastructure is planned to go up to INR 50,000 billion with half of this, expected from private sector which will increase opportunities for the construction companies.
  • Much needed “fiscal” impetus to affordable housing by allowing External Commercial Borrowings (ECB) and reducing tax withholding from interest on such ECBs from existing 20 percent to 5 percent for 3 years. This shall ensure availability of capital for developers and Better capital availability will help in timely project execution, which will result in higher volumes.
  • The extension of the 1% interest subvention scheme for affordable housing continues for another year, benefitting buyers in the market for houses worth upto Rs 25 lakhs.
  • More sectors added as eligible sectors for Viability Gap Funding under the scheme “Support to PPP in infrastructure”.
  • Tax free bonds of `60,000 crore to be allowed for financing infrastructure projects in 2012-13.
  • IIFCL has put in place a structure for credit enhancement and take-out finance for easing access of credit to infrastructure projects.
  • The Rural Housing Fund has been enhanced to Rs 40 billion from Rs. 30 billion to support affordable housing projects.
  • Enhancement of investment linked incentive for affordable housing to 150 percent of capex from current 100 percent.
  • The doubling of allocation in infrastructure debt fund through allocation to NHDP, IIFCL, NHB and SIDBI coupled with full exemption from basic customs duty for equipment for road and highways construction are likely to boost infrastructure and construction sectors.  First Infrastructure Debt Fund with an initial size of `8,000 crore launched recently.
  • Further, measures like credit guarantee and direct transfer of subsidy is likely to change the growth environment.
  • One year extension of sun-set clause on tax incentives for infrastructure projects under Section 80 IA of Income Tax Act, 1961 is also a welcome step."

However like any child even we have some unfulfilled wishes from the budget

  • Increase in excise duty on Cement and Steel could have been avoided
  • No Infrastructure status for Real Estate
  • Removal of levy of multiple taxes on the same property transaction
  • Ease in interest rates for domestic businesses
  • No increase in the limit on tax deduction available on home loans interest from current Rs 1.5 lakhs.

 

2. Service Tax Specific Proposals

Budget 2012 has, brought a paradigm shift in the manner in which we view service tax. How? Lets see! An attempt is made to cover only those provisions which have a material impact on the construction sector.

 

2.1.              Changes in Rates

The rate of service tax is being restored to the statutory rate of 12% - same as goods. This is done by rescinding Notification No. 8/2009-ST which had reduced the rate to 10%. This is effective from April 1, 2012.

 

2.2.              Precautions to be taken by Service Receiver under the Reverse Charge Mechanism

A shift in taxing approach from ‘selective’ to ‘comprehensive’, has been announced by Mr. Finance Minister. To effectively implement these changes, certain amendments in various areas have been made. This is very much like the TDS provisions as applicable under the Income Tax Act. So few select categories of services, where a lot of indiscipline was observed by government have been brought under the reverse charge mechanism.Currently, there are seven heads (Rule 2(1)(d) of Service Tax Rules, 1994) under which tax is collected on reverse charge mechanism i.e. a service receiver is required to pay service tax and not the service provider. Notification No. 15/2012 dated 17/03/2012 has proposed to some more service heads under reverse charge mechanism while continuing earlier service heads. Below are some of the services which are normally availed directly by the construction sector or the clients who issue works contracts. If one observes the above list closely most of the services are also covered in TDS provisions under Direct Tax law. Now the said services are also covered under reverse charge mechanism in Indirect Tax law and service receiver will have added responsibility of depositing TDS plus Service Tax of Service providers. This will seriously hit the funds of service receivers. Hence proper care needs to be exercised in all such cases

 

Nature of Service

Liability of Service Provider

Liability of Service Receiver

Renting or hiring any motor vehicle designed to carry passenger

(for Non-abated value)

60%

40%

Supply of manpower for any service

25%

75%

Works contract service by an individual/HUF/ proprietary firm/partnership firm/association of persons (whether registered or not) to company or body corporate located in the taxable territory.

In works contract service 50% service tax will be paid by the contractor and 50% by the contractee. In works contract service there are two schemes one is composite scheme and other is paying on actual labour and services.

The question is in a single works contract if the contractee and contractor choose different schemes for payment of service tax then how the ratio of 50% will be determined, will the contract be divided in two parts or any other criteria will be adopted? Some more clarifications are required in this regard from CBEC.

Also what if the service provider does not charge any service tax in his invoice as he is unregistered although he is required to under the turnover criteria.

