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ISSUES IN CONSTRUCTION AND WORKS CONTRACT UNDER SERVICE TAX

 

Definition of Service

Section 65B(44) defines “service” to mean any activity carried out by a person for another for consideration and includes a declared service, but shall not include –

(a) an activity which constitutes merely, –

(i) a transfer of title in goods or immovable property by way of sale, gift or in any other manner;

(ii)such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

 

Scope

1. Service includes a declared service but does not include an activity of transfer of title in immovable property by way of sale, gift or in any other manner

2. Section 66E(b) while setting out declared services covers construction of a complex, building, civil structure or 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.

3. Sale of an immovable property is excluded

4. Construction of a complex where monies are received before issue of completion certificate is a declared service.

5.Notification No. 25/2012 dated 20.06.2012 w.e.f. 01.07.2012 exempts services by way of construction, erection, commissioning or installation of original works pertaining to a single residential unit other than as a part of a residential complex (Entry 14 (b))

6. Residential complex is defined to mean “any complex comprising of a building or buildings having more than one single residential unit.”

7. Single residential unit means a self contained residential unit which is designed for use wholly or principally for residential purposes for one family.

 

Issues

1. Earlier provision required a complex to have more than 12 residential units.

2. New provision creates a liability for any construction of complex unless it is a single residential unit.

3. Construction of a complex comprising of 6 apartments has started on 01.01.2012 and 30% of the monies have been received under agreements.

4. Martin Lottery decision.

5. No tax position

6. Proportionate tax position

7. Can monies received earlier now be subjected to tax based on Point of Taxation Rules ?

 

Tax Implication for Land owner

1. Developer is likely to recover the service tax in respect of the apartments allocated to the landowner.

2. If landowner markets these apartments prior to issue of completion certificate and receives money in advance, service tax exposure.

3. If landowner executes a single sale deed for the apartment and the land

 

Position In Income Tax

Where the document that is executed is in the nature of an agreement for transfer and possession is handed over as part performance as contemplated in Section 53A of the Transfer of Property Act, 1882 then there is a transfer and capital gains would arise immediately. This would be evident in a situation where the developer settles the consideration in the form of money or monies worth on an outright basis and the land owner has no relevance or say in the development work.

 

Service Tax implications

1. Assuming land value is Rs.50 lakhs and construction consideration is Rs.1 crore, under construction of complex service, service tax is payable at rate of 12.36% on 30% of Rs.1.5 crores that is Rs.5,56,200/-.

2. Under works contract service, service tax is payable at the rate of 12.36% on 40% of Rs.1 crore that is Rs.4,94,400/-.

3. Cenvat credit effect is neutral in both systems since credit is available on capital goods and input services and not available on inputs.

 

ISSUES IN CONSTRUCTION AND WORKS CONTRACT UNDER SERVICE TAX

ISSUES IN CONSTRUCTION AND WORKS CONTRACT UNDER SERVICE TAX

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