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CA Sandesh Mundra

Consult Us For Construction

Service Tax for Civil Contractors

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Service Tax Aspects for Civil Contractors

 

We have bifurcated the parties to whom service tax is applicable in two major categories :-

a)    Civil Contractor

b)    Builders and Developers

 

In this column we shall be touching upon the applicable points for a civil contractors. It is to be noted that primarily the service tax is on construction of a building or structure for commerce or industry. Such constructions which are of use for education, religious, charitable, sanitation and philanthropic purposes and not for the purposes of profit are not taxable, being non-commercial in nature. It may be noted that scheme for construction of residential complex having more than 12 units is covered under service tax by a separate heading, even though the end use is not commercial in nature.

 

 

 

We can broadly classify the points as below :-

 

  • Various Chapters under which registration can be sought for
  • Relevance of Centralised registration for Civil Contractors
  • Options available for discharge of Service Tax Liability
    • Options
    • Impact on cenvat
    • Sold vs Consumed
  • Relevance of Works Contract Service and related judgements
  • Budget amendments 2011
  • Impact of Point of Taxation Rules, 2011
  • Basics of Cenvat Credit
  • Exemptions available
  • Controversy on Road repairs and Maintenance

 

Various Chapters under which registration can be sought for

Following is a list of chapters under which the parties dealing with the construction services need to register themselves :-

Category

Section 65(105)

Applicable Date

Consultant Engineer

(g)

7-7-1997

Architect

(p)

16-10-1998

Interior Decorator

(d)

16-10-1998

Real Estate Brokers

(v)

16-10-1999

Erection, Commissioning and Installation services.

(zzd)

1-7-2003

Commercial and Industrial Construction

(zzq)

10-9-2004

Construction of Complex

(zzh)

16-6-2005

Management, Repair and Maintenance

(zzg)

16-6-2005

Site Formation

(zzza)

16-6-2005

Work Contract Service

(zzzza)

1-6-2007

Survey and Map making

(zzzc)

16-6-2005

 

Section 65A of the act defines the principles of classification of a taxable service. When for any reason a taxable service is classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected:-

a)    Specific description to be preferred over a general description

b)    Classification as per essential character in case of composite services

c)    If the confusion still prevails, then the servie shall be classified under the sub-clause which occurs first among the other sub-clauses.

Centralised Registration

 

Although the construction sites at which the civil contractors normally work are temporary locations and are not required to be registered as branches under the centralized registration scheme. But if invoices of materials / services where excise/service tax is being charged are received at those sites, without a mention of the Head office address then the same may not be an eligible document for claiming the cenvat credit against the service tax liability. If the discipline is these regards can-not be maintained for the major sites, then its advisable to get these sites registered as branches.

One more point to be noted is to intimate the department about the closure of the construction site, if the same has been registered as a branch under the centralized registration scheme.

 

Options for discharge of the service tax liability

 

Following are the basic options available for discharge of service tax liability for a civil contractor:-

 

  1. I. Registered under Industrial and Commercial Construction :-

a)    Paying service tax at the rate of 10.30% on the gross bill value

b)    Paying service tax at the rate of 10.30% after deduction of the cost of material sold in the course of the contract –

Under this scheme, deduction may be taken of only those material which are sold in the course of execution and not for those materials which are consumed. For e.g. various tools and consumables, where the property is not transferred to the contractee, can-not be claimed as a deduction.

c)    Taking an abatement of 67% on the gross bill value and paying service tax at 10.30% on the net bill value

 

 

 

 

II    Registered under Industrial and Commercial Construction :-

 

a)    Paying Service tax at the rate of 4.12% on the gross bill value.

 

It may be noted that option at I (c ) and II (a) above can be exercised only after adding the value of Free Issue material supplied by the contractee in the course of the contract.

 

Further for option exercised at I ( c) above, no Cenvat credit can be availed for the inputs / input service/Capital Goods used for the project.

Also for option exercised at II(a), no Cenvat credit for the inputs used in the project can be taken. And this option can be exercised only if the contractor is registered under the service category of Works Contract Services.