50%

50%

Availing Legal Services of an Individual Advocate

0%

100%

Services received from a person residing in the non-taxable jurisdiction (That is place outside India and Jammu and Kashmir where service tax is not applicable)

0%

100%

Goods Transport Agency

0%

100%

Government Support Services (Infrastructure , Marketing, Logistics) – There is lack of clarity as to what constitutes the government support services in the practical life. And normally reverse charge mechanism are built in for unorganized sectors. No sense in giving government the benefit of this mechanism.

0%

100%

 

Therefore, if you are availing any of the aforesaid services then now (from the enactment of Finance Bill 2012) you will also be required to pay Service tax to Central Government and comply with registration and returns filing requirements.

Certain other impact in terms of reverse charge in case of import of services are redefined in the draft Place of Provision of Services Rules, 2012 which also needs to be examined based on the review of transactions of the company.

It is clarified that liability of the two persons is for respective amounts and is not influenced by compliance or the lack of it by the other side. Service provider is allowed Cenvat credit of tax paid by him on inputs and input services. The respective portions have been attempted such that the credits available will be well below the amount required to be paid by such persons. In extreme situations the small service provider is also being allowed the refund of unutilized Cenvat credit if any, available with him. Suitable changes will be made in Cenvat Credit Rules, to this effect.

 

2.3.              Changes in  Rules

 

2.3.1.    Valuation Rules

Negative list will require movement away from service-specific provisions. As such, the abatements under Notification 1/2006-ST and composition rate under the Works Contract (composition scheme for payment of service tax) Rules, 2007 will need some reformulations. A new valuation rule is being introduced to substitute the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The value of the Works Contract is proposed to be redefined, as follows:

  1. As at present, first determination will be the value of service being the total amount charged for the contract reduced by the value of property transferred in goods for State VAT purpose;
  2. If value of goods is not intimated to State VAT, the assessees can still calculate the actual value of goods and the same will be relevant to deduce the value of the service involved in the works contract;
  3. If the value is not so deduced as per above, and not merely as an option, the value shall be specified percentage of the total value as follows:
    1. for original works: 40% of the total amount;
    2. other contracts: 60% of the total amount;
    3. for contracts involving construction of complex or building for sale where any part of the consideration is received before the completion of the building: 25% of the total amount

Thus mode of payment under the composition scheme is not available as a simple option. It can only be exercised if the first two options can-not be used to compute the value. If say a contractor is working in multiple states and having multiple contracts in a single state as well, then one needs to see and check the mode of payment of VAT under each contract to take a decision as regards the chargeability of service tax.

 

Notes for consideration:-

Original works will include all new constructions and all types of additions and alterations to abandoned or damaged structures to make them workable.

The total amount will be gross amount plus the value of any material supplied under the same contract or any other contract.

The input tax credit on goods forming part of the property on which VAT is payable shall not be available as they are not used in the provision of service, which is totally independent of the deemed sale. However taxes paid on capital goods and input services will be available for set off.

 

2.3.2.    Point of Taxation Rules, 2011

  1. The time period for issuance of invoice is being increased to 30 days ordinarily and 45 days for banks and financial institutions (to reconcile with the business practice of issuing monthly statement). These changes are being provided in Rule 4A of Service Tax Rules and the time period so defined is being incorporated in POT Rules.
  2. The benefit available to individuals and firms to determine POT on the basis of date of payment for eight specified services is being extended to all services in a slightly modified form. The facility will be now available to individuals and partnership firms (including limited liability partnership) up to a turnover of Rs 50 lakh in a financial year provided the taxable turnover did not exceed this limit in the previous financial year. For computing the above limits, the turnover of the whole entity is required to be summed up and not any single registration.

 

2.3.3.    Service Tax Rules, 1994:

 

  1. A common simplified registration format for Central Excise and Service Tax is being placed for public comments, together with further liberalization in registration requirements, particularly centralized registrations.
  2. Likewise a new simplified one page common return with Central Excise: to be called Excise & Service Tax Return (EST for short) is being introduced.
  3. It is also being proposed that the cycles for the payment of service tax and filing of return should coincide. To this end the service tax return filing and tax payment requirement is proposed to be revised as follows:
    1. Assessees who paid tax of Rs 25 lakh or more in previous year and new assessees other than individuals and firms: Monthly
    2. Others: Quarterly

At present only Individuals or Firms are allowed to pay the taxes on quarterly basis. Now this relaxation has been given to every small assessee

2.3.4.    Cenvat Credit Rules, 2004

 

All the amendments are effective from 1-4-2012, except otherwise specified.

