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Basics

Service Tax Applies to whole of India except J&K. Normal rate of Service Tax is 10.3% Service Provider is normally the person liable to pay service tax upon crossing the turnover of Rs. 10 Lacs p.a. Service tax is to be deposited only when payment is received. Export of services is exempted for payment of service tax.

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Applicable rates
Period Rate Upto 13.05.2003 14.05.2003 to 09.09.2004 10.09.2004 to 17.04.2006 18.04.2006 to 10.05.2007 11.05.2007 to 23.02.2009 24.02.2009 onwards

5% 8% 10.20% 12.24% 12.36% 10.30%

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Centralised Registration
Object Several Premises for rendering services. Optional CCE grants the registration Centralised Billing / Centralised Accounting Zonal Centralised Registration Modification Concept of Input Service Distributor Advantages Time No information to any other jurisdiction Audit / Correspondence at one place
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Poser 1 - Break

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Classification of Service
Section 65A
Most specific description Composite services as per Essential character Sub clause which occurs first

- Poser 2

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Valuation of service
Rule 5 Exclusion and Inclusion
Exclusion of costs incurred as Pure Agent Rule 5(2) provides various conditions which need to be satisfied
Whether services rendered free of cost, chargeable to service tax? Whether service tax to be paid on property tax paid for immovable property? How is valuation derived if consideration is received in kind?

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Initial Exemption
Limit of Rs. 10 Lacs Registration at Rs. 9 Lacs
Poser 3

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Option for Discharge of ST for construction sector


On Full value On Labour Value Tax at 10.30% with material deduction Tax at 10.30% with Abatement 67% or 75% Including cost of FIM

Tax at 10.30%

Tax at 4.12% Including cost of FIM

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Introduction of Works Contract service from 2007


Tax on service portion of works contract Specified work contracts covered
Erection / commissioning / Installation Industrial / commercial construction New residential complex Completion, finishing services, repair, alteration, renovation in relation of (b) and ( c) Turnkey Projects including EPC
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Issues in Work Contract Service


Contractors not paying service tax prior to 1-6-2007 Daelim Industrial Co. Ltd Tribunal ruled in the favour of the assessee, Dept appeal to SC was rejected by SC Diebold Systems (P) Ltd URC Construction (P) Ltd CCE vs Shapoorji Pollamji & Co. Ltd. Petrofac International Ltd vs CCE

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vs
B Rama Rao & Co. Bang CESTAT CCE vs BSBK Delhi CESTAT (overruled Daelim) Instrumentation Ltd Delhi CESTAT

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Rate of service tax applicable under Work Contract service is always 4.12%. Is this statement correct?

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Rule 2A of the Valuation Rules under Work Contact Service


As per Rule 2A(1) of Valuation Rules, the value of the works contract services is equivalent to the gross amount charged for works contract less the value of transfer of property in goods involved in the execution of works contract For this purpose Gross amount shall not include VAT or Sales Tax Value shall include the following: Labour Charges for the execution of the works Amount paid to the sub contractors for labour and services Charges for planning designing and architects Charges for obtaining machinery, tools etc whether on hire or otherwise for the execution of the works contract Cost of consumables such water electricity fuel etc used in theexecution of works contract Cost of establishment of the contractor relatable to supply of labour and services Other similar expenses relatable to supply of labour and services and Profit earned by the service provider relatable to supply of labour and services

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Issues in Work Contract Service


Ongoing Works Contract as on 01-06-2007
Contract for construction entered prior to 01-06-2007 and service tax is already paid for the payments received till date Whether it is possible to change the classification to Works Contract service

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Availment of Cenvat Credit under different schemes


10.3% on total value 4.12% on total value Abatement of 67%

Concept of Sold vs Consumed


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Cenvat Credit Budget Amendments 2011


New Term wasteful expenditure as per the revised definition of input service Denial of Cenvat Credit for services related to Construction of Factory and office building Motor vehicle is a luxury even if used to transport employees or for business purposes [Sales and purchase people can either go by bus or by air since air travel can be allowable input service] All employee benefits line transport, canteen facility, health care, insurance, welfare expenditure is a pure waste [Company should employ only casual labour at minimum wages with no benefits].
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Cenvat Credit and Related Budget Amendments 2011


Definition of Input Service Input service means any service, Used for providing an output service / manufacture of final product

and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service and . but excludes services, used for- (a) construction of a building or a civil structure or a part thereof; or (b) laying of foundation or making of structures for support of capital goods, except for the provision of one or more of the specified services; or services are used primarily for personal use or consumption of any employee.

