Construction Activities and Its Taxability

CS Deepak Pratap Singh

Construction industry is one of the most profitable industries in our country. Its play a vital role in development of infrastructure, which is the most essential for development of our country. The government of India has given various concessions in to this industry in taxation matters.

Now government on seeing and considering various options of revenue generation imposed Service tax on this industry.

The Service tax was imposed on industrial or commercial construction w.e.f. 10-09-2004.

The Service Tax on works contracts was imposed w.e.f. 1-6-2007.

The Central Government also imposed Service Tax on construction of residential complex having more than 12 residential units w.e.f. 16-6-2005. This act of the government has been challenged in various High Courts all over the country.

A “Deeming Provision “has been introduced w.e.f. 1-7-2010 in the definition of Commercial or industrial construction and construction of residential complex. The provision provides that if a builders or developer received any payment against sale of flats or shops or commercial/industrial galas before obtaining “Completion Certificate “from concerned authorities, it will be treated as taxable service.

The above definition provides that if a contractor or developer or builder receives all consideration after getting “Completion Certificate” from concerned authorities then the sale will not be considered as sale and nothing is taxable. If the builder or developer received any payment (consider 1% as advance) before getting of “Completion Certificate”, then whole of sale consideration will be taxable as “Deemed Sale.”

The Government has introduced concept of “Negative List of Services” w.e.f. 1-7-2012, thus all services except those mentioned in the “Negative List” will be taxable.

Section 66E (b) “Declare Services” includes “Construction Activities”, this covers residential, commercial and industrial construction services.

“Meaning of Construction” Construction includes additions, alterations, replacements or remodeling of any existing civil structure.

Note: Repair of existing buildings is not covered in this head

As decided in the case of Confederation of Real Estate Developers’ Association v. UOI, it was held that Service Tax is not a tax on land or building but it is a tax on Construction Activities.

“Competent Authority” means the Government or any authority authorized to issue completion certificate under any law for time being in force. The Certificate of registered Architects, Chartered Engineers, Licensed Surveyors are acceptable in this case.

Section 65B (44) of the Finance Act, 1994 as introduced w.e.f. 1-7-201 provides that-“service means any activity carried by one person for another for consideration and includes a declared service, but shall not include;

(a) An activity which constitute merely-a transfer of title of goods or immovable property, by way of sale, gift or in any other manner.

It provides that a builder/ developer in its initial stage of construction activity work for itself and this act is not a taxable activity. When it enters with an agreement for sale of flat, shop or commercial premises with the perspective buyers before completion of construction activities or getting of Completion certificate from competent authority, in this case it is providing services to the purchasers. In case of completion of project or getting of completion certificate the residential or commercial complex become immovable property and same can be transferred by sale or transfer of title in goods. This activity is not considered as service it is sale of goods or immovable property and not liable to service tax.

Abatement Scheme of 25%/30% for payment of service tax if value includes value of land;

This is a composition scheme available to builders or developers if they are unable to compute value of services involved in the construction. In this case builders or developers pay service tax on the basis of percentage of total consideration;

(a) If carpet area of residential complex is up to 2000 square feet and amount charged is less than Rs. One Crore-25%

(b) If carpet area of residential complex is 2000 or more square feet and amount charged is more than Rs. One Crore-30%

Note: The service provider can avail Cenvat Credit of input services and capital goods but not on duty paid (such as excise duty ect.) on goods used as input.

The tax will be payable even if a part consideration is received before receipt of completion certificate by the builder or developer.

The taxable value will be the sum total of the amount charged for the services including the fair market value of all goods and services supplied by the recipient in or in relation to the service, whether or not supplied under the same contract or any other contract. It means that when any goods or services will be supplied by the recipient of service to the contractor free of cost or in relation to service, same will be added in while determining value of taxable portion.

Note: there are many services such as preferential location charges, additional charges for modifications suggested by the customers, maintenance during construction period, covered parking charges etc. These services will be considered as “Bundled Services” and are covered under “Construction Services” and some are available for abatement scheme. Development Charges, which are payable to government authorities and such services, are also taxable in abatement scheme but club membership is not taxable under this scheme.

Taxability of services when some units/flats/shops supplied to land owners free of cost;

In the case of most of construction contracts, the builders or developers supply some flats/shops/commercial units to the land owners, who have supplied the land for development.

The service tax will be payable on free supply of flats/shops/commercial units to the land owners by the builders or developers.

As in case of City Makers P. Ltd. v. CST(2012) 36 STT 228 it has been held that service tax is payable even when consideration is received in form of land.

The value of service will have to be found out on the basis of value of service of identical or similar flat/shop or on basis of cost of construction with reasonable profit.

It is followed that when the builder/developer gets land from land owner, this will be ‘advance received’ and service tax will become payable immediately.

The CBEC Circular No. 151/2/2012-St dated 10-2-2012, service tax is liable to be paid by the builder/developer on the “Construction service” involve 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.

As in the case of redevelopment of a society the constriction activity will be chargeable to tax as notified by CBEC.

In case of investor also, the amount invested by the investor is deemed to be advance and same will be liable to tax. If an investor wants to exist from the project before or after receipt of completion certificate then the amount paid by the builder/developer in earlier will be adjusted in further payment of service tax.

The liability of service tax depends on its nature at the time of construction of residential or commercial premises. Any subsequent change in its use cannot increase or decrease service tax liability.

Note: if a purchaser sold his/her flat/shop/commercial unit before paying full installments and before completion of building is not liable to pay service tax as such transfer does not fall within ambit of “ Declared service”. Since this is transfer of interest in immovable property arising out of land and not taxable.