  1. Following services are excluded from definition of ‘input service’ only so far as they relate to a motor vehicle, which is not a capital goods – (a) Renting of a cab (b) Supply of tangible goods.  However, these services will be eligible as ‘input services’ if used for provision of taxable services for which Cenvat credit of motor vehicle is available as capital goods [rule 2(l) clause (B) amended w.e.f. 1-4-2012].
  2. Following services are excluded from definition of ‘input service’, except when used by (a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by him or (b) provided by general insurance company [as specified in section 65(105) of the Finance Act], in respect of a motor vehicle insured or reinsured by him - (a) General Insurance Services (b) Motor vehicle related service (earlier termed as Authorised Service Station service) [rule 2(l) clause (BA) inserted w.e.f. 1-4-2012].
  3. The ‘amount’ payable under rule 6(3) [where assessee is manufacturer of excisable as well as exempt goods or provider of taxable as well as exempt services] has been increased from 5% to 6% w.e.f. 1-4-2012. Rarely any contractor would have exercised this option. So it does not make much impact.
  4. Interest is not payable on wrongly taken Cenvat credit if it was not utilised [Rule 14 amended] (All those who have paid interest would be cursing themselves)
  5. Inputs or capital goods need not be brought in the premises of service provider.(This provision will only fuel disputes relating to past and should have ideally come as retrospective amendment or a clarification)
  6. Input Service Provider to distribute credit on following basis - (a) Credit of service tax attributable to wholly exempted goods or exempted services shall not be distributed (b) In case of service tax attributable to a particular unit - directly to that unit (c) In case of common input services - on basis of turnover of each unit [Rule 7 of Cenvat Credit Rules overhauled] - This is relevant where a contractor is doing all three categories of construction like exempt, taxable and non-taxable.
  7. Cenvat Credit Reversal not required if exempted taxable service provided to SEZ - retrospective amendment w.e.f. 16-6-2005 [clause  144 of Finance Bill, 2012]]. (Thos who have already paid and reversed in the past may try and take care during the course of service tax audits as far as possible)

 

2.3.5.    Place of Provision Rules

 

Taxation of export of services and import of service is being replaced by “place of provision of

service” and the draft rules are placed for discussion.

One of the examples given in the budget document to explain these rules is in relation to an architect as below :-

An architect based in Mumbai provides his service to an Indian Hotel Chain (which has business establishment in New Delhi) for its newly acquired property in Dubai. If Rule 5 (Property rule) were to be applied, the place of provision would be the location of the property i.e Dubai (outside the taxable territory). With this result, the service would not be taxable in India. Whereas, by application of Rule 8, since both the provider and the receiver are located in taxable territory, the place of provision would be the location of the service receiver i.e New Delhi. Place of provision being in the taxable territory, the service tax would be taxable in India. By application of Rule 14, the later of the Rules i.e Rule 8 would be applied to determine the place of provision.

 

2.4.              Old wine (with some remixes) in the New bottle - "Service"

You are no longer required to pose the question -  “which taxable service is being provided?”

Service has been defined as any activity done for consideration. So now every service that we do is taxable unless the same falls in the negative list or under the exemption notification. So now specific descriptions like "Industrial and Commercial Construction", "Erection and Commissioning", "Consulting Engineer", have been done away with. So the question that arises is what would happen to the Principles of classification which exist in the current scenario

Although the negative list approach largely removes the need for descriptions of services, but for the construction sector such descriptions continue to exist to identify whether the specific service falls under following lists or not –

· In the negative list (Non-taxable services)

· In the declared list (Deemed taxable services)

· In the exemption notifications. (Exempted services)

· In the Place of Provision of Service Rules, 2012

· In few other rules and notifications.

 

Concept of Declared Services:-

There are two principles laid down which are contained in clauses (1) and (2) of section 66F of the Act.

 

In the definition of ‘service’ contained in clause (44) of section 65B of the Act it has been stated that service includes a declared service. The phrase ‘declared service’ is also defined in the said section as an activity carried out by a person for another for consideration and specified in section 66E of the Act. Most of these services are presently also being taxed but only to ensure that these are not avoided with a reasoning that they are also subjected to state taxes , they have been categorized under the heading of Declared services. This is also with a view to remove any ambiguity for the purpose of uniform application of law all over the country.

