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Service Tax issues on Construction of Residential Complex
Types of Services in Real Estate Transactions
Construction Service
Works Contract Service
Architect Service
Auction of Property
Engineering Service
Erection, Commissioning & Installation Service
Interior Decorator
Real Estate Agent & Consultants
Management Repair and Maintenance
Site Preparation Service
Renting of Immovable Property
• Commercial
• Residential
Types of Service Providers in Real Estate Transactions
Builders Own land, own
Construction
Sale
Develope
r
Develop for Land
Owner
Joint
Agreement
Contract
or
Construction for
Builders
Works
Contract
Following Type of activities by above Service Providers
Construction of Flats/ Offices/ Shops
Developing Residential Townships.
Construction of independent Villas.
Sale of Plots (Developed/ Undeveloped)
Abatement from Service
Tax in
Real Estate Sector
Abatement of Service Tax in Real Estate Sector
AbatementDescription Abatement Taxable
ValueCENVAT CREDIT AVAILABILITY
INPUTS INPUT SERVICES
CAPITAL GOODS
Construction of a complex related services falling u/s 66E(b)-
(a) Residential Unit :- (i) with Carpet Area less than 2000 sq ft. & (ii) Amount Charged less than Rs.1 Crore for each unit.[Both conditions must be satisfied]
75% 25% NO YES YES
(b) Any other case :- (i) Commercial units, OR (ii) Residential units having Carpet Area of 2000 sq ft. or more, OR (ii) Residential units priced above Rs.1 Crore or more.[Any of the above cases (i) to (iii) ]
70% 30% NO YES YES
Valuation of
Services
Related to
Real Estate
Transactions
Valuation of Services related to Real Estate Transactions
Valuation of Construction ServiceGross Amount charged (including value of Land) + FMV of goods / services received from service recipient (excluding taxes) - amount charged by service recipient (excluding taxes).
Valuation of Works Contract ServiceAs Per Rule 2A of Service Tax (Determination of Value) Rules, 2006
Other - Gross Amount Charged
Works
Contract: Valuation & Taxation
Works Contract: Valuation & Taxation
What is Works Contract For execution of a contract
Transfer of property in goods on which sale tax is leviable and; such contract is for the purpose of carrying out
Construction Installation
Repair
Maintenance Completion
Erection
In Relation of : any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;
Valuation
Service Tax Determination of Value Rules, 2006
Rule 2A:Determination of Value of Service Portion in the Execution of a Works Contract
Option - IGross amount ChargedLess: (i) Value of property in
goods transferred,(ii) VAT
Option – IITotal Amount
Charged X
Specified Taxable Percentage
Works Contract: Valuation & Taxation
Gross Amount charged (GAC) for Works Contract xxxxxLess:(i) Value of property transferred in goods xxx
Taxable Value xxxxNote:(ii) VAT or Sales Tax shall be excluded from GAC.(iii)Value of transfer of property in goods shall be the value taken for VAT
purposes.Value of Works Contract Shall include:(i) Labour charges(ii) Payment to sub-contractor for labour and services;(iii) Planning, designing and architect’s fees;(iv) Hire charges for machinery and tools(v) Cost of Consumables such as water, electricity, fuel(vi) Cost of establishment of the contractor relatable to supply of labour and
services;(vii) Other similar expenses; and(viii) Profit earned by the service provider relatable to supply of labour and
services.
Works Contract: Valuation & TaxationRule 2A : Option – I
Works Contract: Valuation & TaxationRule 2A : Option – II
Where Value Cannot be ascertained as per Option-I then value shall be worked out as under:
S. No. Nature of contract Taxable
Value
1. Execution of Original Works 40%
2. Execution of contract for maintenance, repair, reconditioning or servicing of any goods
70%
3. Other works contracts not covered by 1 & 2 above (including completion and finishing services such as glazing, plastering, installation of electrical fittings of an immovable property).
60%
1. Original works means (i) All new constructions;(ii) All types of additions and alterations to abandoned or damaged structures to make them workable; (iii) Erection, commissioning or installation of plant, machinery or equipment whether pre-fabricated or otherwise.2. Total amount means the gross amount charged plus the value of any material supplied under the same contract or any other contract. Where supply is free of cost, value shall be determined on FMV.3. No input tax credit of excise duty paid on goods, property transferred in execution of works contract. However taxes paid on capital goods and input services will be available.
