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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 uponcrossing 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 5%

14.05.2003 to 09.09.2004 8%10.09.2004 to 17.04.2006 10.20%

18.04.2006 to 10.05.2007 12.24%

11.05.2007 to 23.02.2009 12.36%

24.02.2009 onwards 10.30%






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






• Poser 1 - Break






Classification of Service

• Section 65A

– Most specific description

– Composite services as per Essential character

– Sub clause which occurs first

- Poser 2






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?






Initial Exemption

• Limit of Rs. 10 Lacs

• Registration at Rs. 9 Lacs

– Poser 3






Option for Discharge of ST for construction sector

• 67% or 75%Includingcost of FIM

• Includingcost of FIM

• On LabourValue• On Full value

Tax at 10.30%

Tax at 10.30%

withmaterial

deduction

Tax at 10.30%

with

Abatement

Tax at 4.12%






• Introduction of Works Contract service from2007……

– 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






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






vs

–

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

– Instrumentation Ltd – Delhi CESTAT






• Rate of service tax applicable under Work

Contract service is always 4.12%.

• Is this statement correct?






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 architect’s

– 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






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 WorksContract service






• 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






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].






Cenvat Credit and Related


• 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






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 anyof 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.






• 3.2 Services specifically excluded under clause only so far as theyrelate 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 ServiceStation 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 registrationunder Motor Vehicles Act, but insurance, repair services, renting etc. inrespect of such vehicles should be eligible for Cenvat credit.






3.3 Services specifically excluded under clause (C)

• Certain services like outdoor catering, beauty treatment, healthservices, 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






• However, this exclusion is only when such

services are used primarily for personal use

or consumption of any employee.





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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 – Rule6(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)

Giving both taxable and exempt services –





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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. 868/6/2008-CX 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 forthe financial year

• Cenvat on Inputs used for exempted final products

• Cenvat Credit on Inputs used for exempted services (On proportionate basis, based on actualratio of financial year)

• Cenvat Credit on input services used for exempted final products and exempted services (Onproportionate basis based on actual ratio of financial year).

• Cenvat credit on services specified in rule 6(5), which are exclusively used for exempted goodsor exempted services

= Total amount attributable to exempted final products and exempted services

- Poser 6





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Particulars Pre-Budget 2011 Post Budget 2011

Input Credit 10 Lacs 10 Lacs

Taxable Services 100 Lacs + 60 Lacs =

70 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

Proportionate

Disallowance

10 * (160/230) = 6.95 10 * (80 / 190) = 4.21

Payment towards 4 Lacs (5% of 80 Lacs)

Answer to Poser 6





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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. 1-4-

2011].





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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 turnoveror 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 goldmanufacture





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• 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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• 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 CENVATcredit 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. 1-4-

2011), 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.





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• 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 TaxationRules, 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 asfollows:

(a) Date of invoice or payment, whichever is earlier, if the

invoice is issued within the prescribed period of 14 daysfrom 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

2. April 10, 2011 April 26, 2011 April 30, 2011 April 10, 2011

Invoice not issued within 14 days and

payment received after completion of

service

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 C

u

t

o

f

f

After POT

Provision of service Issue of Invoice &

Receipt of Payment

DOP or Issue of Invoice

which is earlier

Provision of service &Issue of Invoice

Receipt of Payment Date of Issue of Invoice

Provision of Service &

Receipt of Payment

Issue of Invoice DOP

Issue of Invoice Provision of Service &

Receipt of Payment

DOP





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New Service

Before C

u

t

o

f

f

POT

Issue of Invoice and

Receipt of Payment

No Tax is payable

Issue of Invoice within

the period provided in

Rule 4A and Receipt of

Payment

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)]

C i R l 3 R l 6





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Comparison Rule 3 vs Rule 6

Partic

ulars

Rule 3 Rule 6

Clause

a

POT is time when invoice for the

service provided or to be provided is

issued

Same

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

Clauseb In case payment is received before POTin Clause a, the date on which payment

is received

Same

Explan

ation

Where provision of service is determined

periodically on completion of an event as per

contract , when the payment becomes due,






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• 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 company’s 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 service”-

Service is complete not only upon providing the same but also thecompletion of all other auxiliary activities that enable the serviceprovider 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 completionof service.

However such activities do not include flimsy or irrelevant grounds fordelay 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 wasmade. 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 bookingbasis, provided payment is made in 90 days.

• Associated Enterprise – Date of Credit in booksof service receiver / Date of Payment,whichever is earlier.

• Existing contracts to be covered under POTRules from 1st July, 2011.