The following activities directly related or ancillary to construction have been specified in section 66E as declared services:-

a. Renting of immovable property;

b. 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 certificate of completion by a competent authority;

 

This service is already taxable as part of construction of residential complex service under clause (zzzh) of sub-section 105 of section 65 of the Act and as part of service in relation to commercial or industrial construction under clause (zzq) of sub-section 105 of section 65 of the Act. This entry covers the services provided by builders or developers where building complexes, civil structure or part thereof are offered for sale but the payment for such building or complex or part thereof is received before the issuance of completion certificate by a competent authority. Further there are various types of arrangements under which builders or developers sell buildings, flats, office space etc. to buyers where entire consideration is received before completion certificate is issued including tripartite model, redevelopment model, investment model, reconversion model, BOT projects and joint development agreement model.

 

A detailed circular has been issued by the Board dealing with such arrangements in the context of existing taxable service of same description vide Circular no 151/2/2012 ST dated 10/2/12 issued from F.No. 332/13/2011 TRU. The said circular may be referred to for guidance on this point.

 

Further as regards Completion Certificates - Earlier under the Circular No. 1/2011(CE&ST PuneIII TF) dated 15/02/2011, the competent authority includes architects, chartered engineers, licensed surveyor besides any Government Authority. Now the position is that in case if the Government Authorities are required to issue “Completion Certificate” under the state lawsthen they are the only ‘Competent Authority’. Only in case of no such requirement under the State Law, the only the above specified persons are competent to issue ‘Completion Certificate’.

c. Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods;

 

This will create some controversy. The provisions as exist currently mention that in all such cases where VAT has been paid, no service tax shall be levied. However now the taxability is purely based on how you interpret "Transfer of right to use". So there may be a scenario where both the authorities (VAT and Service Tax) argue the case in their favour when assessee takes a particular stand. This might result in double taxation on the same value. This interpretation of “Right to use” is also marred by conflicting court judgements.

 

All such issues are only expected to be resolved once GST is in place.

 

d. Service portion in execution of a works contract

 

A new definition for the “Work Contract” has been introduced through Sec 65B (54) and is as follows:

 

  1. Definition - Works contract has been defined in section 65B of the Act as a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, 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.

 

  1. Significance of the word ‘only’ in the exclusion clause in the definition of ‘service’ -  The word ‘only’ signifies the transactions which involve only transfer of title in goods or immovable property not included as service. A transaction which in addition to a transfer of title in goods or immovable property involves an element of another activity carried out or to be carried out by the person transferring the title would not be excluded from the definition of service.

 

  1. Question that arises is whether all composite transactions which in addition to a transfer of title in goods involve an element of provision of service be considered as a ‘service’ and taxable under Service Tax as such? - The manner of treatment of such composite transactions for the purpose of taxation, i.e. are they to be treated as sale of goods or provision of service, has been laid down by the Honorable Supreme Court in the case of Bharat Sanchar Nigam Limited vs Union of India [2006(2)STR161(SC)]. The relevant paras 42 and 43 of the said judgment are reproduced below -

 

“42. Of all the different kinds of composite transactions the drafters of the 46th Amendment chose three specific situations, a works contract, a hire purchase contract and a catering contract to bring within the fiction of a deemed sale. Of these three, the first and third involve a kind of service and sale at the same time. Apart from these two cases where splitting of the service and supply has been Constitutionally permitted in Clauses (b) and (g) of Clause 29A of Art. 366, there is no other service which has been permitted to be so split. For example the clauses of Art. 366(29A) do not cover hospital services. Therefore, if during the treatment of a patient in a hospital, he or she is given a pill, can the sales tax authorities tax the transaction as a sale? Doctors, lawyers and other professionals render service in the course of which can it be said that there is a sale of goods when a doctor writes out and hands over a prescription or a lawyer drafts a document and delivers it to his/her client? Strictly speaking with the payment of fees, consideration does pass from the patient or client to the doctor or lawyer for the documents in both cases.

 

43. The reason why these services do not involve a sale for the purposes of Entry 54 of List II is, as we see it, for reasons ultimately attributable to the principles enunciated in Gannon Dunkerley’s case, namely, if there is an instrument of contract which may be composite in form in any case other than the exceptions in Article 366(29-A), unless the transaction in truth represents two distinct and separate contracts and is discernible as such, then the State would not have the power to separate the agreement to sell from the agreement to render service, and impose tax on the sale. The test therefore for composite contracts other than those mentioned in Article 366 (29A) continues to be - did the parties have in mind or intend separate rights arising out of the sale of goods. If there was no such intention there is no sale even if the contract could be disintegrated. The test for deciding whether a contract falls into one category or the other is to as what is the substance of the contract. We will, for the want of a better phrase, call this the dominant nature test.”

 

The following principles emerge from the said judgment for ascertaining the taxability of composite transactions-

· Except in cases of works contracts or catering contracts [exact words in article 366(29A) being – ‘service wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the service’] composite transactions cannot be split into contracts of sale and contracts of service.

