CA Gautam Joshi
With the introduction of deeming provision in the definition of “Construction of Complex Service” sub-clause (zzzh) of section 65(105) of the Finance Act, 1994 effective from 01-07-2010, construction of residential complex is taxable to builders and it has removed plethora of doubts regarding taxability of builder in service tax gamut.
However, the tragedy of confusion does not end here.
Since 01-06-2007, “Works Contract Service” sub-clause (zzzza) of section 65(105) of the Finance Act, 1994 has been introduced and it can include even construction of residential complex services if VAT/sales tax has been paid on goods involved in the contract.
Any residential complex construction is not possible without consumption of VAT/Sales tax paid goods either at input level or output level. Any construction will consume sand, cement, steel etc. which are all covered in VAT and this way builder pays VAT at input level. On the other side, on output level as well, i.e. on sale or development of flat, builders pay WCT VAT either on actual/regular basis (i.e. 4% or 12.5% on product to product) or @ 0.6% or other applicable lump sum rate.
The bare reading of definition of works contract will also cover any residential construction.
Therefore, the overlapping certainly exists for builder between “Construction of Complex Service” and “Works Contract Service”. Irony is the earlier service gives benefit of exemption by way of an abatement in value (@67% or 75%) that too no tax if total number of flats are less than 12 residential units and later gives benefit of composition scheme @ 4.12% effectively.
Which category of service will result in to the most effective rate?
Undoubtedly “Construction of Complex Service” would be the most effective rate either 3.40% or 2.575% (as per respective abatement rate) compare to 4.12% under “Works Contract Service”. One may argue that under “Works Contract Service”, CENVAT Credit can be available however CENVAT Credit rights again can be challenged on the documentary or other legal grounds.
Which category of service should actually be applicable as per current law?
When overlapping is found, the classification rules come in to play. As per Rule 65A (2) of Finance Act, 1994, when the service is prima facie classifiable under two or more services, the most specific description should override the general description.
The most specific description in this case could be works contract as the recent residential construction trend involves goods covered under VAT/Sales tax. However, this view also is not free from criticism.
All hopes on upcoming budget –
The last circular number 151/2/2012 published on 10/02/2012 regarding service tax on construction has failed to cover works contract service. Upcoming budget will certainly face challenges in this regard.