Sunday, August 5, 2012

Service Tax on Construction Activities wef 01.07.2012


on Sunday, August 5, 2012

Before dealing with the issue of Service Tax on Construction Activities under Taxation of Services by Negative List approach which has come into effect with effect from 01-07-2012, it is worthwhile to specify here that Service Tax was leviable on construction activities under the following three categories of services until 30-06-2012:

a) Commercial or Industrial Construction Services with effect from 10-09-2004

b) Construction of Complex Services with effect from 16-06-2005

c)  Works Contract Services with effect from 01-06-2007.

However, with effect from 01-07-2012 all activities related to construction fall within the purview of following “Declared Services” under Section 66E of the Act:

66E(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 completion-certificate by the competent authority.

66E (h) Service portion in the execution of a works contract.

With effect from 01-07-2012, the following definition of “Works Contract” as given in Section 65B (54) of the Act is applicable:

"works contract" means 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, repair, maintenance. renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

A perusal of above definition reveals that scope of works contract has increased immensely. The most striking feature of the above definition is that it applies to both movable and immovable properties.

Exemption to certain Construction Activities 

Certain construction activities have been exempted by virtue of entry no. 12, 13 & 14 of Notification No. 25/2012 dated 20-06-2012 with effect from 01-07- 2012

Entry No. 12, inter alia, grants exemption to services provided to the Government, a Local Authority or a Governmental Authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession, a historical monument, archaeological site, a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment. Services covered by this entry are exempted only if these services are provided to the Government or Local Authority or Governmental Authority.

Entry No. 13, inter alia, grants exemption to services provided by way of construction, erection,commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a road, bridge, tunnel, or terminal for road transportation for use by general public, a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana. In order to avail exemption under entry no. 13 the status of service recipient is insignificant-be it Government, a Local Authority or a Governmental Authority or any other person.

Entry No. 14 inter alia, grants exemption to Services by way of construction, erection, commissioning, or installation of original works pertaining to an airport, port or railways, including monorail or metro, a single residential unit otherwise than as a part of a residential complex, Low-cost houses upto 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. The scope of exemption granted vide entry no. 14 is restricted because it does not cover completion, fitting out, repair, maintenance, renovation or alternation of original works pertaining to any of the specified structures, immovable properties, machineries or equipments.

Exemption to sub -contractor :In addition, exemption has also been provided with effect from 01-07-2012 vide Entry No. 29(h) of Notification No. 25/2012 to sub-contractor providing services by way of works contractor to another contractor providing works contract services which are exempt. This exemption was also available until 30-06-2012 vide Circular No. 147/16/2011 dated 21-10-2011.







Illustrative list of services in relation to Construction Activities which have become taxable with effect from 01-07-2012 onwards
  1. Construction of Boundary Wall.
  2. Construction of Parking Area.
  3. Services in respect of Cutting of Plots and Development of colonies received by builders.
  4. Construction of Residential Complex of units ranging between 2-12 units (more than one unit).
  5. Construction of Private Roads.
  6. Construction Services provided to Non– Commercial Organisation in respect of buildings which are used for other than Religious Purpose.
  7. Services provided in respect of Construction of hospitals to any person other than Government or Governmental Authority or Local Authorities.
  8. Services provided in respect of Construction of buildings to be used for the purpose of Education to any person other than Government or Governmental Authority or Local authorities.
Valuation of service portion in execution of a works contract with effect from 01-07-2012

Substituted Rule 2A(i) of Service Tax (Determination of Value) Rules, 2006, inter alia, provides that the value of service portion in the execution of a works contract 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. Alternatively, under foregoing Rule 2A (ii), the aforementioned value will be determined as under:

S. No.
Purpose of the Works
Contract
Percentage of total amount deemed as Value of
service portion of the Works Contract
(A)
Execution of Original
Works
40%
(B)
Maintenance or Repair or Reconditioning or Restoration or Servicing of any Goods
70%
(C)
Any purpose other than
(A) & (B) above, including Maintenance, Repair, Completion and Finishing Services [such as Glazing, Plastering, Floor and Wall Tiling, Installation of Electrical Fittings] of an immovable property
60%

Bonanza for Builders in the form of Additional CENVAT Credit

According to Notification No 26/2012 dated 20-06-2012 with effect from 01-07-2012 in respect of Construction of a complex, building, civil structure or a part thereof which is intended for sale to a buyer,wholly or partly, service tax is payable on the 25% of the amount charged by such service provider subject to the condition that CENVAT Credit on input goods used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004. 