· The test whether a transaction is a ‘composite transaction’ is that did the parties intend or have in mind that separate rights arise out of the constituent contract of sale and contract of service. If no then such transaction is a composite transaction even if the contracts could be disintegrated.

· The nature of a composite transaction, except in case of two exceptions carved out by the Constitution, would be determined by the element which determines the ‘dominant nature’ of the transaction.

Ø If the dominant nature of such a transaction is sale of goods or immovable property then such transaction would be treated as such.

Ø If the dominant nature of such a transaction is provision of a service then such transaction would be treated as a service and taxed as such even if the transaction involves an element of sale of goods.

· In case of works contracts and ‘service wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the service’ the ‘dominant nature test’ does not apply and service portion is taxable as a ‘service’ This has also been declared as a service under section 66E of the Act.

· If the transaction represents two distinct and separate contracts and is discernible as such then contract of service in such transaction would be segregated and chargeable to service tax if other elements of taxability are present. This would apply even if a single invoice is issued.

 

The principles explained above would, mutatis mutandis, apply to composite transactions involving an element of transfer of title in immovable property.

  1. Notification 12/2003-ST is proposed for deletion - By way of this notification, Service Tax was exempted on so much of the value of all taxable services as was equal to the value of goods and materials sold by the service provider to the service recipient subject to condition that there is documentary proof of such value of goods and materials. Under the negative list scheme, transactions that involve transfer of title in goods are excluded. Therefore if goods are being sold by a service provider under a distinct and a separate contract then sale of such goods is excluded from the definition of service. If it is a ‘composite contract’ and dominant nature of the contract is that of provision of service then value of goods cannot be excluded and if the dominant nature is sale of goods then the contract is not taxable as service. In view of the same the notification 12/2003-ST has been proposed to be deleted.

Biggest issue which remains to be discussed upon is the dominant intention theory itself which has been subject to various conflicting judgements. So if the VAT authorities do not accept the same, then the assessee has to gear himself up to fight till the highest authority. The implications are explained by way of a small example as below :-

M/s ABc is enagaged in doing AMC for the factory machines. During the course of AMC, certain parts of machines are also required to be replaced if damaged. However at the start of the contract the chances are that such replacement would be rare. In such a contract the dominant intention is to provide the maintenance services. Hence if M/s ABC pays service tax on full value and if the VAT authorities do not agree to the contention and require the assessee to pay VAT on whatever material was incidentally transferred in the course of maintenance, then it shall be a case of double taxation qua the value of goods involved.

 

  1. Relevant FAQ's as mentioned in the budget memorandum

 

5.1.      Would labour contracts in relation to a building or structure treated as a works contract?

No. Labour Contracts do not fall in the definition of works contract. It is necessary that there should be transfer of property in goods involved in the execution of such contract which is leviable to tax as sale of goods. Pure labour contracts are therefore not works contracts and would be leviable to service tax like any other service and on full value.

 

5.2.      Would contracts for tailoring of clothes or development of photographs also be treated as works contracts as these are also for carrying out a particular work?

No. The phrase used is ‘works contract’ and not work contract. ‘Works’ has a defined and accepted legal meaning. As per Black’s Law dictionary ‘works’ means ‘buildings or structures on land’. Moreover works contract has been defined in the Act as contract for carrying our specified activity, like construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration etc., or a part thereof in relation to any building or structure on land. Therefore contracts which do not pertain to building or structures on land would be out of the ambit of works contracts.

 

5.3.      Would contracts for construction of a pipe line or conduit be covered under works contract?

Yes. As pipeline or conduits are structures on land contracts for construction of such structure would be covered under works contract.

 

5.4.      Would contracts for erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise be treated as a works contract?

Such contracts would be treated as works contracts if –

· Transfer of property in goods is involved in such a contract; and

· The machinery equipment structures are attached or embedded to earth after erection commissioning or installation.

 

5.5.      What is the scope of ‘building or structure on land’?

Buildings and structures on land means not only buildings or structures attached to earth but also things permanently fastened to a building or structure attached to earth.

 

5.6.      Would contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under ‘works contract’?

Yes, if such contracts involve provision of materials as well.

 

5.7.      What is the way to segregate service portion in execution of a works contract from the total contract?

A simplified manner for determining the value of service portion of a works contract from the total works contract is given in Rule 2A of the Service Tax (Determination of Value) Rules, 2006 ( which will be amended partially for the negative list). In brief the value of the service portion is the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract.

