Levy of Service tax on services provided by Government or a local authority to a business entities relating to Real Estate/Construction Industry
Any service provided by Government or a local authority to a business entity has been made taxable w.e.f. 1St April 2016. Post Budget 2016, representations have been received from several quarters including business and industry associations in respect of various aspects pertaining to the taxation of such services. Accordingly, few clarifications are issued vide circular No. 192/02/2016-Service Tax dated 13th April 2016 issued by Government of India, Ministry of Finance, Department of Revenue (Tax Research Unit), F.No. 334/8/2016-TRU.
♣ Services provided by Government or a local authority to another Government or a local authority have been exempted vide Notification No. 25/2012-ST dated 20-06-2012 as amended by Notification No. 22/2016-ST dated 13-04-2016(Entry 54). However the said exemption does not cover services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act, 1994, the same is reproduced below:
Section 66 D Negative list of services:
The negative list shall comprise of the following services, namely:–
(a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere –
(i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government;
(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; ;
(iii) *transport of goods or passengers; or
* exempted for railways w.e.f.02.07.2012 to 30.09-2012 vide Notification No 43/2012-ST dated 02.07.2012
♣ Service Tax on Taxes, cesses or duties are not consideration for any particular service as such and hence not leviable to Service Tax. These taxes, cesses or duties include excise duty, customs duty, Service Tax, State VAT, CST, income tax, wealth tax, stamp duty, taxes on professions, trades, callings or employment, octroi, entertainment tax, luxury tax and property tax.
Service Tax on abovementioned Taxes, cesses or duties including property tax is rightly exempted as there is no element of service. By specifying Property tax under exemption, the same will act as a major relief to Real Estate/Construction Industry as due to increase in rates of Property tax, the said component is very high in case of development/redevelopment/reconstruction. Hence controversy to charge service tax on property tax will not take place.
♣ Service Tax on fines and penalties :
It is clarified that fines and penalty chargeable by Government or a local authority imposed for violation of a statute, bye-laws, rules or regulations are not leviable to Service Tax.
Fines and liquidated damages payable to Government or a local authority for non-performance of contract entered into with Government or local authority have been exempted vide Notification No. 25/2012-ST dated 20-06-2012 as amended by Notification No. 22/2016-ST dated 13-04-2016 (Entry 57).
♣ Services provided in lieu of fee charged by Government or a local authority :
It is clarified that any activity undertaken by Government or a local authority against a consideration constitutes a service and the amount charged for performing such activities is liable to Service Tax. It is immaterial whether such activities are undertaken as a statutory or mandatory requirement under the law and irrespective of whether the amount charged for such service is laid down in a statute or not. As loag as the payment is made (or fee charged) for getting a service in return (i.e. as a quid pro quo for the service received), it has to be regarded as a consideration for that service and taxable irrespective of by what name such payment is called. It is also clarified that Service Tax is leviable on any payment (exceeding Rs. 5,000) , in lieu of any permission or license granted by the Government or a local authority.
Above clarification has created havoc in the Real Estate/Construction Industry because many permissions or licenses are required to complete any Real State projects which is granted by the Government or a local authority, and to acquire the same heavy official fees are to be paid to them. As per above clarification the same will be covered under service tax net on reverse charge basis, hence from 01-04-2016 14.5% and from 01-06-2016 after introduction of 0.5% of Krishi Kalyan Cess 15% service tax has to be paid by business entities on reverse charge basis as a result of which cost of Real Estate Developers will increase tremendously and the said increase of cost will indirectly will passed on the consumers. As everybody is knowing that prices in real estate industry has reached sky high, now further addition to the same will increase burden on the lacklustre demand. Buying a flat for middle class people in Mumbai is like a dream which will never be fulfilled.
Approval process for Real Estate Projects – Maharashtra (Mumbai) includes following:
a) Ownership Certificate/Extract
b) Building Layout Approval
c) Obtain Intimation of disapproval (IOD) (building permit) from the Building Proposal office. Scrutiny fees is to be paid along with cost for IOD varies depending upon whether construction is of residence or commercial. The Intimation of disapproval is issued with a list of no-objection certificates which the applicant must obtain separately from various departments & government authorities.
d) Final Clearance to build “Commencement Certificate” (CC) will only be given once the company obtains all NOCs and meet all IOD conditions. There are about 40 IOD conditions to be met by the builder to be eligible for applying for commencement certificate (CC). Major NOCs/ IOD conditions are listed below.
i) Non-Agriculture (NA) permission : Granted by Revenue Department
ii) Obtain NOC from Tree Authority Committee of Municipal Corporation.