In other words, Department has given bonanza to builders by allowing them to avail and utilise CENVAT Credit in respect of input servicesand “capital goods” while discharging their service tax liability in respect of above-mentioned Construction Services with effect from 01-07-2012. 

In contrast, there was a total prohibition on availing any kind of CENVAT Credit until 30-06-2012 in respect of above Construction Services. Looking from another angle, with effect from 01-07-2012 the service tax liability of the builders has been significantly reduced because they are required to discharge their service tax liability only on the 25% of the total amount charged which can be either completely set off or significantly reduced by availability of CENVAT Credit in respect of input services and Capital Goods.

Conclusion

The scope of service tax on construction activities has been enlarged with effect from 01-07-2012 because many services which were hitherto outside the tax net, have become taxable with the exception of construction, erection, commissioning or installation of original works pertaining to low-cost houses as mentioned above. On the other hand, CENVAT Credit in respect of “input services” and “capital goods” has been allowed to builders with effect from 01-07-2012. The Valuation of Works Contract Services under substituted Rule 2A of Valuation Rules, 2006 will affect adversely the specified service providers in specific cases.

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  1. We are providing services under construction of commercial or industrial buildings and residential complex services. Now, I want to pay the service tax on services provided during the month of july, at which rate I should to pay the service tax..??? As per old provision, i.e. 100 - 67 Abatement = 33 taxable and service tax @ 12.36% on 33. OR As per works contract service i.e. 4.944 as specified.

    ReplyDelete
    Replies
    1. Pay As per works Contract Service i.e. 4.944 %

      Delete
    2. Kindly Note that reverse charge is applicable if your treated is as works contract.

      http://www.simpletaxindia.net/2012/06/new-services-under-reverse-charge-in.html

      Delete
  2. please clear this ambiguity:in two statments:
    "service tax is payable on the 25% of the amount charged by such service provider subject to the condition that CENVAT Credit on “inputs” used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004"

    &
    "service tax liability of the builders has been significantly reduced because they are required to discharge their service tax liability only on the 25% of the total amount charged which can be either completely set off or significantly reduced by availability of CENVAT Credit in respect of input services and Capital Goods"

    ReplyDelete
    Replies
    1. In first Para Inputs is Input goods and credit of the same is not available.

      and in 2nd para capital goods and Input services has been used and credit is available for these two types.

      for clarity inputs word in first para has now been changed to input goods

      Delete
  3. we are providing thermal insulation work amc to company in which we are doing with material job in their existing planta so how we have to bifergate service taxable amt

    ReplyDelete
  4. Sir,
    when service tax is paid @25%, cenvat credit is available. but the admissibilty of cenvat credit for input services & capital goods is not discussed in the option under rule 2A(ii)- viz. 40% / 70% & 60%. pl confirm the cenvat credit eligibilty also.
    Further, under the valuation option, value for arriving @25% includes value of land, free supply etc. is not coverred in the above artcle.
    without such crucial information, which are also part of WC taxabilty, the article is not a complete one and has missing links. there is a possibility of readers being misguided, in the absence of such info.

    ReplyDelete
    Replies
    1. Please check notification 26/2012 , where CENvat credit is not available for all three categories word has shown as under.

      "CENVAT credit on inputs, capital goods and input services, used for providing the taxable service"

      Read more: http://www.simpletaxindia.net/2012/06/abatement-rate-in-services-tax-amended.html#ixzz22jriAj9h

      But in case of construction activities condition has been given as under

      "CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004"

      Read more: http://www.simpletaxindia.net/2012/06/abatement-rate-in-services-tax-amended.html#ixzz22jsUi5n0

      so no restriction has been placed for cenvat credit for capital goods and input services received in construction activities as given the post above also.

      Delete
  5. Dear Sir,

    We have an order for Rs. 90,000/- which includes supply of material plus erection & Commissioning thereof of certain plant. As terms order is composite, we can not issue separate invoice for supply of material and erection & commissioning. Party will deduct Assam WCT as per applicable rate in Assam on total Rs. 90,000/-. In the order two things has been mentioned clearly.