 

Gross amount includes

Labour charges for execution of the works

Amount paid to a sub-contractor for labour and services

Charges for planning, designing and architect’s fees

Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract

Cost of consumables such as water, electricity, fuel, used in the execution of the works contract

Cost of establishment of the contractor relatable to supply of labour and services and other similar expenses relatable to supply of labour and services

Profit earned by the service provider relatable to supply of labour and services

 

Gross amount does not include

Value of transfer of property in goods involved in the execution of the said works contract.

Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract

 

Note:

Where Value Added Tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract.

 

The issue that arises is, if the declaration give by the dealer is not accepted by the VAT department in the course of assessment proceedings and deparment asks the dealer to pay VAT on a higher value, will he be allowed to claim refund of excess service tax paid on the contract. So again solution probably lies in GST.

 

5.8.      Is there any simplified scheme for determining the value of service portion in a works contract?

Yes. The scheme will be contained in the revised Rule 2A of the Service Tax (Determination of Value) Rules, 2006. As per this scheme the value of the service portion, where value has not been determined in the manner as explained at 5.8.7 above, shall be determined in the manner  as below -

 

Where works contract is for…

Value of the service portion shall be…

(i) execution of original works

40% of the total amount charged for the works contract

(ii) execution of original works and the gross amount charged includes the value of land

25% of the total amount chargedfor the works contract

(iii) works contracts, other than contracts for execution of original works, including contracts for completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings.

60% of the total amount charged for the works contract

 

5.9.      How is the value of goods or services supplied free of cost be determined to arrive at the total amount charged for a works contract?

If the value of goods and services supplied free of cost for use in or in relation to execution of a works contract is not ascertainable, the same shall be determined on the basis of the fair market value of the goods or services that have close resemblance to goods made available.

 

5.10.    What are ‘’original works’?

Original works’ means :

· all new constructions;

· all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;

 

5.11.    Is duty paid on any goods, property in which is transferred (whether as goods or in some other form) in the execution of works contract, available as Cenvat credit?

No. Such Cenvat credit is not available, irrespective of the fact that the value of service portion in execution of the works contract is determined in the specified manner, since such goods are not inputs for the service provided. However, the goods not forming part of such transfer will be eligible for input tax credit subject to the provisions of the Cenvat Credit Rules, 2004 including the provisions relating to reversal of credits contained in rule 6 of the said rules.

 

5.12.    Are various corporations formed under Central Acts or State Acts or various government companies registered under the Companies Act, 1956 or autonomous institutions set up by a special Acts covered under the definition of ‘Government’?

No. In terms of the definition of ‘Government’ as contained in the General Clause Act, 1857 and as per the settled position of law such corporations or authorities or companies are not included in the definition of ‘Government’. Services provided by such entities would, therefore, not be entitled to the negative list entry relating to the ‘Government’. It would also not include regulatory bodies.

 

5.13.    Is access to national highways or state highways also covered in the entry under Negative List?

Yes, National highways or state highways are also roads and hence covered in this entry

 

5.14.    Are collection charges or service charges paid to any toll collecting agency also covered?

No. The negative list entry only covers access to a road or a bridge on payment of toll charges. Services of toll collection on behalf of an agency authorized to levy toll are in the nature of services used for providing the negative list services. As per the principle laid down in sub section (1) of section 66F of the Act the reference to a service by nature or description in the Act will not include reference to a service used for providing such service.

 

5.15.    If charges are collected by a developer or a housing society for distribution of electricity within a residential complex then are such services covered under this entry?

No. The developer or the housing society would be covered under this entry only if it is entrusted with such function by the Central or a State government or if it is, for such distribution, a distribution licensee licensed under the Electricity Act, 2003.

 

5.16.    If the services provided by way installation of gensets or similar equipment by private contractors for distribution of electricity covered by this entry?

No. the entry does not cover services provided by private contractors. Moreover the services provided are not by way of transmission or distribution of electricity.

 

2.5.              Exemptions

Various exemptions have been given to the construction sector under the budget provisions. These have been given either by way of inclusion in the negative list or under exemption notification. These are as below :-

 

2.5.1.    Under Negative List of Services

Service by way of access to a road or a bridge on payment of toll charges. Except these services of construction of roads, where the revenue is generated by way of toll collection, no other service has been specified under the Negative List. So idea is that in the times to come we can see various other exemptions which have currently been given under the Mega Noticiation, being removed making the activities chargeable to service tax.