Poser - 4
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3.1 Services specifically excluded under clause (A) If used for construction of a building or a civil structure or a part thereof, or laying of foundation or making of structures for support of capital goods

* Architect Services [Section 65(105)(p)] * Port Services [Section 65(105)(zn)] * Other Port Services [Section 65(105)(zzl)] * Airport Services [Section 65(105)(zzm)] * Commercial or Industrial Construction [Section 65(105)(zzq)] * Construction of Residential Complex [Section 65(105)(zzzh)] * Works Contract Service [Section 65(105)(zzzza)]
These specified services will be eligible for Cenvat credit only if used for any of these Specified Services. e.g. Architect Service will be eligible as input service if used for Port Service or Construction Service or Works Contract Service.

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3.2 Services specifically excluded under clause only so far as they relate to a motor vehicle * General Insurance Services [Section 65(105)(d)] * Renting of a cab [Section 65(105)(o)] * Motor vehicle related service (earlier termed as Authorised Service Station service) [Section 65(105)(zo)] * Supply of tangible goods [Section 65(105)(zzzzj)] Eligible if used for provision of taxable services for which Cenvat credit of motor vehicle is available as capital goods. Some vehicles (e.g. fork lift truck, excavators) require registration under Motor Vehicles Act, but insurance, repair services, renting etc. in respect of such vehicles should be eligible for Cenvat credit.
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3.3 Services specifically excluded under clause (C) Certain services like outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession have been specifically excluded.

Poser - 5

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However, this exclusion is only when such services are used primarily for personal use or consumption of any employee.

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Giving both taxable and exempt services


In such cases, the manufacturer/service provider has following four options w.e.f. 1-4-2011

(a) Maintain separate inventory and accounts of receipt and use of inputs and input services Rule 6(2) of Cenvat Credit Rules .
(b) Pay amount equal to 5% of value of exempted goods/services Rule 6(3)(i). (c) Pay an amount equal to proportionate Cenvat credit attributable to exempted goods / services as per Rule 6(3A) Rule 6(3)(ii) (d) Maintain separate accounts for inputs and pay amount as determined under rule 6(3A) in respect of input services - Rule 6(3)(iii)
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Option has to be exercised in respect of all exempted goods manufactured and all exempted output services provided. The option once exercised shall not be changed in remaining part of financial year Explanation I to Rule 6(3) - reiterated in para 2 of CBE&C Circular No. 868/6/2008CX dated 9-5-2008.

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Rule 6(5) that allowed full credit of 17 specified services has been deleted. These services were construction service, management service etc

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Meaning of exempted services As per rule 2(e) of Cenvat Credit Rules, exempted services means
taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken. Explanation For removal of doubts, it is hereby clarified that exempted services includes trading [Words in italics inserted w.e.f. 1-4-2011]

Services on which no tax is payable are also exempt services unlike goods. It has been clarified that export of service will not be treated as exempted service - para 6 of CBE&C Circular No. 868/6/2008-CX dated 9-5-2008.
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Calculation of 'value' for purposes of rule 6(3) and 6(3A)

(a) in the case of a taxable service, when the option available under the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 has been availed, shall be the value
(b) in case of trading, shall be the difference between the sale price and the purchase price of the goods traded or 10% of CGOS which is higher.