 

Relevance of Works Contract Service and related judgements

 

Further lot of controversies have prevailed the day a new category of works contract service has been introduced w.e.f 1-6-2007. We can take note of some of the judgements which have said that works contracts whether for construction / installation did not fall within the ambit of service tax till 1-6-2007. The specific chapters dealing with industrial construction, erection and installation were only meant to cover pure labour constracts. Some of these are:-

a)    Decision by Tribunal in Daelim Ind Co. Ltd vs CCE, 2006 (3)STR 12 (Tribunal); 2003 (155) ELT 457 (Tribunal). Against this ruling the department went in appeal to the Hon’ble Supreme Court, and the same was dismissed vide 2004 (170) ELT A181(SC)

b)    CCE v. Shapoorji Pollamji & Co. Ltd. 2006 (1) STR 164

c)    CCE v. L&T Ltd, 2006 (4) STR 63

 

However in a recent ruling by Honourable New Delhi Bench, CESTAT in the case of Instrumentation Ltd v. CCE, Jaipur-I which has been ruled in favour of the revenue stating that even for periods prior to 1-6-2007, when the levy of service tax on works contracts came into force  if the works contract is indivisible, the same would still attract service tax as the question of vivisection of an indivisible work contract is relevant only in the context of charging sales tax on the

transfer of property in goods involved in providing of service, for which by 46th Constitutional amendment Article 366 (29A) containing extended definition of "Tax on sale or purchase of goods" was introduced. But there is no need to invoke the legal fiction of Article 366 (29A) for charging service tax on a work contract.

 

Another question that arose was whether the benefit of composition scheme under works contract service is available for ongoing works contract as on 1-6-2007 wherein it was held that in the case of M.B. Chitale Constructions' 2008 (11) STR 583 (Commr. Appeals) that the appellant who is holder of service tax registration under 'commercial and industrial construction services', had already started paying service tax under the provisions of Notification No.1/2006 read with Section 66.  Besides the same Rules speaks that the option has to be exercised for the entire works contract.   In the instant case the appellant himself has accepted that they have provided some services and paying service tax on the running bills.  Therefore, a part of service has already been completed and service tax has been paid under Sec. 66.   Therefore, the appellant cannot exercise option under Rule 3(1) of the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007.

 

Amendments in Budget 2011 impacting Civil Contractors

 

  • Any goods / services used for construction of a civil structure unless it is provided by a sub-contractor to the main contractor shall be excluded from the definition of Input / Input services.

 

  • 38.1 A tariff rate of 5% excise duty is being prescribed on Ready-mix concrete (RMC). However these goods would attract the concessional 1% duty without CENVAT credit facility. Thus even if RMC is captively consumed and the value of such RMC exceeds Rs. 1.50 cr as per Excise Valuation rules, the civil contractor would have to apply for excise registration.
  • The Works Contract Rules, 2007 have been amended to provide for restriction in availment of CENVAT credit to 40% of service tax paid on services relating to erection, commissioning and installation services, commercial or industrial construction services and construction of residential complex services in case service tax has been paid, without availing the abatement benefit under notification 1/2006.
  • Point of Taxation rules have been implemented, stating that the point of taxation shall be as follows:-

ü  Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 14 days from the date of completion of the provision of service.

ü  Date of completion of the provision of service or payment, if the invoice is not issued within the prescribed period as above.

ü  No provision for Bad Debt – It only mentions if amount is refunded when service is not provided.

ü  Cenvat Credit shall be allowed on booking basis, provided payment is made in 90 days.

ü  Concept of Continous Supply of Service if the Contract duration Exceeds 90 Days.

ü   Point of Taxation shall be the date of completion of the specified event stated in the contract which obligates payment.             For example, in the case of construction services if the payments are linked to stage-by-stage completion of construction, the provision of service shall be deemed to be completed in part when each such stage of construction is completed.

ü  Existing contracts to be covered under POT Rules from 1st July, 2011.

 

  • Small Scale Sector Benefits

ü  Individual and sole proprietor assessees with a turnover upto ` 60 Lakhs shall not be subject to audit;

ü  Interest rate for all assessees (including firms and corporate) upto a turnover of ` 60 Lakhs shall be 3% less than the prescribed rate of 18% (w.e.f. 01-04-2011).