 

2.5.2.    Exemptions related to the construction sector proposed under Mega Notification

2.5.2.1.         Services provided to the Government or local authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of:–

(a) a civil structure or any other original works meant predominantly for a non-industrial or non-commercial use;

(b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii)sewerage treatment or disposal; or

(f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Finance Act;

 

2.5.2.2.        Services provided by way of erection, construction, maintenance, repair, alteration, renovation or restoration of:-

(a) road, bridge, tunnel, or terminal for road transportation for use by general public;

(b) building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public;

(c) pollution control or effluent treatment plant, except located as a part of a factory; or

(d) electric crematorium;

 

2.5.2.3.        Services by way of erection or construction of original works pertaining to:-

(a) airport, port or railways;

(b) single residential unit otherwise as a part of a residential complex;

(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;

(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages

 

“original works” means –

(a) all new constructions;or

(b) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable,

“residential complex” means any complex comprising of a building or buildings, having more than one single residential unit,

“single residential unit” means an independent residential unit with specific facilities for living, cooking and sanitary requirements,

 

2.5.3.    Other exemptions for the Construction Sector

2.5.3.1.        Small scale exemption - For a service provider for the taxable services of aggregate value not exceeding ten lakh rupees in a financial year subject to certain conditions.

2.5.3.2.         Taxable services, received by a unit located in a Special Economic Zone or Developer of SEZ for the authorized operations.

 

2.6.              Exemptions under the current regime sought to be withdrawn

 

Sr. No.

Pre – Budget

Post - Budget  (Expected if the Finance Bill is passed as proposed)

Negative Impact on existing exemptions

1

Site formation and clearance services were exempt under Notification 17/2005 on service provided in the course of con struction of roads, airports, railways, transport terminals, bridges, tunnels, dams, ports and other ports.

All these services henceforth, except when provided to or by  Government or local authority shall become taxable under service tax regulations.

2

Services in relation to Construction of Roads not liable to tax.

Construction of private road for factory, residential complex and other private premises is taxable now.

3

Under Airport services exemption was available to all works contract services performed within airport premises.

All services provided in the airport which are not for or in relation to the original erection or construction of such airport will henceforth be taxable.

4

Construction of Residential Complex services provided for "personal use" is presently exempt from Service Tax as exempted in the definition of

‘residential complex’.

Under the new regulations, construction of residential complex services for personal use shall be taxable other than for government or local authority for its personal use and for MPs, MLAs, constitutional authorities etc.

5

Services in relation to construction of less than 12 Residential units are specifically exempt from Tax as per the definition of ‘residential complex’.

It appears that even construction of less than 12 residential units will also get covered under the service tax ambit. Regarding exemption for single residential unit otherwise as a part of a residential complex, no clarity is presently available, as construction of residential unit for self use also seems to becoming taxable.

6

Under works contract provisions construction in respect of Dam is generally exempt. Construction of Canal is exempt except for the ones primarily used in the commerce or industry.

Henceforth, construction for or by any non- government entity / person of any Dam or canal irrespective of its end use would be a taxable event. This may likely to impact industrial townships and large plants where canals are required to transport fresh water, liquids or sewage to and from the factory / township premises.

7

Notification No. 11/2011 & 10/2011 provides for exemption of works contract specific services provided within the port & all services in airport.

All works which are non-original in nature performed within the airport or port shall henceforth become taxable.

8

Presently Works contract ser vices receiver was not required to pay service tax under the reverse charge mechanism

The new regulations would have a major implication on business entities which engage contract services from individuals, firms, HUF etc as now such business entities would also be liable for service tax compliance. Earlier, as the responsibility for service tax was on the service provider, these business entities were engaging multiple entities (who were in many cases individually below the taxable limit) and were not legally required to pay service tax. Henceforth, even with this approach, the said business entities (who are normally large) would be liable to pay service tax on 50 % of the said amounts paid for such works contracts. This may possibly increase the effective cost for such Works Contract services to such business enti ties.

9

Construction of  Non commercial Buildings Hospitals and Educational Institutes for any one whether government or private was exempt from service tax

If the construction of such structures if for persons other than for the government or local authority, then service tax shall be levied irrespective of the end use of the structure

Positive Impact

 

10

Services by way of erection or construction of original works pertaining to post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages were taxable

These have now been given the exemption under this Budget.

11

Repair and Maintenance of Roads and government buildings were always subject to disputes

These have been now been given exemption both retrospectively in the old regime as well as post 2012 budget regime

 

 

 

2.7.              Amendments in old Law in favour of assessees (Including Retrospective Amendments)

 

2.7.1.     Rule 6(6A) of the Cenvat Credit rules, introduced last year vide Notification 3/2011-CE (NT), dated 01/03/2011, is being given effect from February 10, 2006. This will neutralize the investigations or demands for reversal of credits in respect of services provided to SEZs for the past.

