Service Tax : Construction of Residential Complex service

Introduction

Construction industry is one of the major sources of revenue to the government of India. It is very imperative for each and every entrepreneur to plan his service tax well in advance. Before starting any project professional consultation on applicability of various taxes needs to be understood. In an effort to do that today I am writing this article on service tax applicability on construction projects.

Construction activities are broadly taxed in the following manner under the service tax law

  • Construction of residential complex
  • Construction services (industrial & commercial)
  • Works Contract services

There are major amendments to service tax law applicable from 01.07.2012 which saw the arrival of negative, mega exemption notification and so on. Certain aspects before 01.07.2012 has not been discussed herewith.

This article is only for education purpose. Not to be construed as an opinion. Seek professional help before taking any decisions based on this article.

There were number of issues on considering construction portion in a works contract or construction activity as a service. To remove ambiguity and to establish the intent of the government, an amendment has been made to make construction activity a declared service. Hence no questions can be asked upon whether it is a service or not.

Exemptions for certain activities

Only construction service is taxable and not sale of building. According to Section 66E(b) if all money is received by the service provider on obtaining completion certificate from the competent authority.

Exemption has been provided to following services :

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 predominately for use as an establishment for following purposes:
educational,
clinical,
an art or cultural establishment.
(d) canal, dam or other irrigation works
(e) pipeline, conduit or plant for
water supply
water treatment, or
sewerage treatment or disposal; or
(f) A residential complex predominantly meant for self-use or the use of employees their employees or other persons specified in Explanation 1to clause (44) of section 65B of the said Finance Act.

Construction of specified structures are exempt as well

Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

(a) road, bridge, tunnel, or terminal for road transportation or for use by general public;
(b) a civil structure or any other original work 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 12AA of the Income-tax Act, 1961 (43 of 1961) and meant predominately for religious use by general public.
(d) a pollution control or effluent treatment plant, located as a part of a factory; or
(e) a structure meant for funeral, burial or cremation of deceased.

Construction of following original works are also exempt

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 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) mechanized grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages.

CONSTRUCTION OF RESIDENTIAL COMPLEX SERVICE

There is lot of debate on choosing the right method of service tax for builders of residential complex. One chooses to go by the works contract method by claiming deduction of land and material, and the other chooses this service. In our opinion construction of residential complex is more apt for the following reasons.

  1. Construction of residential complex is also a works contract but there is movement of title by way of registration, which is absent in case of a normal works contract.
  2. Since there is a specific category available one has to choose it over a general category.

General model of construction industry is as follows

  • A builder having money and expertise approaches a landowner.
  • The landowner agrees to give his land on joint development.
  • The builder constructs the building and transfers a part of it in return for the land transferred by the landowner.

Service tax applicability on transactions

No. Particulars Applicability
1) Transfer of land by landowner to the builder Not Taxable
2) Sale of flats either through or without sale agreement and receipt of advance by the builder before obtaining completion certificate. Taxable
3) Sale of flats either through or without sale agreement and receipt of advance by the landowner before obtaining completion certificate. Taxable
4) Sale of flats by builder or landowner after obtaining completion certificate provided whole consideration is received after obtaining such certificate. Not Taxable
5) Transfer of flats by builder to landowner Taxable

Suggested scheme of taxation

  • As soon as development agreement is registered and plan sanction is obtained, raise a bill on the landowner for the portion of building to be transferred.
  • The value for that purpose can be considered at the guidance value prevailing on the date of joint development in such area.
  • The same has to be paid to the government by the builder.
  • The Landowner has to collect service tax on any sale of his share of building upto the date of obtaining Completion certificate.
  • The Landowner can claim CENVAT credit of the tax paid to the builder based on the invoice raised by them.

Abatement – Notification No.26/2012-ST – Sl No.12. 

Applicable from 01.04.2016

No. Particulars Abatement Taxable
1) For a residential unit satisfying both the following conditions:

a)     Carpet area of one unit is less than 2ooo SFT

b)     The amount of consideration is less than 1 Crore

70% 30%
2) For other than above 70% 30%

Conditions for claiming abatement

  1. No CENVAT credit of inputs
  2. Value of land is included in the consideration

However there is no restriction on claiming CENVAT credit on Capital goods used in construction of the project and the input services used in the project.

 

9 thoughts on “Service Tax : Construction of Residential Complex service

  1. In case of land owners portion of flat whether it is possible to take benefit of CBE&C circular dt 10/02/12 that tax will be payable on conveyance deed or allotment letter given after completion of building to land owner. whether completion means deemed transfer of flats to land owner or to execute separate conveyance deed is important.

    1. My view is since there is a change in the service tax law which makes construction a deemed service, we might not be able to take benefit on that circular you are referring to.

  2. in case of construction of flat to owner along with other flat.
    does service tax is levied on transfer of flat to owner?

    1. This is a grey area. Department is taking the stand that the builder is providing construction service to the landowner and the land foregone by the landowner is the value of the consideration hence service tax is chargeable. However, there are number of builders who are taking the stand that since land is a immovable property and it is a transaction of barter that is exchange of immovable property land for immovable property flat service tax is cannot be levied.

  3. One company X has been in the business of construction of complex at 3 different sites(say A, B, C). All are under construction. Project A was transferred ‘as is where is’ condition to other construction company Y under conveyance deed with clause for protection of rights of persons who entered into agreement of sale with previous company. Whether the transaction of conveyance deed attracts service tax on sale consideration received by company X.

  4. Builder owns the land. He plans to develop residential complex. Enters into 2 separate agreements with his customer. One for Construction (flat will be handed over 2-3 years later and amount will be collected by installments based on stages of completion) and other for the sale of undivided share. Now, whether the customer is liable to pay service tax on both or only on construction value?

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