Service Tax and Vat on Builders and Developers

Builders and Developers How the controversy arose

•         Supreme Court in case of K.Raheja Development Corporation (2005) 2 STT 178 SC which was a case on Karnataka General Sales Tax Act held that where developer was undertaking construction on behalf of prospective flat owners, it tantamounts to works contract and exigible to sales tax

•         In this case , the assessee had entered into development agreements with land owners. Developer to there after get the plan approved and after completion flats were to be handed over to those land owners who were to get undivided interest in the land also. There after owners to transfer flats to housing society. It was in this case that transaction was held to be works contract

•         On the basis of decision of K.Raheja Development Corporation , DG Service tax , Mumbai vide letter dated 16-02-2006 (withdrawn since 23-08-2007) sought to impose service tax on service part of transaction.

Mitigating Controversy

•         As per Entry 49 of State List only State Government has power to levy tax on Land and Buildings

•         In 2004 Government has issued clarification that builder constructing the building for sale is service to self and not subject to service tax

•         Government examining the above issue issued a circular 108/02/2009-ST dtd. 29-01-2009 and clarified that whenever builder/developer enters into agreement before or after construction ,with buyer to sell house/flats, it will not attract service tax and shall be treated service to self.

•         Gauhati High Court in Magus Construction Pvt. Ltd. Has held that service tax can not be levied in such transactions.

•         In L&T case 2008 12 STR 257 (SC) the apex court has expressed disagreement with Raheja Development Corporation and referred the matter to larger Bench.

Levy of Service Tax by Government

•         However under Service Tax law Finance Act 2010 by inserting an explanation in definition of Construction of Complex Services, amount received by builders and developers from prospective buyers before completion certificate by competent authority had been charged to service tax w.e.f. 01-07-2010 subject to abatement of 75% under that service. No Cenvat Credit was available

•         Further Finance Act 2012 under declared services u/s 66E has affirmed the situation again providing 75% abatement. Cenvat Credit of capital goods and input services is available. But cenvat credit of inputs is not available.

•         Finance Act 2013 has however reduced abatement to 70% in respect of cases where carpet area of residential units is more than 2000 square feet and amount charged is not less than 1 crore (Notification 2/2013 dated 01-03-2013)

Levy of Service Tax & Vat in Punjab  Affirmed

•         Bombay High Court has affirmed the levy in case of Maharashtra Chamber of Housing Industry in 2012-TIOL-78

•         Punjab and Haryana High Court has affirmed the levy of service tax in GS Promoters (2011) 21 STR 100. However in this case no pleadings on Entry 49 were taken and hence may be per incur am

•         In the decision of Vat Commissioner  dtd. 13-08-07, in case of SMV Agencies, Mohali, decision of K. Raheja held applicable.

•         As per public notice dated 09-11-2012 issued by Excise and Taxation Department of Punjab

            “…………….All builders and developers involved in sale of flats or housing units are liable to be registered…………….”

Valuation

For calculating 25%/20%

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.           

Service Tax in Tripartite Development Agreement

•         In case of Tripartite Agreement between i) owner ii) developer and contractor

•         Sale of land by owner is not taxable

•         Developments rights are taxable in the hands of developer

Value of development rights= Value of similar flats charged by

builder from second category of service recipients or Value of

similar flats sold at the time of or nearer to time when land is

made available for construction.

   Service tax is liable to  be paid by the builder/developer  on the ‘construction service’ involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (eg. allotment letter).

Service Tax on BOT Contracts

•         Government or its agency transfers right to develop and/or use say for 30 years for \upfront fee or annual lease charges.

•          In this case government is service provider

•         Government shall be covered by renting of immovable property

•         However the services provided by Government are under Negative List Section 66D(a)

•         Where concessionaire gets charges from public e.g. toll charges, then toll charges for access to road or bridge are also covered by  S.66D(h) of negative list of services

Vat on BOT Contracts in Punjab

As per order of ETC dtd. 20-07-2009 in case of Chetek Enterprises (P) Ltd

In order to determine the quantum of deemed sales involved in the BOT project, the

value of entire works contract can be taken as the total project cost and after

deducting there from the above mentioned expenses towards  labor and services,

we can arrive at the value of goods involved in the execution of said works contract

awarded by way of concession and accordingly, the tax payable can be assessed on

this amount of goods involved in the execution  of said BOT  project –cum-works

contract.

There are following pre-requite of a sale

a) Existence of goods b)Transfer of property in goods c) Valuable consideration cash or deferred

b) Buyer competent to contract e) Seller competent to contract

c) The BOT contract has all the above ingredients of a sale and therefore is liable to be taxed

In view of the above discussion it is clarified that “

•        The sale in the case of work contract takes place when goods are incorporated in the works. The such goods are taxable at the rates prescribed under various Schedules attached to the PVAT Act.

•        Local purchases made by company are eligible for ITC as per Section 13 of the PVAT Act, 2005.

•        As discussed above, the measure for levy of tax as contemplated in the Gannon Dunkerley case (Supra)   is value of the goods involved in the execution of work contract. Therefore, the tax will be levied irrespective of source of supply.