Service Tax issues on Construction of
Residential Complex
Types of Services in Real Estate Transactions
• Commercial
Construction Service
Works Contract Service
• Residential
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
Types of Service Providers in Real Estate Transactions
 Builders
Own land, own Construction
Sale
 Developer
Develop for Land Owner
Joint Agreement
 Contractor
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
Abatement
Description
Abatement
Taxable
Value
CENVAT CREDIT AVAILABILITY
INPUTS
INPUT
CAPITAL
SERVICES 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 Service
Gross 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 Service
As 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
Erection
Commissioning
Installation
Completion
Fitting out
Repair
Maintenance
Renovation &
Alteration
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;
Works Contract: Valuation & Taxation
Valuation
Service Tax Determination of Value Rules, 2006
Rule 2A:
Determination of Value of Service Portion in the
Execution of a Works Contract
Option - I
Gross amount Charged
Less:
(i) Value of property in
goods transferred,
(ii) VAT
Option – II
Total Amount Charged
X
Specified Taxable
Percentage
Works Contract: Valuation & Taxation
Rule 2A : Option – I
Gross Amount charged (GAC) for Works Contract
Less:
(i) Value of property transferred in goods
Taxable Value
xxxxx
xxx
xxxx
Note:
(i) VAT or Sales Tax shall be excluded from GAC.
(ii) 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 & Taxation
Rule 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 prefabricated 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.
Works Contract: Valuation & Taxation
Service Tax Liability under Partial Reverse Charge
Works Contract Service
Service
Provider
Individual
HUF
Firm
Service
Recipient
Service
Business Entity
Registered as
Body Corporate
AOP
Liability to
Deposit
Service Tax
50%
50%
CENVAT Credit
in
Real Estate Transactions
Basic rule of CENVAT Credit for service provider
Capital Goods
Provider of
Output
Service can
avail
CENVAT Credit
Inputs
Input Services
Used
for Providing
Output Service
Basic rule of CENVAT Credit for service provider
Requirement for
availing CENVAT
Credit
Input 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
On the basis of Invoice
issued by Service Provider
Joint Charge
Quantum of
CENVAT Credit
available
On the basis of Challan
Service Tax Issues
in
Real Estate Transactions
Service Tax Issues in Real Estate Transactions
Service of Vehicle Parking
General
Public
Cover under
Mega
Exemption
Private
Rental
Taxable
under
renting
Taxable
Sale of
Space
Covered vehicle
parking / open
vehicle parking
Construction
service (3.09%
/ 3.708%)
Service Tax Issues in Real Estate Transactions
Issue of Preferential Location Charges
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 Numbers
Status of Taxability
No Separate consideration
Separate Consideration
Covered by
construction service
12.36% on Gross Amount
No abatement
Service Tax Issues in Real Estate Transactions
Issue of Surrender/ Cancellation/Transfer/Buy-Back of
Flat by Buyer to another person before its completion
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).
Service Tax Issues in Real Estate Transactions
Issue of Assured Return
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 ReturnIn 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.
Service Tax Issues in Real Estate Transactions
Issue
of
Administrative
Charges/
Transfer Charges / Restoration Charges
Status of Taxability
Prior to 1-7-2012
Department’s view that
it is taxable under “Real
Estate agent’s service”.
Matter sub-judice.
On or after 1-7-2012
Any activity carried out
by a person for another
for consideration falls
within the ambit of term
“Service” – Full Rate
12.36%
Service Tax Issues in Real Estate Transactions
CENVAT Credit availed on Brokerage invoice –
Later on Flat cancelled by the buyer.
Status of Taxability
Brokerage amount
not recoverable
from broker.
CENVAT Credit availed
need not be reversed.
Brokerage amount
recoverable from
broker.
Reverse CENVAT Credit
availed.
Service Tax Issues in Real Estate Transactions
Reverse Charge Issues
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.
Service Tax Issues in Real Estate Transactions
Other Issues
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.
Service Tax Issues in Real Estate Transactions
Other Issues
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%.
Knowledge Speaks ,
But Wisdom Listens