The Tree Authority must ascertain what trees (if any) will be cut down as a result of construction. If trees are to be cut down, the building company will have to plant trees to replace them.
iii) Obtain NOC from storm water & Drain Department (Municipal)
iv) Obtain NOC from Sewerage Department (Municipal)
v) Obtain NOC from the Electric Department (Municipal):
The electric consultant hired by the developers works out load requirements, transformer capacity etc., Load is sanctioned by power requirements along with a copy of application submitted for building plan approval. BEST will assess whether an electrical sub-station up-grade is required at this stage.
vi) NOC from the traffic & Co-ordination Department (Municipal)
vii) Obtain NOC from the Chief Fire Officer (Municipal): In Mumbai buildings above 24 meters in height requires Chief Fire Officer (CFO) clearance.
viii) Environment Clearance : The environment consultant hired by the company prepares the Environment Impact Assessment Report which is submitted to the State level expert Appraisal Committee which refers it to the State Environment Impact Assessment Authority (SEIAA).
Approving Authority: Ministry of Environment/State Environment Impact Assessment Authority (SEIAA)/ State level expert Appraisal Committee
ix) NOC if near Coastal area: Approving Authority: Coastal Zone Management Authority. Construction is not allowed up to 500 meters from the coast line.
x) Permission for Excavation/ Royalty payment
xi) Other common facilities Approval (Internal Infrastructure services)
xi) Road Access Highway/Expressway: Approving Authority NHAI/PWD
xii) Chief Escalator Installation Approval: Approving Authority Public Works Department.
xiii) Electrical substation NOC for all substation transformers in building (Electric Service Provider). Approving Authority: Electricity Distributor Authority
ix) Ancient Monument Approval : Approving Authority : Archaeological Survey of India
x) Consent to establish & operate: Ministry of Environment has authorised Pollution Control Board to monitor the environment related compliances by the developer which includes setting up of Sewage Treatment Plant (STP) etc.
xi) NOC from Airport Authority of India : Approving Authority : Civil Aviation Department
e) Submit structural plans approved by structural engineer to the BMC/Municipal.
The IOD is only an approval of the civil plans. Review of the structural plan is done in parallel with the NOC process. No approval to this plan is required from the Municipal Corporation but copies are required to be submitted.
f) Obtain Occupancy Certificate (OC) from the BMC (Municipal)
The OC allows the building company to occupy the building but is not considered the final document because the building company still requires the certificate of completion. The company’s architect must submit a formal letter stating that construction has been completed according to the standards set forth in the IOD & CC.
g) Obtain Building completion certificate from the BMC (Municipal)
The Building Completion Certificate is considered to be the ultimate document that the building company requires to fully occupy the building and connect it to utilities like water, power, sewerage connection etc.
Hence based on above one can conclude that Builder/Developer/Contractor has to obtain n no. of permissions/licenses granted by the Government or a local authority. To obtain the said permissions/licenses builder/developer/contractor have to pay huge official money on which now service tax will be applicable from 01-04-2016 as a result of which now Builder/Developer/Contractor have to shell out huge amount of service tax i.e. at present 14.5% and from 01-06-2016 15% on amount spent by them for getting above permissions/licenses from government or a local authority.
“Government” means the Departments of the Central Government, a State Government and its Departments and a union territory and its departments but shall not be include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with article 150 of the Constitution or the rules made their under
“Local Authority” means-
(a) a Panchayat as referred to in clause (d) of article 243 of the Constitution;
(b) a Municipality as referred to in clause (e) of article 243P of the Constitution;
(c) a Municipal Committee and a District Board, legally entitled to, or entrusted by the Government With, the control or management of a municipal or local fund;
(d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006);
(e) a regional council or a district council constituted under the Sixth Schedule to the Constitution;
(f) a development board constituted under article 371 of the Constitution; or
(g) a regional council constituted under article 371A of the Constitution;
M.C.G.M. is covered under local authority but MHADA is not covered under local authority definition but it can fall under government authority which is not included in the said circular no 192/02/2016-Service tax dated 13-04-2016. Hence whether one can argue that all payment in lieu of any permission or license granted by BMC is not exempt but MHADA is exempt.
However, Ministry of Finance vide its notification no. 02/2014 dated 30.01.2014 widened the scope of the definition of the Governmental Authority. The earlier definition as provided under the mega Exemption Notification dated 20.06.2012 was substituted with the following:
“Governmental authority” means an authority or a board or any other body;
i. set up by an Act of Parliament or a State Legislature; or
ii. established by Government,
with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution;’
Maharashtra Housing & Development Authority (MHADA) is a Government of Maharashtra owned Organisation established in 1977. Hence MHADA cannot be considered as Government but certainly can be considered as Government Authority.
◊ However, services provided by the Government or a local authority by way of :
i) Registration required under the law;
ii) testing, calibration, safety check or certification relating to protection or safety of workers,, consumers or public at large, required under the law have been exempted vide Notification No. 25/2012-St dated 20-06-2012 as amended by Notification No. 22/2016-ST dated 13-04-2016 (Entry 58).
