Service Tax on Construction Activities
Before dealing with the issue of Service Tax on Construction Activities under Taxation of Services by Negative List approach which has come into effect with effect from 01-07-2012, it is worthwhile to specify here that Service Tax was leviable on construction activities under the following three categories of services until 30-06-2012:
a) Commercial or Industrial Construction Services with effect from 10-09-2004
b) Construction of Complex Services with effect from 16-06-2005
c) Works Contract Services with effect from 01-06-2007.
However, with effect from 01-07-2012 all activities related to construction fall within the purview of following “Declared Services” under Section 66E of the Act:
66E(b) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion-certificate by the competent authority.
66E (h) Service portion in the execution of a works contract.
With effect from 01-07-2012, the following definition of “Works Contract” as given in Section 65B (54) of the Act is applicable:
"works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance. renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;
A perusal of above definition reveals that scope of works contract has increased immensely. The most striking feature of the above definition is that it applies to both movable and immovable properties.
Exemption to certain Construction Activities
Certain construction activities have been exempted by virtue of entry no. 12, 13 & 14 of Notification No. 25/2012 dated 20-06-2012 with effect from 01-07- 2012.
Entry No. 12, inter alia, grants exemption to 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 civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession, a historical monument, archaeological site, a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment. Services covered by this entry are exempted only if these services are provided to the Government or Local Authority or Governmental Authority.
Entry No. 13, inter alia, grants exemption to 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 for use by general public, a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awaas Yojana. In order to avail exemption under entry no. 13 the status of service recipient is insignificant-be it Government, a Local Authority or a Governmental Authority or any other person.
Entry No. 14 inter alia, grants exemption to Services by way of construction, erection, commissioning, or installation of original works pertaining to an airport, port or railways, including monorail or metro, a single residential unit otherwise than as a part of a residential complex, Low-cost houses upto 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. The scope of exemption granted vide entry no. 14 is restricted because it does not cover completion, fitting out, repair, maintenance, renovation or alternation of original works pertaining to any of the specified structures, immovable properties, machineries or equipments.
Exemption to sub -contractor :In addition, exemption has also been provided with effect from 01-07-2012 vide Entry No. 29(h) of Notification No. 25/2012 to sub-contractor providing services by way of works contractor to another contractor providing works contract services which are exempt. This exemption was also available until 30-06-2012 vide Circular No. 147/16/2011 dated 21-10-2011.
Illustrative list of services in relation to Construction Activities which have become taxable with effect from 01-07-2012 onwards
- Construction of Boundary Wall.
- Construction of Parking Area.
- Services in respect of Cutting of Plots and Development of colonies received by builders.
- Construction of Residential Complex of units ranging between 2-12 units (more than one unit).
- Construction of Private Roads.
- Construction Services provided to Non– Commercial Organisation in respect of buildings which are used for other than Religious Purpose.
- Services provided in respect of Construction of hospitals to any person other than Government or Governmental Authority or Local Authorities.
- Services provided in respect of Construction of buildings to be used for the purpose of Education to any person other than Government or Governmental Authority or Local authorities.
Substituted Rule 2A(i) of Service Tax (Determination of Value) Rules, 2006, inter alia, provides that the value of service portion in the execution of a works contract is the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. Alternatively, under foregoing Rule 2A (ii), the aforementioned value will be determined as under:
Purpose of the Works
Percentage of total amount deemed asValue of
service portion of the Works Contract
Execution of Original
Maintenance or Repair or Reconditioning or Restoration or Servicing of any Goods
Any purpose other than
(A) & (B) above, including Maintenance, Repair, Completion and Finishing Services [such as Glazing, Plastering, Floor and WallTiling, Installation of Electrical Fittings] of an immovable property
Bonanza for Builders in the form of Additional CENVAT Credit
According to Notification No 26/2012 dated 20-06-2012 with effect from 01-07-2012 in respect of Construction of a complex, building, civil structure or a part thereof which is intended for sale to a buyer,wholly or partly, service tax is payable on the 25% of the amount charged by such service provider subject to the condition that CENVAT Credit on “input goods” used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004.
In other words, Department has given bonanza to builders by allowing them to avail and utilise CENVAT Credit in respect of “input services” and “capital goods” while discharging their service tax liability in respect of above-mentioned Construction Services with effect from 01-07-2012.
In contrast, there was a total prohibition on availing any kind of CENVAT Credit until 30-06-2012 in respect of above Construction Services. Looking from another angle, with effect from 01-07-2012 the service tax liability of the builders has been significantly reduced because they are required to discharge their service tax liability only on the 25% of the total amount charged which can be either completely set off or significantly reduced by availability of CENVAT Credit in respect of input services and Capital Goods.
The scope of service tax on construction activities has been enlarged with effect from 01-07-2012 because many services which were hitherto outside the tax net, have become taxable with the exception of construction, erection, commissioning or installation of original works pertaining to low-cost houses as mentioned above. On the other hand, CENVAT Credit in respect of “input services” and “capital goods” has been allowed to builders with effect from 01-07-2012. The Valuation of Works Contract Services under substituted Rule 2A of Valuation Rules, 2006 will affect adversely the specified service providers in specific cases.