    1) Party will provide free issue material of Rs. 2,50,000/- for execution of order
    2) We can not go for composite of Service Tax and will have to pay service tax @ 10.30 %

    (Note: Order was issued before 1-Mar-12 and execution will start after 1-Jul-12 and rate is inclusive of Service Tax)

    Please clarify at which rate we should pay service tax ??

    Thanks in advance

    Chirag

    ReplyDelete
    Replies
    1. Regarding works contract deduction Assam read more details here

      http://prasenjitfca.blogspot.in/2010/11/vat-on-work-contracts-in-assam_21.html

      As the services has been started after 01.07.2012 the rate applicable is 12.36 as it is applicable from 01.04.2012 itself.

      But from your data it is clear that your services are covered under works contract ,so valuation of new work should be applicable @ 40 %.

      so net effective rate is 12.36*40%=04.944

      More over as the work contract services are covered under reverse charge . So if you are not a company and plant is under the control of company then you should bill only for 50 % of 4.944 and show balance payable by plant (if under company)

      read details here
      http://www.simpletaxindia.net/2012/06/new-services-under-reverse-charge-in.html

      and
      valuation of works contract rule 2A(ii)(A)

      http://www.simpletaxindia.net/2012/06/value-of-service-works-contract.html

      Delete
    2. Dear Sir,

      Thanks for your reply. As we are Pvt Ltd co, Partial reverse charg will not apply. Further, what could be the rational of party of mentioning Value of Free issue material and why they have mentioned that we can not go for Composite scheme and pay service tax @ 10.30 %. Somebody told me that either we should pay Service Tax @ 4.944 % on Rs. 3,40,000/- {Order value + Free issue material} and take input service tax credit OR pay Service Tax @ 12.36 % and take input Service tax credit as well Cenvat credit on material.

      Thanks again

      Chirag

      Delete
  6. Dear Sir,
    We are engaged in erection commissioning of Equipment and Structures.
    I would like to know whether equipment for erection shall also be considered free issue material as structural steel and cost of the same added to the Order Amount to derive the Taxable Value.

    Regards
    Mukut

    ReplyDelete
    Replies
    1. In our opinion equipment is not covered only material is covered

      Delete
  7. Sir, I am a senior citizen and a resident of Kerala and located at Badagara. We are constructing a house and the work is being carried out by a sub contractor (registered). We are paying VAT and other educational, cess taxes etc., as applicable to state Govt. The tax details was not given in the signed contract. Now they are insisting for service Tax that are applicable as per the new procedures. The construction started in November 2010 and only half of the construction is completed. Can you please let me know Sir, how the service tax and other taxes are to be paid and what is the total percentage of taxes to be paid against contract value.

    thanks, sashidharan - mail id - sashidharan1949@yahoo.com

    ReplyDelete
    Replies
    1. This is personal house or you have bought it from builder. who have appointed to contractor .Please provide complete detail.

      Delete
  8. dear sir,
    i am builder, my job is construction of residential villas, land owner is different, the purchase was entered in to the agreement of sale with the land owner and construction agreement with us for construction. when the residential villa completed or payments are cleared by the buyer than done the registration. in the registration deed having the parties as land owner as seller and builder as conforming party, and purchaser. than it is classified as construction activity or works contract? and what is the tax rate. please clarify me.

    ReplyDelete
  9. Dear Sir,
    We provide service as a work Contract, please confirm that the due date of service tax payment, If we raised invoice on 04.07.2012 than the due date for Service tax payment is ????????


    Please confirm us...

    Thanks

    Amit

    ReplyDelete
    Replies
    1. if your yearly turnover less than 50 lakh then due date will be 5 th of next month in which payment is received from client,

      If sale is more than 50 lakh then due date is 05/08/2012.(if advance payment not received)

      Delete
  10. Dear Sir,

    We provide service as a work contract, please confirm the due date of Service tax payment, if we raised invoice on 04.07.2012 than the due date is ????????
    Thanks

    Amit Shaw

    ReplyDelete
  11. Dear Sir,
    We provide service as a work Contract, please confirm that the due date of service tax payment, If we raised invoice on 04.07.2012 than the due date for Service tax payment is ????????