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Total amount of Cenvat credit attributable to exempted goods and exempted services for the financial year Cenvat on Inputs used for exempted final products

Cenvat Credit on Inputs used for exempted services (On proportionate basis, based on actual ratio of financial year)
Cenvat Credit on input services used for exempted final products and exempted services (On proportionate basis based on actual ratio of financial year). Cenvat credit on services specified in rule 6(5), which are exclusively used for exempted goods or exempted services

Total amount attributable to exempted final products and exempted services

- Poser 6

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Answer to Poser 6

Particulars

Pre-Budget 2011

Post Budget 2011

Input Credit Taxable Services

10 Lacs 100 Lacs + 60 Lacs = 70 Lacs

10 Lacs 100 Lacs + 60 Lacs * 33% = 120 Lacs

Exempt Services

10 Lacs + 150 Lacs = 160 Lacs

10 Lacs + 60 Lacs * 67% + 30 Lacs = 80 Lacs 10 * (80 / 190) = 4.21

Proportionate Disallowance

10 * (160/230) = 6.95

Payment towards

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Answers Poser 6
Payment of amount or reversal of Cenvat credit is not required in case the taxable service is provided to SEZ Unit or SEZ developer for their authorised operations. These are overriding provisions irrespective of any provision in rule 6(1), 6(2), 6(3) and 6(4) [Rule 6(6A) of Cenvat Credit Rules inserted w.e.f. 1-42011].

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Answers Poser 6
Cenvat credit on capital goods If capital goods are partly used for exempted goods and party for dutiable final products, entire Cenvat credit of duty paid on capital goods is available. Cenvat credit of duty on capital goods is not allowable only when it is exclusively used for manufacture of final products [rule 6(4)]

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Exceptions to Rule of Proportionate Disallowance : Dis-allowance of Cenvat of capital goods only if used exclusively for exempted final product/services.
Some manufacturers are entitled to exemption based on turnover or quantity (e.g. SSI units). They will be entitled to Cenvat on capital goods. They can take Cenvat on capital goods and utilise it for payment of duty when their exemption limit is crossed. Supply to EOU/SEZ, export of goods, deemed exports or gold manufacture

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Budget Amendments 2011


The Works Contract Rules, 2007 have been amended To provide for restriction in availment of CENVAT credit to 40% of service tax paid on services relating to erection, commissioning and installation services, commercial or industrial construction services and construction of residential complex services in case service tax has been paid, without availing the abatement benefit under notification 1/2006.

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Budget Amendments 2011

38.1 A tariff rate of 5% excise duty is being prescribed on Ready-mix concrete (RMC). However these goods would attract the concessional 1% duty without CENVAT credit facility.

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Point of Taxation
Background Currently payment of service tax is linked to receipt of money from the service receiver which is odds with regime in force in Central Excise and VAT laws prevailing in the state. In both these laws payment is required to be paid on accrual basis. The GST regime is also likely to follow the same practise and it is thus felt necessary to align the service tax regime with the same rule so that transition to GST is smooth. The change shall simplify the accounting for the taxpayers. Also to give proper clarity in situations where there is a) Change of rate of service tax b) Imposition of service tax on new services

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Point of Taxation
Can issue of invoice be a taxable event? Really, issue of invoice is only a procedural aspect. Not issuing invoice in time can at the most be a procedural lapse. Relevant date for rate of tax - As per rule 5B of Service Tax Rules (as inserted w.e.f. 1-42011), the rate of tax in case of service provided or to be provided shall be the rate prevailing at the time when the service is deemed to have been provided.

Due date for payment of service tax - Rule 6(1) of Service Tax Rules (as amended w.e.f. 1-4-2011) states that service tax shall be paid to the credit of Government by 5th /6th of the month/quarter immediately following the month/quarter in which service is deemed to be provided (except in month of March) as per rules framed in this regard.
Rules to determine date when service is deemed to be provided - Point of Taxation Rules, 2011 have been issued (which are effective from 1-4-2011) to make provisions in respect of date when a service shall be deemed to provided. These rules will be applicable for purposes of rule 5B and 6(1) of Service Tax Rules. info@consultconstruction.com www.consultconstruction.com

Meaning of point of taxation Point of taxation means the point in time when a service shall be deemed to have been provided [Rule 2(e) of Point of Taxation Rules, 2011]. This point will determine rate of service tax and due date of payment of service tax.