◊ Services in the nature of allocation of natural resources by Government or a local authority to individual farmers have been exempted vide Notification No. 25/2012-ST dated 20-06-2012 as amended by Notification No. 22/2016-St dated 13-04-2016 (Entry 59). Such allocation/auctions to categories of persons other than individual farmers would be leviable to Service tax.
◊ Services in the nature of change of land use, commercial building approval, utility services provided by Government or a local authority
Regulation of land use, construction of buildings and other services listed in the twelfth schedule to the constitution which have been entrusted to Municipalities under Article 243W of the constitution, when provided by governmental authority are exempt under Notification No. 25/2012-ST dated 20-06-2012. The said services when provided by Government or a local authority have also been exempted from service tax vide Notification no. 25/2012-ST dated 20-06-2012 as amended by Notification No.22/2016-ST dated 13-04-2016 (Entry 39).
Following are the list of services listed in the Twelfth Schedule to the Constitution which have been entrusted to Municipalities under Article 243W of the constitution:
1. Urban planning including town planning.
2. Regulation of land-use and construction of buildings.
3. Planning for economic and social development.
4. Roads and bridges.
5. Water supply for domestic, industrial and commercial purposes.
6. Public health, sanitation conservancy and solid waste management.
7. Fire services.
8. Urban forestry, protection of the environment and promotion of ecological aspects.
9. Safeguarding the interests of weaker sections of society, including the handicapped and mentally retarded.
10. Slum improvement and up gradation.
11. Urban poverty alleviation.
12. Provision of urban amenities and facilities such as parks, gardens, playgrounds.
13. Promotion of cultural, educational and aesthetic aspects.
14. Burials and burial grounds; cremations, cremation rounds and electric crematoriums.
15. Cattle pounds; prevention of cruelty to animals.
16. Vital statistics including registration of births and deaths.
17. Public amenities including street lighting, parking lots, bus stops and public conveniences.
18. Regulation of slaughter houses and tanneries.
Following few above mentioned services are exempt as per Notification No. 25/2012-ST dated 20-06-2012 which are displayed as under:
12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, 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;
(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;
(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;
13. 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;
14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,-
(a) an airport, port or railways, including monorail or metro;
(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) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages;
Slum improvement & up gradation is mentioned under Twelfth Schedule to the Constitution but the same is not covered under mega exemption provided under Notification No. 25/2012-ST dated 20-06-2012 hence permissions or licenses granted by the Government or a local authority under Slum Rehabilitation schemes (SRA) cannot be exempted.
Similarly Regulation of land-use and construction of buildings is mentioned under Twelfth Schedule to the Constitution but the same is not covered elaborately i.e. residence complex built for self use or for employees is covered under mega exemption provided under Notification No. 25/2012-ST dated 20-06-2012 but residences built under redevelopment schemes are not covered hence permissions or licenses granted by the Government or a local authority under redevelopment schemes cannot be exempted.
CENVAT Credit be availed in respect of services provided by Government or a local authority on the basis of challan evidencing payment of Service Tax by the Service recipient (Clause (e) of sub-rule (1) of rule 9 of the CENVAT Credit Rules,2004).
1) It is clarified via Circular No. 192/02/2016 – Service Tax dated 13-04-2016 that Service tax is leviable on any payment (exceeding RS 5,000/-), in lieu of any permission or license granted by the Government or a local authority. Above clarification has created havoc in the Real Estate/Construction Industry because many permissions or licenses are required to complete any Real State projects which are granted by the Government or a local authority, and to acquire the same heavy official fees are to be paid to them. As per above clarification the same will be covered under service tax net on reverse charge basis, hence from 01-04-2016 14.5% and from 01-06-2016 after introduction of 0.5% of Krishi Kalyan Cess 15% service tax has to be paid by business entities on reverse charge basis.
2) C.G.M. is covered under local authority but MHADA is not covered under local authority definition but it can fall under government authority which is not included in the said circular no 192/02/2016-Service tax dated 13-04-2016 as only Government or local authority is included. Hence whether one can argue that all payment in lieu of any permission or license granted by BMC is not exempt but MHADA is exempt.
3) If Slum Rehabilitation Projects & Redevelopment projects as can be considered as part of Twelfth Schedule to the Constitution which has been entrusted to Municipalities under Article 243W of the constitution hence the same can be added by the service tax department under mega exemption notification no. 25/2012-ST dated 20-06-2012 then builder/developer lobby will be benefited otherwise they have to pay huge service tax on amount payable by them in lieu of any permission or license granted by the Government or a local authority.
4) As everybody is knowing that prices in real estate industry has reached sky high, now further addition to cost of developers will increase burden on the lacklustre demand faced by the Real Estate Industry.
5) By specifying Property tax under exemption, the same will act as a major relief to Real Estate/Construction Industry as due to increase in rates of Property tax, the said component is very high in case of development/redevelopment/reconstruction. Hence controversy to charge service tax on property tax will not take place.