    Please confirm us...

    Thanks

    Amit

    ReplyDelete
  12. Sir,

    I need to know whether the tax is payable on receiving the payment or when the bill is submitted. The client is not paying the service tax on the payment.

    please clarify . I also need the notification for reference of client to clarify the query.

    ReplyDelete
    Replies
    1. As per the new provision of service tax , you need to pay tax on issue of bill or received of payment which ever is first. in your case it seems that you are not getting payment of service tax but getting the bill payment. if so then you need to pay full tax as per your bill.

      Delete
  13. hi
    We are a Work contractor. We have a query on the valuation. We got two contract one for supply of material and one for erection including the Civil material. Now how to value the liability under service tax.
    1. Under the Supply contract we are supplying directly to the Owner.
    2. Let say we got acontract for supply Rs 100, Erection including the civil material is Rs 50. We give subcontractor Rs 45 to complete the erection job including the Civil. So we are paying the sales tax on Rs 50 - Rs 45 = Rs 5 only. Can i go for the first option under the service tax.
    3. If i want to go for 2nd option that is pay service tax @ 40% on the total contract value. Now what is the total contract value as per my facts. 40% of 150 or 40% of 100 to be taken.
    please guide us?

    ReplyDelete
  14. Sir we are into the interior decorators as PVT LTD concern( In turn Key Basis),

    1)please tell us the rate of service Tax both normal & in works contract. Also request you to kindly inform us about the CENVAT credit

    2) Generally we do the work as Sub-contract also but most of the Sub-Contractors are individual in that case what is the liability to us and the Sub-contract

    Please guide us

    ReplyDelete
    Replies
    1. Rates are same for works contract i.e 12.36 % but as you know tha t in works contract both material and services are provided so Department has defined valuation method for service portion and service tax will apply accordingly.
      1. if material value known then tax can be paid on balance amount.
      2, or you can use notional value
      A:if work is original then 40 % is service
      B if not original like repair etc then 60 % is service

      Delete
  15. We are doing business of road construction to builder for residential, Commercial & both. we have use word in our bills "Laying and Spresding, Rolling of Road.So what % service tax apply in work contrac reverse mechenisam? & pls give other work contract rate for the Carpenter, Ellectric Fitting, Plastering etcs.
    Krunal shah

    ReplyDelete
  16. I am in the process of constructing an Single individual house(with 3 Kitchens) for personal use with help of building contractor (Agreement happend on June 2012). Land and home loan are under my name. Please let me know whether i have to pay service tax in this scenario.

    ReplyDelete
  17. I entered in an agreement on january 6, 2013 for purchase of flat from a construction co. Please let me know whether I have to pay service tax @3.9

    Manjit

    ReplyDelete
  18. As per the definition of work contract

    it includes service tax is applicable on movable & immovable property

    whether service tax is applicable @ 70%
    1. On car repair services
    2. Pesticides service

    please give your expert view

    ReplyDelete
  19. Dear Sir,

    We are engaged in construction of residential complex consisting of 19 buildings, We are charging Maintenance Charges in advance for 2 yrs on possession date. Service Tax is also being charged thereon. However, I would like to know if such Charges are correct and accordingly to law. And whether my Service Tax liability actually does arise??

    Please give your views and oblige.

    Thank you.

    ReplyDelete
    Replies
    1. yes service tax is chargeable on advance payment ,so you have done right thing

      Delete
  20. Dear Sir,

    If a company gives a labour contract for repairing godowns, which category of service it will belong to and who will be liable for service tax payment? Whether cenvat credit can be availed? If advance is paid to the contractor with progress of work, whether service tax is to paid on such advance payments or on bills after completion of work? Please advise.

    Thanking you

    ReplyDelete
    Replies
    1. If material is also given by contractor then it covered under works contract.

      Further if contractor is individual /firm/huf then service tax is to be deposited in 50-50 ratio.

      yes, on advance service tax is payable.

      Delete
  21. Dear Sir,
    I am doing Labour out sourcing construction work for erecting new HT,LT lines, transformers for state electricity corporation .Meterial is Supplied by corp. Please advise Service Tax Liability as Distribution of Electricity is in Negative List. Service Tax circ.no.123/5/2010 dt. 24-1-5-2010 may also be checked.

    ReplyDelete