2.7.2.    Repair of roads has been exempted from service tax by Notification 24/2009-ST dated 27th July, 2009. By section 97, exemption relating to roads is extended for the earlier period commencing from June 16, 2005;

2.7.3.    Service tax exemption has also been granted with retrospective effect on management, maintenance or repair service in relation to non-commercial Government buildings from 16th June, 2005 till the coming into force of the negative list when such repair will be exempted by the new mega notification.

2.7.4.    Penalty waiver for renting of immovable property service:

 

Recently, Delhi High Court while examining the issue of constitutionality of service tax on renting of immovable property service in the matter of Home Solutions Retail Vs UOI observed that ‘on the question of penalty due to non-payment of tax, it is open to the Government to examine whether any waiver or exemption can be granted’ [para 73]. Subsequently, in the matter of Retailers Assn. of India Vs Union of India, Honorable apex court, had ruled on October 14, 2011, that litigants should pay 50% of the arrears within six months in three equated installments. For the balance, solvent surety should be furnished to the satisfaction of the jurisdictional commissioner. It is thus proposed that penalty may be waived for those taxpayers who pay the service tax due on the renting of immovable property service (as on the sixth day of March, 2012), in full along with interest within six months. Section 80A is being introduced for this purpose. Those who fail to avail the benefit will be treated as if this section did not exist.

 

3. Impact of other tax proposals

 

Direct Taxes:-

3.1.  Introduction of Alternate Minimum Tax will adversely impact the non-corporate developers developing SEZs

3.2.  Tax Deduction at Source (TDS) at 1 percent of consideration for transfer of immovable property is being proposed. This is aimed at curbing circulation of unaccountable money in the sector

3.3.  Further, GAAR has been proposed to be introduced on similar lines as outlined in the proposed Direct Taxes Code, towards countering aggressive tax avoidance

3.4.  The limit for tax-free bonds in the infrastructure sector has been doubled to Rs 600 billion for 2012-13 vis-à-vis 2011-12. These measures will ease financing constraints faced by certain infrastructure segments and improve the investment scenario for construction sector.

3.5.  The restriction on Venture Capital Funds (VCC) to invest only in nine specified sectors is removed and consequently, investment in real estate sector is eligible for pass through tax treatment for VCFs/VCCs

3.6.  Removal of cascading effect of Dividend Distribution Tax(‘DDT’) in multi layer corporate structure – if dividend distributed by a subsidiary company has been subject to DDT, there will be no further DDT in the hands of holding company while further distributing the said dividend in the same year

3.7.  Provisions of Alternate minimum tax extended to all persons other than companies claiming profit linked deductions

3.8.  Transfer Pricing Regulations have been proposed to apply to certain domestic transactions as well. This would provide objectivity in determination of income from domestic related party transactions and determination of reasonableness of expenditure between related domestic parties.

 

Other Indirect Taxes

 

3.9. Full exemption from basic customs duty, CVD and SAD is being extended to equipment imported for road construction projects awarded by Metropolitan Development Authorities.

3.10.              Full exemption from basic customs duty and CVD at present available to tunnel boring machines for hydel and road projects is being extended to all infrastructure projects. The exemption shall also be available for parts required for assembly of such machines.

3.11.              Overall, the Budget provides the much needed impetus to the Affordable Housing segment to achieve the Government’s vision of “Housing for All” and this will have a positive impact on the sector. Further, the enhancement of the spending on the infrastructure sector will generate opportunities for the construction sector. However, the enhanced levy of services tax and levy of multiple taxes on the same transaction will hamper the desired growth.

 

This we have tried to cover various provisions of the Budget impacting the Construction Sector. Please spare us if you do not agree to the interpretation in some if cases. The concept of Negative List is still very new and is expected to take some time to settle down.

 

The writer can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it. (91 9426024975)

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CA Sandesh Mundra, Consultant – Management Audit and Indirect Taxation - Chartered Accountant, Diploma in Information System Audit, Diploma in Insurance & Risk Management , Certificate from ICAI on International Financial Reporting Standards. Actively associated with clients in the industrial construction sector since last 9 years.He possesses special skills in structuring the indirect tax component of the works contracts and as management auditor, has visited several construction sites in various states like Orissa, Rajasthan, Gujarat, Maharasthra, Madhya Pradesh etc. During the course of said visits he has been to very large industrial complexes, refineries, power plants etc

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