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Pain of Taxation Rules


Rule 3 , POT Rules says, Point of Taxation shall be as follows: (a) Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 14 days from the date of completion of the provision of service. (b) Date of completion of the provision of service or payment, if the invoice is not issued within the prescribed period as above.

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S. No.

Date of completion of service

Date of invoice

Date on which payment recd.

Point of Taxation

Remarks

1.

April 10, 2011

April 20, 2011

April 30, 2011

April 20, 2011

Invoice issued in 14 days and before receipt of payment Invoice not issued within 14 days and payment received after completion of service

2.

April 10, 2011

April 26, 2011

April 30, 2011

April 10, 2011

3.

April 10, 2011

April 20, 2011

April 15, 2011

April 15, 2011

Invoice issued in 14 days but payment received before invoice

4.

April 10, 2011

April 26, 2011

April 5, 2011 (part) and April 25, 2011 (remaining)

April 5, 2011 and April 10, 2011 for respective amounts

Invoice not issued in 14 days. Part payment before completion, remaining later

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Change in Rate of Tax


Before Provision of service

C u t

After Issue of Invoice & Receipt of Payment

POT DOP or Issue of Invoice which is earlier

Provision of service & Issue of Invoice

Provision of Service & Receipt of Payment

o f f

Receipt of Payment

Date of Issue of Invoice

Issue of Invoice

DOP

Issue of Invoice

Provision of Service & Receipt of Payment

DOP

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New Service
Before Issue of Invoice and Receipt of Payment

C u t

POT No Tax is payable

Issue of Invoice within the period provided in Rule 4A and Receipt of Payment

o f f

No Tax is payable

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Continous Supply of Service


Continuous supply of service means any service provided or to be provided for a period exceeding three months [Rule 2(c) of Point of Taxation Rules, 2011]. Following services have been notified as continuous supply of services in terms of clause 2(c) of the rules vide notification No. 28/ST-2011 dated 01.04.2011: (a) Telecommunication service [65(105)(zzzx)] (b) Commercial or industrial construction [65(105)(zzq)] (c) Construction of residential complex [65(105)(zzzh)] (d) Internet Telecommunication Service [65(105)(zzzu)] (e) Works contract service [65(105)(zzzza)]
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Comparison Rule 3 vs Rule 6


Partic ulars Clause a Rule 3 Rule 6

POT is time when invoice for the service provided or to be provided is issued Provided that where invoice is not issued within 14 days of completion of provision of service, POT shall be the date of such completion

Same

Same

Clause b

In case payment is received before POT in Clause a, the date on which payment is received

Same

Explan ation

Where provision of service is determined periodically on info@consultconstruction.com completion of an event as per contract , when www.consultconstruction.com the payment becomes due,

For e.g. As per the contract the milestone for payment is 30th of every month provided 5 slabs are completed. The work was allotted on 1st April and only two slabs were completed by 30th April. Will the POT arise for work done till 30th April, 2011.

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Suggested Milestone:90% of the Contract Price along with Service Tax shall be paid on pro-rata basis against monthly progressive Quantity Abstract within 21 days after receipt of certified Qty Abstract from the companys engineer subject to the following:The abstract shall be prepared on the basis of the cumulative Works/ Facilities completed till the end of the particular month (on 100% Contract Value basis).

Payment shall be made after certification of abstract upon submission of the following documents: i) Invoice (clearly indicating cross referencing the Contract Item no.). Invoice should contain the Service Tax Number and Income Tax PAN number. ii) Inspection release note. iii) Measurement sheets duly certified by Employer's Project Manager. iv) Free issue material reconciliation statement.

