Circular No. 151 /2 /2012-ST dated 10th February, 2012
Clarification Service tax on construction service
On levy and collection of service tax on construction services [clauses (zzq),(zzzh) of section 65(105) of the Finance Act, 1994],on different business models.
1. Tripartite Business Model
2. Redevelopment including slum rehabilitation projects models:
3. Investment model:
4. Conversion Model:
5. Build- Operate - Transfer (BOT) Projects:
6. Joint Development Agreement Model:
1. Tripartite Business Model
Parties involved:
(i) landowner;
(ii) builder or developer; and
(iii) contractor (who undertakes construction):
Issue: Service tax on flats/houses agreed to be given by builder/developer to the land owner towards the land /development rights and to other buyers.
Analysis: Here two important transactions are identifiable:
(a) sale of land by the landowner which is not a taxable service; and
(b) construction service provided by the builder/developer.
The builder/developer receives consideration for the construction service provided by him, from two categories of service receivers:
(a) from landowner: in the form of land/development rights;
(b) and (b) from other buyers: normally in cash.
Taxability of the construction service:
(i) For the period prior to 01/07/2010: Construction service provided by the builder/developer will not be taxable
(ii) For the period after 01/07/2010, construction service provided by the builder/developer is taxable Only If part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion
Valuation:
(1) Value of flats given to land owners - determinable U/s 67(1)(iii) read with rule 3(a) of Service Tax (Determination of Value) Rules. That is in effect similar to that of other buyers.
Liability arises only 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).
(2) Value of flats given to other buyers - Shall be determined in terms of section 67 of the Finance Act, 1994.
2.Redevelopment including slum rehabilitation projects models:
Parties involved:
(i) land is owned by a society,
(ii) comprising members of the society
(iii) builder/developer for undertaking re-construction.
Role of builder:
Builder/developer makes new flats with same or different carpet area for original owners of flats and additionally may also be involved in one or more of the following:
(i) construct some additional flats for sale to others;
(ii) arrange for rental accommodation or rent payments for society members/original owners for stay during the period of re-construction;
(iii) pay an additional amount to the original owners of flats in the society.
Consideration for Builder:
Builder/developer receives consideration for the construction service provided by him:
(i) The society/members of the society, who transfer development rights over the land (including the permission for additional number of flats), to the builder/developer.
(ii) Buyers of flats other than the society/members.
Taxability:
(i) Re-construction undertaken by a building society by directly engaging a builder/developer will not be chargeable to service tax as it is meant for the personal use of the society/its members.
(ii) Construction of additional flats undertaken as part of the reconstruction, for sale to the other than the society/members will also not be a taxable service, during the period prior to 01/07/2010. However taxable after 01/7/2010 if any payment is made to the builder/ developer before the issuance of completion certificate.
Valuation:
Value, in the case of flats given to other than the society/members, shall be determined in terms of section 67(1)(i) of the Finance Act, 1994.
3. Investment model:
(i) In this model, before the commencement of the project, the same is on offer to investors either a specified area of construction / a flat of a specified area is allotted.
(ii) Additionally the investor may also be promised a fixed rate of interest.
(iii) After a certain specified period an investor has the option either to exit from the project
a. On receipt of the amount invested along with interest or
b. He can re-sell the said allotment to another buyer or
c. Retain the flat for his own use.
Taxability:
(i) after 01/07/2010, investment amount shall be treated as consideration paid in advance for the construction service to be provided by the builder/developer to the investor and the said amount would be subject to service tax.
(ii) If the investor decides to exit from the project at a later date, either before or after the issuance of completion certificate, the builder/developer would be entitled to take credit under rule 6(3) of the Service Tax Rules, 1994( to the extent he has refunded the original amount).
(iii) If the builder/developer resells the flat before the issuance of completion certificate, again tax liability would arise.
4.Conversion Model:
This model is to convert untaxed construction /complex or part thereof into a building or civil structure to be used for commerce or industry, after lapse of a period of time.
Taxability:
A Mere change in use of the building does not involve any taxable service, unless conversion falls within the meaning of commercial or industrial construction service.
5. Build- Operate - Transfer (BOT) Projects:
Many variants of this model are being followed in different regions of the country, depending on the nature of the project. Build-Own-Operate-Transfer (BOOT) is a popular variant.
Parties involved:
(i) Government or its agency,
(ii) concessionaire (who may be a developer/builder himself or may be independent)
(iii) and the users are the parties.
Transfers:
Government or its agency by an agreement transfers the ‘right to use’ and/or ‘right to develop’ for a period specified, usually thirty years or near about, to the concessionaire.
Analysis: Transactions involving taxable service take place at
(a) Firstly, between Government or its agency and the concessionaire;
(b) Secondly, between concessionaire and the contractor and
(c) Thirdly, between concessionaire and users, all in terms of specific agreements.
(a) Between Government or its agency and the concessionaire
1. Government or its agency transfers the right to use and/or develop the land for an upfront lease amount or annual charges paid by the concessionaire.
2. Here the Government or its agency is providing ‘renting of immovable property service’ (renting of vacant land to be used for furtherance of business or commerce) and in such cases the concessionaire becomes the service receiver.
In this model, though the concessionaire is undertaking construction of a building to be used wholly or partly for furtherance of business or commerce, on the land provided by the government or its agency for temporary use, he will not be treated as a service provider since such construction has been undertaken by him on his own account and he remains the owner of the building during the concession period.
(b) Between concessionaire and the contractor
(1) If the concessionaire is himself a builder/developer, this level of transaction may not arise. Where an independent contractor is engaged by a concessionaire for undertaking construction for him, then service tax is payable on the construction service provided by the contractor to the concessionaire.
(c) Concessionaire and users
(1) Here concessionaire is the service provider and user of the building is the service receiver. The concessionaire may provide to the users, taxable services such as
(a)renting of immovable property service’,
(b)‘business support service’,
(c)‘management, maintenance or repair service’,
(d) ‘sale of space for advertisement’, etc
Taxability:
(i) the service provided by the Government or its agency to the concessionaire is liable to service tax;
(ii) the construction services provided by the contractor to the concessionaire would be examined from the point of taxability as to whether the activity is not otherwise excluded;
(iii) the services provided by the concessionaire to the user of the facility are liable to service tax;
Persons liable to pay tax:
(1) Government or its agency and concessionaire are liable to pay tax on the services being provided by them.
(2)There could be several other persons liable to pay service tax, depending on the variant of the BOT model followed.
6.Joint Development Agreement Model:
(1)Here land owner and builder/developer join hands and may either create a new entity or otherwise operate as an unincorporated association, on partnership /joint / collaboration basis, with mutuality of interest and to share common risk/profit together.
(2)The new entity undertakes construction on behalf of landowner and builder/developer.
Taxability:
Circular 148/17/2011-ST dated 13/12/2011, particularly paragraphs 7, 8, 9 apply mutandis mutandis in this regard.
7. Non requirement of completion certificate / where completion certificate is waived or not prescribed:
In such cases a from certificate architect or chartered engineer or licensed surveyor shall constitute completion certificate.
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