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Service Tax on Construction Contracts

INTRODUCTION The levy of service tax was introduced with a meager three services in 1994 which grew to 119 services by 2012. The scope of services has widened during the period of time. Earlier, the levy of service tax was based on positive list. That is, only those services were taxable which were specifically mentioned in taxable category of service under Section 65(105) of the Finance Act, 1994. Later on, in the year 2012, the concept of negative list was introduced whereby all services, other than those specifically exempt, became taxable.


SWITCHOVER FROM CLASSIFICATION TO SUBSTANCE  Prior to the introduction of ‘works contract service’ w.e.f. 01.06.2007, Construction industry was subject to different categories of service viz. Commercial or industrial construction service’, ‘construction of complex service’, ‘erection and commissioning & installation service’ etc.


Since the introduction of negative list concept, all activities related to construction /real estate are governed by single word ‘works contract’ which has been defined under Section 65B(54) as under:


“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, 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.”

APPLICABILITY OF SERVICE TAX ON WORKS CONTRACT One of the terms used in the definition of Service is ‘Declared Service’. Declared Services are specifically included in the definition of Service to bring those services into the service tax net, which might not have otherwise satisfied the definition of ‘service’ but because of their inclusion, are liable for service tax. This helps in bringing clarity on taxability of these services and reduces litigation.


Section 66E enumerates the declared services and clause (h) of Section 66E reads as under:

“service portion in the execution of a works contract”


Now it is settled law in terms of judgments of Courts that a works contract can be segregated into a contract of sale of goods and that of provision of service. This entry signifies that service portion in works contract shall be liable  to service tax.


Further, clause (b) of Section 66E reads as under:

“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.”


Explanation (II) to this clause gives an inclusive meaning of the word ‘Construction’ which shall include additions, alterations, replacements or remodeling of any existing civil structure.

TAXABILITY OF VARIOUS TYPES OF WORKS CONTRACT SERVICES


a.  Where value of land is added to the gross value of the contract :

As per Notification No. 26/2012 dated 20/06/2012, there is a 75% abatement (i.e.25% of the value is taxable) on construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority.


This notification was amended by Notification No. 09/2012 dated 8th May 2013 to restrict this abatement only for those residential units which have a carpet area of less than 2,000 square feet and where the amount charged is less than Rupees One Crore


For others, the abatement was reduced to 70%.


Both the above abatements are subject to the following conditions:

(i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004 (‘CCR’).

(ii)The value of land is included in the amount charged from the service receiver.


Please note that

a)      Credit of only Inputs is not allowed. Credit of capital goods as well as input services is allowed subject to Rule 6 of CCR.

b)      The amount charged shall be  the sum total of the  amount charged for the service, including the fair market value of all goods and services supplied by the recipient(s) in or in relation to the service, whether or not supplied under the same contract or any other contract, after deducting-


(i) the amount charged for such goods or services supplied to the service provider, if any; and

(ii) the value added tax or sales tax, if any, levied thereon:


Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles. 

b.  Where value of land is not added to the gross value of the contract: (That is to say that the value of land is charged separately or, the land belongs to the service recipient )

The relevant provisions are mentioned in Rule 2A of Notification 24/2012 dated 06/06/2012.


The person liable to pay tax on the service portion involved in the execution of the works contract shall determine the service tax payable in the following manner:-


(A)  in case of  works contracts entered into for execution of original works, service tax shall be payable on 40% of the total amount charged for the works contract;


(B) in case of works contract entered into for maintenance or repair or reconditioning or restoration or servicing of any goods,  service tax shall be payable on 70% of the total amount charged for the works contract;


(C) in case of other works contracts, not covered under sub-clauses (A) and (B), including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical  fittings of an immovable property , service tax shall be payable on 60% of the total amount charged for the works contract; (Increased to 70% as per Notification No.11/2014 dated 11/07/2014)


Explanation 1:- For the purposes of this rule,-

(a) “original works” means

(i) all new constructions;

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

(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;

(d) “total amount” means the sum total of the gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of the works contract, whether or not supplied under the same contract or any other contract, after deducting-

(i) the amount charged for such goods or services, if any; and

(ii) the value added tax or sales tax, if any, levied thereon:

Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.


CENVAT Credit on inputs will not be available but credit on capital goods and input services will be available.


EXEMPT SERVICES


Certain services provided by a works contractor are exempt from whole of service tax. These services are given in Notification 25/2012 dated 20/06/2012


Clause 12 of this Notification exempts services provided by any person to the Government, a local authority or a governmental authority by way of constructionerection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of –


(a)  a civil structure or  any other original works meant predominantly for  use other than for commerce, industry, or any other business or profession; (However, w.e.f. 1st April 2015, this service is now taxable consequent to the changes made in Budget 2015 vide Notification No. 6/2015 dated 01/03/2015)

(b)  a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the 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; (However, w.e.f. 1st April 2015, this service is now taxable consequent to the changes made in Budget 2015 vide Notification No. 6/2015 dated 01/03/2015)

(d)  canal, dam or other irrigation works;

(e)  pipeline, conduit or plant for (i) water supply (ii) water treatment, or (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 Act; (However, w.e.f. 1st April 2015, this service is now taxable consequent to the changes made in Budget 2015 vide Notification No. 6/2015 dated 01/03/2015)


Clause 13 of this Notification exempts services provided by way of construction,  erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of,-


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

(b)    a civil structure or  any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana;

(c)     a 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;

(d)    a pollution control or effluent treatment plant, except located as a part of a factory; or a structure meant for funeral, burial or cremation of deceased;


Clause 14 of this Notification exempts services by way of construction, erection, commissioning, or installation of original works pertaining to,-


(a)  an airport, port or railways, including monorail or metro; Similar services in relation to an airport and a port were exempt upto 31st March 2015. (However, w.e.f. 1st April 2015, this service in relation to an airport, port is now taxable consequent to the changes made in Budget 2015 vide Notification No. 6/2015 dated 01/03/2015)

(b)  a single residential unit otherwise than 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)  mechanized food grain handling system, machinery or equipment for units  processing  agricultural produce as food stuff excluding alcoholic beverages;


Clause 25 of this Notification exempts services provided to Government, a local authority or a governmental authority by way of –


(a)  carrying out any activity in relation to any function ordinarily entrusted to a municipality in relation to water supply, public health, sanitation conservancy, solid waste management or slum improvement and upgradation; or

(b)  repair or maintenance of a vessel or an aircraft;


Clause 29(h) of this Notification exempts services provided by a sub-contractor providing services by way of works contract to another contractor providing works contract services which are exempt.


Here it must be noted that only works contract services provided by a sub-contractor to the main contractor are exempt. Any service like commercial or industrial construction where the material is not passed on from the service provider to the service recipient shall not be exempt.

Conclusion By consolidating all construction related services into a single works contract services, the government has tried to simplify the taxation of this industry and brought clarity in the minds of the tax payers and professionals. However, because of different business models adopted in the construction industry and because of plethora of contradictory judgments given by various courts, the taxation of construction contracts remains a challenging task.

Disclaimer The article is meant for general understanding purposes only. Views expressed by the author in this article are personal.  Readers are advised to consult experts on specific issues. Last updated on 10 April, 2015

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