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Circular Dated 18th July, 2011


Clarification on Completion of serviceService is complete not only upon providing the same but also the completion of all other auxiliary activities that enable the service provider to be in a position to issue the invoice. Such auxiliary activities could include activities like measurement, quality testing etc which may be essential pre-requisites for identification of completion of service. However such activities do not include flimsy or irrelevant grounds for delay in issuance of invoice.
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What will happen to Retention Monies? Is there any way out to prevent payment of service tax on the same?

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Non-receipt of Payment
X Pvt Ltd completed the services to the client on 30th Sept, 2011. Final RA bill of Rs.50 Lacs has been raised. Due to some dispute, payment of only Rs. 10 Lacs was made. The chances of getting the balance amount is very less.

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Bad Debts
Letter No. 341/34/2011 dt. 31st March, 2011 categorically states that bad debts can-not be claimed as adjustments. If the invoice is renegotiated due to deficient provision or as per change in terms, the tax will be payable on revised amount. However no concession is available for bad debts Rule 6(3) of Service Tax Rules.

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Pain of Taxation Rules


Cenvat Credit shall be allowed on booking basis, provided payment is made in 90 days. Associated Enterprise Date of Credit in books of service receiver / Date of Payment, whichever is earlier.

Existing contracts to be covered under POT Rules from 1st July, 2011.
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Poser - 7

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Construction of complex services

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Chronology of Judgements
Karnataka High Court - K Raheja - 2006 Allahabad HC - Assotech Reality 2008 (Set Aside by SC) Advance Ruling Hare Krishna - 2008 Guwahati HC Magus Construction Pvt Ltd 2008 CBEC Circular Dated 29.1.2009

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Well, it all began with verdict of Hon' Karnataka High Court in the matter of K Raheja Corporation wherein the facts were as follows: Builder entered into two separate agreements with the customers, one for construction and the other for sale of undivided share of land. The words used in the Agreement for Construction were that the agreement is for construction as a developer on behalf of the allottee.

Section 2(1)(v-i) of Karnataka Sales Tax Act stated that 'works contract' includes any agreement for .carrying out the building, constructionof any movable or immovable property.
It was thus interpreted by court that the property in the goods passed by accession during the construction. Hence it was held as "Works Contract" and not a contract of sale. It may be noted that under a Contract of sale the property is transferred after the construction.

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Service tax levied on consideration earned by developer


Prior to amendment in 2010, concept of self-service existed construction of a complex (a new building) - intended for sale, before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder before the grant of completion certificate by the competetent authority) shall be deemed to be service provided by the builder to the buyer Abatement scheme for builders also introduced. Option to pay Service tax at the applicable rate on 25% of the Agreement value, provided no deduction of land is availed and no CENVAT credit is claimed

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IV Transitional Provisions on 1-7-2010 Date of booking is not relevant. Date of provision of service is relevant as provision of service is the taxable event. Hence, if construction service is provided after 1-7-2010, service tax will be payable. If construction is complete before 1-7-2010 even if completion certificate is not received, no tax is payable, as service tax is on provision of service, provided the facts can be made clear from books of accounts. In case of payments received prior to 1-7-2010, as per Notification No. 36/2010-ST dated 28-6-2010, if any advance payment was received prior to 1-7-2010, for service to be provided after 1-7-2010, service tax was made fully exempt.
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IX Challenging the constitutional Validity The amendment in Finance Act, 2010 which brought the deeming fiction with regard to service tax on construction of residential complex was stayed by the high court of Mumbai in case of Maharashtra Chamber of Housing Industry. An interim stay was granted on the grounds of constitutional validity. The judges ruled that No coercive steps will be taken against the developers for recovery of service tax in relation to the provisions in question. Similar order were passed in writ petetions filed by DB Reality Ltd vs UOI (2011) 30 STT 110 (Bom HC DB) / Mighty Construction vs UOI and May fair Housing. It may be noted that the stay is limited only for the coercive action for recovery. However in GS Promoters v. UOI (2011) 8 taxmann.com 271 = 30 STT 268 = 37 VST 272 (P&H HC DB), validity of the amendment has been upheld.

