MARCH 21, 2012

By CA Pradeep Jain & CA Preeti Parihar

Introduction:-

Service tax on Reality sector is once again a talk of the town after announcement of Budget, 2012. This budget has proposed the implementation of service tax by negative list wherein all the services except those specifically excluded will be taxable. The proposal contained in the budget seems to redefine the service tax applicability on the construction contracts. This piece of depiction is all about building the service tax on reality sector.

Pre budget scene:-

Prior to announcement of budget, three categories were meant for the construction industry –

+ Commercial or industrial construction service,

+ Works Contract service, and

+ Construction of residential complex service.

Service tax was levied under the above three categories in respect of construction of various small and large buildings, by whatever named called. Under Commercial or industrial construction service, construction of a new building or part thereof was taxable provided the building or part is used or intended to be used for commerce or industry. Under works contract, service was leviable if the contract was for providing both the material and services. Service tax under this head was applicable if the material involved in the works contract was leviable to service tax. The construction of residential houses was chargeable to service tax under the category of Construction of residential complex service. Every head had its own benefits for eg. abatement at specified rates was allowed in case of Commercial or industrial construction service, composition scheme was applicable in case of works contract and in case of Construction of residential complex service, exemption was being granted to the construction of upto 12 residential complexes. Thus, all the schemes had their own benefits.

Post Budget scene:-

The budget, 2012 has proposed the service tax by negative list. The services specified in the negative list are specifically excluded from the purview of service tax. The negative list primarily contains the services of public utility. So far as construction industry is concerned, it contain the construction services pertaining to road, bridge, tunnel, terminal, pollution control or effluent treatment plant, etc. subject to certain conditions. These exemptions in the old scheme were provided by way of giving the exclusion clause in the definition of the respective services. Besides the services of public utility, Services by way of erection or construction of original works pertaining to airport, port or railways, single residential unit otherwise as a part of a residential complex, low- cost houses by approved authority up to a specified area, or in relation to a housing project are also excluded. Further, valuation rules, abatement scheme and reverse charge method have also been amended having major impact on the reality sector.

Analysis of Pre/Post Budget scenario:-

+ Only works contract scheme survives - Prior to budget, there were three specified services of treating various types of construction projects. However, after budget, there seems to be only one category which is included in the declared list of activities specified in Section 66E. This section includes the "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 the competent authority". Thus, in this clause, the entire construction industry has been covered and the description of this service gives insight of the works contract service. This fact also gets favour from the fact that the Service tax (Determination of value of services) Rules, 2006 have been amended and rule 2A has been substituted which describes the manner of valuing the works contract service. Further, no abatement has been proposed for any other service under the new notification no. 13/2012-ST dated 17.3.2012. Also, the reverse charge method has been extended to the works contract scheme under notification no. 15/2012-ST dated 17.3.2012. All these factors clearly indicate that all the other services pertaining to the construction industry have been scrapped and only works contract survives.

+ Construction on behalf of buyer covered - The inclusion of works contract in the declared list of services with the description "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 the competent authority" clarifies the fact that where the owner of the land undertakes the construction for the prospective buyer for a consideration whether or not received in piecemeal will be covered under works contract. This is simply clarifying the things that were already inbuilt in the works contract scheme prior to budget. At the time of Budget, 2010; when the explanation was added in the definitions of Construction of residential complex service and Commercial or industrial construction service wherein it was clarified that these two heads will be applicable even if the payment is received in installments and the possession or ownership is transferred at the end. At that time since no such explanation was added to the works contract service, it was contended by a class of learned scholars that it is merely a mistake and it will be rectified soon. We, the authors of this article were on the other side who were of the opinion that there was no need of such explanation as the same thing in the case of works contract was already settled by the decision of Apex Court in the case of Raheja Development Corporation V. State Of Karnataka [2005 Ntc (Vol. 27)-243]. In this decision it was held that even if the payment is made in installments, then also, the transaction would fall in the category of the works contract. Our articles on the even issue were published on the prestigious website taxindiaonline.com. Thus, our clear and distinct view has now been specifically proven by the recent budget wherein it is specifically provided that the works contract would be applicable even if the construction is taken on behalf of prospective buyers who pay the consideration in installments.

+ Exemption to one residential unit only - Under negative list exemption has been granted to the Services provided by way of erection or construction of original works pertaining to single residential unit otherwise as a part of a residential complex. Thus, single residential unit has been exempted which has narrowed the scope of exemption previously contained in the Construction of residential complex service. In this service, construction of upto 12 residential units was exempted in the definition itself. But the proposed scheme exempts only one residential unit, that too pertaining to original works. Here the original works is defined as new constructions or additions and alterations to abandoned or damaged structures on land that are required to make them workable. Thus, where the construction pertains to old building that is not substantially damaged, it would not be exempted. Also, the cases where finishing work is undertaken will not be covered. Here ambiguity arises in what context the word "single residential unit" is used. Whether the single residential unit is to be checked assessee-wise or place wise or period wise. This has not been clarified and may lead to litigation. Thus, the exemption of 12 residential units has been reduced drastically to only one residential unit.

+ Amendments in works contract scheme - Under proposed scheme, only works contract has found a place, that too with a no. of amendments therein relating to the valuation and other aspects. We have also written an article on the budget implications on the works contract scheme. The key amendments in the works contract scheme are as follows:-

- The rate of works contract is increased from 4% to 4.8%, w.e.f. 1.4.2012.

- The reverse charge method has been extended to the works contract scheme wherein liability of paying the 50% service tax is casted on the recipient of works contract service and remaining still lies on the provider of the service.

- New rule 2A is being substituted in the Service Tax (Determination of Value) Rules, 2006 which prescribes the manner of determining the taxable value under works contract.

- The optional composition scheme of works contract is proposed to be withdrawn. Instead, actual value of material supplied is required to be ascertained for the purpose of determining the taxable value. Where such ascertainment is not possible, then only abatement at a fixed percentage is allowed.

While parting:-

The recent budget has brought more costs and low benefits to the reality sector. The options have been scrapped. The scope of exemptions has been narrowed. The entire construction industry is now left with only one option – Works contract, that too with increased complexities. Let's see how does the man with no alternative reacts in this entirely new scenario.