IndividualHUFFirm AOP
Service Provider
Business Entity
Registered as Body
Corporate
Service Recipient
Works Contract Service
ServiceLiability to
Deposit Service Tax
50% 50%
Service Tax Liability under Partial Reverse Charge
Works Contract: Valuation & Taxation
CENVAT Credit in
Real Estate Transactions
Basic rule of CENVAT Credit for service provider
Provider of Output
Service can avail CENVAT Credit
Capital Goods
Inputs
Input Services
Used for Providing
Output Service
Basic rule of CENVAT Credit for service provider
Requirement for availing CENVAT CreditInput Services & Capital Goods are used for provision of taxable service
Possession of Proper duty paying documents
Documents must contain all particulars as per Rule 4A of ST Rules, 1994
CENVAT Credit on capital Goods – upto 50% in C/Y, balance 50% in next year.
Basic rule of CENVAT Credit for service provider
Joint Charge Quantum of
CENVAT Credit available
On the basis of Invoice issued by Service Provider
On the basis of Challan
Service Tax Issues
in
Real Estate
Transactions
Service of Vehicle Parking
General Public
Private
Rental Sale of Space
Taxable under
rentingCovered vehicle parking / open vehicle parking
Cover under Mega
Exemption
Service Tax Issues in Real Estate Transactions
Construction service
(3.09% / 3.708%)
Taxable
Issue of Preferential Location Charges
Service Tax Issues in Real Estate Transactions
Any location having extra advantage which attracts extra payment over and above the basic sale price.Examples:
Direction
Sea Facing, Park Facing, Corner Flat
Floor First Floor, Top Floor
Vastu Having the Bed Room in a Particular Direction
Number Lucky NumbersStatus of Taxability
Separate Consideration
No Separate consideration
Covered by construction service
12.36% on Gross AmountNo abatement
Issue of Surrender/ Cancellation/Transfer/Buy-Back of Flat by Buyer to another person before its completion
Service Tax Issues in Real Estate Transactions
Status of Taxability
Builder/Developer would be eligible for adjustment of excess payment under rule 6(3) of the Service Tax Rules, 1994 to the extent he has refunded the original amount.
If the builder/developer resells the flat before the issuance of completion certificate, again tax liability would arise.
Cancellation Charges : Cancellation Charges would fall under declared service Section 66E (e) of Finance Act, 1994 i.e. Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act, these charges will attract Service Tax at the full rate w.e.f. 1-7-2012.Transfer of flat before its completion – Mere transfer of right by the previous owner to subsequent owner. No service is provided.Buy-back of flat – No service. Builder can make adjustment of service tax u/r 6(3).
Issue of Assured Return
Service Tax Issues in Real Estate Transactions
Assured Returns are given by the builders to the investor who invest in their under construction project & they are mostly for commercial projects.
Mode of Payment :Give monthly returns to the investors on the amount paid by the investor as down payment by means of post dated cheques till such time the building is ready.
Service Tax implications of Assured Return-
In case of Builder:- It is an expenses for builder- No service tax.
In case of customer :- Assured return represents a consideration for providing services by way of extending deposits/ loans / advances. Covered by Negative List of Services (66D(n)(i)). Hence not taxable.
Issue of Administrative Charges/ Transfer Charges / Restoration Charges
Service Tax Issues in Real Estate Transactions
Status of Taxability
Department’s view that it is taxable
under “Real Estate agent’s service”.Matter sub-judice.
Any activity carried out by a person for
another for consideration falls within the ambit of
term “Service” – Full Rate 12.36%
Prior to 1-7-2012 On or after 1-7-2012
CENVAT Credit availed on Brokerage invoice – Later on Flat cancelled by the buyer.
Service Tax Issues in Real Estate Transactions
Status of Taxability
CENVAT Credit availed need not be reversed.
Reverse CENVAT Credit availed.
Brokerage amount not recoverable from broker.
Brokerage amount
recoverable from broker.
Service Tax Issues in Real Estate Transactions
There is no exemption limit in the case of
Reverse Charge. Even Re.1/- liability is to be
discharged
Even if the SP is not registered with
department than RC liability is to be
discharged by SR.
POT is the date of payment to input Service
provider, provided the payment is made within
6 months from the date of invoice.
Reverse Charge Issues
Service Tax Issues in Real Estate Transactions
Interest Free Maintenance Security (IFMS) –
Taxable @ 12.36% if non refundable otherwise
NIL rate.
Club Membership Fees taxable @ 12.36%.
Power Backup taxable @ 3.09% / 3.708% as
applicable.
EEC / FFC taxable @ 3.09% / 3.708% as
applicable.
Lease Rent not taxable if recovered from buyer
on actual payment basis otherwise fully
taxable.
Other Issues
Service Tax Issues in Real Estate Transactions
Interest income on delayed payment from
Customers: No service Tax.
Transfer Charges: Full rate of Service Tax.
Other Charges collected @ 425/- per sq ft like
(Lease Rent / Car Parking Charges / Club
Membership / Power back up / EEC / FFC / etc)
taxable @ full rate 12.36%.
Other Issues
Knowledge Speaks , But Wisdom
Listens