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Other points Con. Of Complex


Parking Slots or Garage of Properties - Along with the apartment or flat, builders also sell parking slots to buyers. No service tax would be applicable for the amount paid for such parking slots. Preferential Location Services - Builders many times will build internal roads, pavements, or maintain gardens for the development of the property complex. Such services would attract a service tax. Also any additional amount paid for a floor rise, an apartment with a specific number or a specific direction, apartment facing either a park, pool or sea , would cost the buyer a service tax.

Poser No. 8

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Exemptions under Service tax for the construction sector


SEZ Export of services Road (Repair?) Airport Port Bridges, Tunnels, Railways Services to government
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Exemptions
Construction service is taxable only if it is commercial or industrial. Noncommercial construction like construction for Government, non-profit organisations like Educational Institutions, religious places etc. is not taxable. Construction services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams have been excluded from definition of construction service itself.

Construction services provided within SEZ to SEZ unit or SEZ developer are exempt vide Notification No. 17/2011-ST dated 1-3-2011 (Earlier Notification No. 9/2009-ST dated 3-3-2009).
Construction of residential complex service provided to Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana is fully exempt from service tax [Notification No. 28/2010-ST dated 22-6-2010].

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Construction vs Repair of Road


16/6/2005 - Services relating to maintenance or management of immovable property have also been covered under the purview of service tax. Several demands were raised on contractors involved in road repair work. In the latest Circular - No. 110/4/2009-ST Dated: February 23, 2009, the Board had clarified that repair of roads' is taxable.
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Construction vs Repair of Road

Judgement from Vizag


APPEAL NO.5/2008(V-I) S.Tax Dated: 16.03.2009 ORDER-IN-APPEAL NO.27/2009(V- I) ST PASSED BY Shri P.J.R. SEKHAR, I.R.S., COMMISSIONER (Appeals), VISAKHAPATNAM ]

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Construction vs Repair of Road


Commercial and Industrial construction includes a)construction, b) completion and c) finishing and d) repair, alteration, renovation or restoration The definition itself specifically excludes such services provided in respect of roads. From the above it is evident that not only construction services but also repair services provided in respect of roads are exempted from tax. Though the same may also fall under management, maintenance or repair service in terms of Section 65(64) of the Finance Act, 1994, In view of specific exclusion of repair services provided in respect of roads under Section 65(25b) of the Finance Act, 1994 the same can not be subjected to any tax.
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Construction vs Repair of Road


EXEMPTION TO MAINTENANCE OF ROADS
NOTIFICATION NO. 24/2009 - SERVICE TAX, DATED 277-2009

Exemption of taxable services provided to any person by any other person in relation to management, maintenance or repair of roads However from 2005 2009 the disputes are still going on?

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Poser - 9

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Whether Sub-Contractors are liable to service tax?

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Earlier, Department had clarified that a service provided to person in same category is not taxable e.g. service provided by architect to another architect, as the principal person providing service is liable to pay tax. However, service tax would be required to be paid in case of sub-contracting to a different service category e.g. architect providing service to consulting engineer. These circulars have been withdrawn vide Para 6 of CBE&C Circular No. 96/7/2007-ST dated 23-8-2007.

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Subsequent view of department


In supercession of the earlier circulars, CBE&C, vide circular dated 23-8-2007 has clarified that a subcontractor is also a taxable service provider. Circular dated 23-8-2007 stated as follows - In a case where the builder engages a contractor for construction , the contractor in his capacity as a taxable service provider (to the builder / promoter / developer / any such person) shall be liable to pay service tax on the gross amount charged for the construction services under construction of complex service [section 65(105)(zzzh)].
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Also recent circular in response to an application made by Jaiprakash Associates issued in May, 2011
Issues :a) Applicability of ST on sub-contracts of various nature , when main contract is exempted /excluded from preview of services. b) Can a principal contractor take responsibility of tax payment and ask sub contractors not to charge ST ? Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services.

The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided.
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No clarification about situation where sub-contractor providing construction service itself

The aforesaid circular does not talk about a situation where the subcontractor provides construction service itself. However, it is possible that at lower level, over zealous officers may take a stand (by misinterpreting the circular), that sub-contractor is liable to service tax even in cases where he provides construction service.
This will indeed open a Pandoras box.