ü  The period for making the payment in order to avail the benefit of reduced penalty under the second proviso to Section 78 shall be 90 days for assesses (including firms and corporate) having turnover upto ` 60 Lakhs.

 

  • Penal Provisions

ü  Interest on delayed payment of Service tax is 18% & 15%

ü  For failure to furnish return

◦       Rs.500 – Rs.2,000 per return

The maximum penalty for delay in filing Service Tax return U/s. 70 is       proposed to be enhanced from ` 2,000/- to ` 20,000/-; existing rate of            penalty under rule 7C of the Service Tax Rules, 1994 to be retained.

ü  Prosecution Provisions  for offences like  -

  • rendition of services without raising invoices,
  • availment of Cenvat credit without receipt of inputs/ input services, etc.
  • Non-payment of service tax collected but not deposited for more than 6 months.

 

Availability of Cenvat Credit when both taxabe and exempt services are provided

 

Either Maintain Separate Books of Accounts for taxable and exempt services.

OR

Pay  5% of value of exempted services

OR

Pay an amount equivalent to Cenvat Credit attributable to input services used in relation to providing exempt services.

 

Once an option is exercised it shall remain so during the year. If you wish to avail the option in red, you need to intimate the same to the dept. in specified format.

 

Also as per latest budget amendment, the definition of exempted services shall include taxable services which are partially exempted with the condition that no credit of input and input service shall be availed. Moreover it has been clarified that exempted service will include trading service.

 

 

 

Exemptions under Service tax for the construction sector

 

Exemptions are mainly available for providing services to

  • SEZ
  • Export of services
  • Road
  • Airport
  • Port
  • Bridges, Tunnels, Railways
  • Services to government

 

However it is interesting to note that a recent circular in response to representation made by Jaiprakash Associates issued in May, 2011

Representation Made:-

The Works Contract service (WCS) in respect of construction of Dams, Tunnels, Road, Bridges etc. is exempt from service tax. WCS providers engage sub-contractors who provide services such as Architect’s Service, Consulting Engineer’s Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc. The representation by Jaiprakash Associates Limited seeks to extend the benefit of such exemption to the sub contractors providing various services to the WCS provider by arguing that the service provided by the sub contractors are ‘in relation to’ the exempted works contract service and hence they deserve classification under WCS itself.

Gist of the circular issued:-

The Revenue Department noted in a circular that the services provided by sub-contractors of WCS providers are classifiable under the respective heads and not under WCS. When a descriptive sub-clause is available for classification, the service cannot be in another sub-clause which is generic in nature, the Department said.

“By this circular, the Revenue Department has reinforced the principle that input services need not be necessarily service tax exempt just because the output service is service tax exempt. Input services will have to be taxable under the individual heading they belong to. A contractor will have to factor in this service tax on input services in his project cost

Construction vs Repair of Road

 

Chronology of events:-

  • 16/6/2005 - Services relating to maintenance or management of immovable property covered under the purview of service tax.
  • Several demands were raised on contractors involved in road repair work.
  • In the latest Circular - No. 110/4/2009-ST Dated: February 23, 2009, the Board had clarified that repair of roads' is taxable.
  • Exemption to maintenance of roads was finally given vide notification no. 24/2009 - service tax, dated 27-7-2009

 

However we strongly believe that repair of road was exempt from the very beginning. To elaborate let us have a closer look at the definition

Commercial and Industrial construction includes-

a)construction,   b) completion and  c) finishing and  d) repair, alteration, renovation or restoration. The definition itself specifically excludes such services provided in respect of roads.

 

From the above it is evident that not only construction services but also repair services provided in respect of roads are exempted from tax. Though the same may also fall under management, maintenance or repair service in terms of Section 65(64) of the Finance Act, 1994, In view of specific exclusion of repair services provided in respect of roads under Section 65(25b) of the Finance Act, 1994 the same can not be subjected to any tax. To support the view we even have a Judgement from Honourable Commissioner, Vizag vide appeal no.5/2008(v-i) s.tax dated: 16.03.2009, order-in-appeal no.27/2009(v- i) ST passed by Shri P.J.R. SEKHAR, I.R.S., COMMISSIONER (APPEALS), VISAKHAPATNAM ].

 

The author is a practicing chartered accountant and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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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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