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• Poser - 7

Construction of complex services





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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 thematter of K Raheja Corporation wherein the facts were as follows:-

• Builder entered into two separate agreements with the customers, onefor construction and the other for sale of undivided share of land.

• The words used in the Agreement for Construction were that theagreement is for construction as a developer on behalf of the allottee.

• Section 2(1)(v-i) of Karnataka Sales Tax Act stated that 'workscontract' includes any agreement for ………….carrying out the building,construction……of 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 "WorksContract" and not a contract of sale. It may be noted that under aContract 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 theAgreement 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 constructionservice is provided after 1-7-2010, service tax will be payable.

• If construction is complete before 1-7-2010 even if completioncertificate is not received, no tax is payable, as service tax is onprovision of service, provided the facts can be made clear from booksof 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 receivedprior to 1-7-2010, for service to be provided after 1-7-2010, service taxwas made fully exempt.

•





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• • IX – Challenging the constitutional Validity

•

• The amendment in Finance Act, 2010 which brought the deeming fiction withregard to service tax on construction of residential complex was stayed by thehigh court of Mumbai in case of Maharashtra Chamber of Housing Industry. An

interim stay was granted on the grounds of constitutional validity. The judgesruled that “ No coercive steps will be taken against the developers for recoveryof 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 fairHousing. It may be noted that the stay is limited only for the coercive action forrecovery.

•

However in GS Promoters v. UOI (2011) 8 taxmann.com 271 = 30 STT 268 = 37VST 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, buildersalso 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’. Non-commercial 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 fromdefinition of construction service itself.

• Construction services provided within SEZ to SEZ unit or SEZ developer areexempt vide Notification No. 17/2011-ST dated 1-3-2011 (Earlier NotificationNo. 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 fromservice 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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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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• Commercial and Industrial construction -

includesa)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 repairservice 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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EXEMPTION TO MAINTENANCE OF ROADSNOTIFICATION NO. 24/2009 - SERVICE TAX, DATED 27-

7-2009

• 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 providedto person in same category is not taxable e.g. serviceprovided by architect to another architect, as theprincipal person providing service is liable to pay tax.

• However, service tax would be required to be paid incase of sub-contracting to a different service categorye.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.

Subsequent view of department





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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 sub-contractor is also a taxable service provider.

• Circular dated 23-8-2007 stated as follows - In a

case where the builder engages a contractor forconstruction , the contractor in his capacity as ataxable service provider (to the builder / promoter /developer / any such person) shall be liable to payservice 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 b y

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 sub-

contractor 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 Pandora’s box.





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Poser

• M/s ABC has got a road contract of Rs. 100 Lacs from Govt of Goa. Thework 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 buildingcontinues 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-STdated 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 section65 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 ismore complicated.

• Exemption Notification No. 17/2011-ST dated 1-3-2011 (relating toSEZ) reads as follows –

In exercise of the powers – the Central Government, - - , herebyexempts 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 theauthorised 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 amendedw.e.f. 3-2-2009, the exemptions, drawbacks andconcessions on goods and services allowed to developeror co-developer will also be available to contractor orsub-contractor appointed by such developer or co-

developer. All documents shall bear name of developeror co-developer along with contractor or sub-contractorand shall be filed jointly.

• Thus, services provided to contractors for ultimate useof developer should also be exempt.

• However, this proviso applies only in respect of SEZDeveloper and co-developer and not in respect of SEZunits 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 theservice is provided by sub-contractor, ultimately it is ‘receivedby SEZ Unit or SEZ Developer’.

• 4.3 Only one deemed sale and one taxable event even whenwork is done by sub-contractor

• In Larsen & Toubro Ltd. v. State of Andhra Pradesh (2006) 148STC 616 (AP HC DB), L&T were main contractors. L&T had givenvarious work to others on sub-contract basis. Contractee

(Principal) had no agreement with sub-contractors and therewas no legal relationship between contractee (Principal) andsub





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Conclusion

• If the main contractor providing construction service which is not subject toservice tax (as construction is non commercial or is relating to roads, bridgesetc.) the sub-contractor providing construction service itself would not beliable but other service providers would be liable.

• If main contractor is providing construction service within SEZ, sub-contractorcan claim exemption on the basis that (a) service is eventually received by SEZUnit or Developer (b) SEZ Rules have overriding effect (c) Rule of purposiveconstruction.

• If the construction service is a taxable service, sub-contractor is liable toservice tax even if service tax has been paid on entire contract value by maincontractor.

• 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 SCJudgement 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 thesales tax as envisaged in a composite contract. It may consist of different elementsproviding for attracting different nature of levy. It is, therefore, difficult to hold that in acase 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”





• Any Queries on Service Tax

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