Real Estate Transactions By: Jigar Shah, Advocate

1. Real Estate Transactions By: Jigar Shah, Advocate

2. 1 AN OVERVIEW OF CONSTRUCTION SERVICES

3. Construction Service - History Two Categories of Services • Construction of complex services • Commercial of Industrial Construction Services • Explanation inserted in the definition of taxable services effective 01.07.2012 to include the payments received by the recipient of services before issuance of completion certificate deeming as service • Relevance of the court decisions • Magus Constructions 2008 (11) STR 225 (Gau) • Assotech Realty Pvt. Ltd. 2007 (7) STR 129 (All)

4. Construction Service – New Regime Declared Services – Section 66E(b) What is taxable? • Construction of complex, building, civil structure, • including a complex or building intended for sale to a buyer, except where entire consideration is received after issuance of certificate of completion • Issuance of completion certificate • Mandatory • Sale prior to completion • Sale post receipt of completion

5. Construction Service Valuation Methods 75%/ 70% Abatement • With cenvat (Capital goods & services) Tax on 100% value? • Can credit on all inputs be availed?

6. Construction Service Taxability of various charges ? • Basic price • PLC • Car Parking charges • Club Membership • Interest Free Maintenance • EDC/IDC • Other charges

7. Classification of Services Bundled services Bundled service means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services.

8. Classification of Services Guiding Principles Naturally bundled not defined in the Act Guidance Note states that it would depend upon the frequent practice followed in business Perception of the consumer is relevant Majority of service provider in that business adopt the same practice – Air Lines providing food on board Combination of services is incidental and ancillary to each other Single price to the customer

9. Construction Service Other issues • Sale of Development Rights • Applicability of Service tax, sales tax/VAT& stamp duty? • Sale of developed plots • Taxability of other charges • Taxability of construction done for land owner – Valuation • Taxability of Premium/ non refundable deposit paid to Land Owner – Whether taxable with effect from 01.07.2012? • Classification of services provided to land owner – Works contract or Construction?

10. + = Bundled goods + = Works Contract + = Bundled service WORKS CONTRACT: MEANING Goods Goods Goods Service Service Service

11. (29A) "tax on the sale or purchase of goods" includes ; (a) … (b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract ; (c) … (d) … (e) … (f) … and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made WORKS CONTRACT - MEANING

12. Central Sales Tax Act, 1956 (ja) “works contract” means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property Inserted by Finance Act, 2005, dated 13th May, 2005 WORKS CONTRACT – CST DEFINTION

13. WORKS CONTRACT SERVICE • With effect from 1.06.2007 • Taxable Service • any service provided to any person, by any other person in relation to execution of works contract • Excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams

14. “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 (ii) such contract is for the purposes of carrying out specified works. WORKS CONTRACT SERVICE 14

15. Rule 2A - Deduction of value of Materials Composition Scheme – 4.8% - No Cenvat credit of inputs VALUTION – PAST REGIME

16. NEW REGIME : WORKS CONTRACT Works contract as defined in section 65B(54) : ‘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, improvement, repair, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or part thereof in relation to such property.

17. DEFINITION [Section 65B(54)] IMPORTANT • What is a works contract • Transfer of property in goods • Leviable tax as sale of goods and • for specified purposes construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of movable or immovable property • Taxability • Service portion in the execution of a works contract

18. WORKS CONTRACT- COMPARED

19. TYPES OF WORKS CONTRACTS IMPORTANT • Construction contract • Renovation contracts/Repair works • Interior decorator works • Annual maintenance contracts (AMC) • EPC Contracts

20. WORKS CONTRACTS : TAXABILITY • Each aspect to be analysed for taxability • Qualify as works contract for service tax and sales tax/VAT • Circular dated 22.05.2007

21. REVERSE CHARGE & VALUATION OF WORKS CONTRACT 2

22. VALUATION : NEW REGIME

23. Valuation: Two Methods Rule 2A(i) : First Method – Actual Value Method Value of service in a works contract = Gross amount charged lessactual value of goods in which ownership is transferred • Value of consumables?

24. Actual Value of Goods • To be determined based on book of accounts • If actual value determined for VAT purposes, same can be adopted for determining Service portion [R.2A(i) Expl. (c)]

25. Valuation: Works Contract Rule 2A(ii): Second Method – Abatement If actual value of goods has not been determined then service value can be taken as: • for Original works– 40% of Total amount of Works Contract • Maintenance, repair etc of any goods – 70% • Other works – 60%

26. Original Works • all new constructions; (ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable; (iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise

27. Total Amount

28. ISSUES: VALUATION • I have discharged VAT under the actual value method • How to determine value for Service Tax purposes?

29. Options

30. Ongoing Projects • If advance received before 1.7.2012, taxable under Old Regime • Work completed and payment not received before 1.7.2012 • If Invoice raised before 1.7.2012, then taxable under Old Regime • If Invoice raised on or before 30.7.2012, then taxable under Old Regime • If Invoice raised after 30.7.2012, then taxable under New regime

31. REVERSE CHARGE

32. New Addition – Sharing of liability between provider and receiver Conditions - Provider is individual/, HUF, Firm including AOP, and Recipient is business entity registered as body corporate. REVERSE CHARGE

33. Work Contracts – Service recipient can opt to pay tax either under First Method or Second Method based on data made available by the Service Provider Reverse Charge - Valuation

34. Pure Labour contracts – i.e., where material given free of cost? Contractors employed on Man-day basis? ISSUES