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Poser
M/s ABC has got a road contract of Rs. 100 Lacs from Govt of Goa. The work is subletted to M/s CBA. M/s CBA does not charge service tax on the presumption that work done by sub-contractor still continues to be road or bridge construction service and hence should be outside the service tax net.

Service Tax department has levied service tax demand stating that the relationship between the contractor and that of sub-contractor is commercial in nature. Will Service tax be levied on the same?

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Construction of Government or educational building continues to be construction of Government or educational building whether done by contractor or sub-contractor. In fact, para 4 of the CBE&C circular No. 138/7/2011-ST dated 6-5-2011 specifically states that service provided by the sub-contractors/consultants and other service providers are classifiable as per section 65A of the Finance Act under respective clause of sub-clause (105) of section 65 of Finance Act, 1994.

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Services provided in SEZ by sub-contractor to main contractor Issue relating to construction service provided sub-contractor in SEZ is more complicated. Exemption Notification No. 17/2011-ST dated 1-3-2011 (relating to SEZ) reads as follows In exercise of the powers the Central Government, - - , hereby exempts the taxable services specified in clause (105) of section 65 of the Finance Act, chargeable to tax under section 66 or section 66A of the Finance Act, received by a Unit located in a Special Economic Zone (hereinafter referred to as SEZ) or Developer of SEZ for the authorised operations, from the whole of the service tax, education cess and secondary and higher education cess leviable thereon.

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As per second proviso to rule 10 of SEZ Rules amended w.e.f. 3-2-2009, the exemptions, drawbacks and concessions on goods and services allowed to developer or co-developer will also be available to contractor or sub-contractor appointed by such developer or codeveloper. All documents shall bear name of developer or co-developer along with contractor or sub-contractor and shall be filed jointly. Thus, services provided to contractors for ultimate use of developer should also be exempt. However, this proviso applies only in respect of SEZ Developer and co-developer and not in respect of SEZ units manufacturing or providing services.
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Meaning of received by SEZ Unit or SEZ Developer The SEZ Exemption notification uses the term received by SEZ Unit or SEZ Developer. The notification does not use the words directly received by SEZ Unit or SEZ Developer. Thus, even if the service is provided by sub-contractor, ultimately it is received by SEZ Unit or SEZ Developer. 4.3 Only one deemed sale and one taxable event even when work is done by sub-contractor In Larsen & Toubro Ltd. v. State of Andhra Pradesh (2006) 148 STC 616 (AP HC DB), L&T were main contractors. L&T had given various work to others on sub-contract basis. Contractee (Principal) had no agreement with sub-contractors and there was no legal relationship between contractee (Principal) and sub
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Conclusion If the main contractor providing construction service which is not subject to service tax (as construction is non commercial or is relating to roads, bridges etc.) the sub-contractor providing construction service itself would not be liable but other service providers would be liable. If main contractor is providing construction service within SEZ, sub-contractor can claim exemption on the basis that (a) service is eventually received by SEZ Unit or Developer (b) SEZ Rules have overriding effect (c) Rule of purposive construction. If the construction service is a taxable service, sub-contractor is liable to service tax even if service tax has been paid on entire contract value by main contractor. If contract is given on sub-contract basis, and the service is taxable, it is not advisable for main contractor to pay service tax under 33% abatement scheme, as he cannot avail any Cenvat credit. It is advisable to make disclosure to department to avoid charge of suppression of facts and wilful mis-statement.

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At this Point in time, the question is whether the charge of VAT and service tax shall be overlapping.

The matter to a certain extent has been settled by the SC Judgement in IMAGIC CREATIVE PVT LTD Vs COMMISSIONER OF COMMERCIAL TAXES Appeal (civil) 252 of 2008 wherein it has been held
28. Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided.

Poser No. 10
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They are deciding, what to pay VAT or Service Tax


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Any Queries on Service Tax

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