issues in vat & st in construction industry
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Sale of Premises – Service or Sale??
Construction business is growing at a rapid increase and it is expected that it will
continue to be achieve a higher value in the years to follow.
However with the introduction of VAT in the regime of collection of taxes, followed by the
introduction of Service Tax on Construction of Residential Complex has widened the
scope of collectibles of indirect taxation and it has been felt that the burden is not
beneficial to the need and desire of people.The levy of VAT on Works contract is on the
sales effected by way of transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract, subject to such restrictions
and conditions as may be prescribed, in lieu of the amount of tax payable by him under
this Act, whether in respect of 65 the entire turnover of sales effected by way of works
contract or in respect of any portion of the turnover corresponding to individual works
contract, pay lump-sum by way of composition,—
(a) equal to 5% of the total contract value of the works contract in the case of a
construction contract, and
(b) 8% of the total contract value of the works contract in any other case, after
deducting from the total contract value of the works contract, the amount payable
towards sub-contract involving goods to a registered sub-contractor.
The construction contract as defined under MVAT Act, 2002 “shall mean construction
contract as may be notified by the State Government in the Official Gazette, from time to
time”
Under these circumstances immergence of complex business structure has taken place,
entities have framed multifaceted agreements to save taxes through tax planning.
Government (both state and Central) over the period has ventured themselves to cover
all types of agreements in the tax regime, so that loss of revenue can be avoided.
Following table shows the certain types of business agreements which are prevalent in
construction business and there effect to the taxation regime are certain types of
agreements which are common in the business world and following are the
corresponding views given by various government authorities
1. Landowner appointing contractor for building apartment & Landowner allotting the
flats in consideration for contract which contractor may sell them as his property.
The contractor constructs building on land (owned by Landowner) using the material
owned by contractor. Generally, such transaction would be considered as works
contract. However, the consideration is in form of certain premises.
Definition of Sale under MVAT Act 2002 [Sec 2(24)]: “sale” means a sale of goods
made within the State for cash or deferred payment or other valuable
consideration but does not include a mortgage, hypothecation, charge or pledge;
and the words “sell”, “buy” and “purchase”, with all their grammatical variations and
cognate expressions, shall be construed accordingly. Unless money consideration is
agreed upon, there is no question of sale as per Sales Tax Laws.
Definition of Sale Price under MVAT Act 2002 [Sec 2(25)]: “sale price” means the
amount of valuable consideration paid or payable to a dealer for any sale
made including any sum charged for anything done by the seller in respect of the
goods at the time of or before delivery thereof, other than the cost of insurance for
transit or of installation, when such cost is separately charged.
It can be interpreted from the combined definition of sale and sale price that unless
the money consideration is determined for transfer of property, the transaction is not
liable under MVAT Act.
Judicial Pronouncements:
The supreme court judgment incase of M/s. Gannon Dunkerley & Co. (9 STC
353) (SC) brings out the following criteria for construing sale transaction:
a. Basic conditions for valid contract.
b. Subject matter of sale is moveable goods.
c. Money consideration for sale.
d. Transfer of property i.e. transfer of ownership from seller to purchaser.
Consideration should be in money terms. If consideration is not in money terms,
i.e. in any other mode, it may be exchange or barter, but not a sale.
The supreme court judgment in case of CIT v. Motors & General Stores (P)
Ltd., (66 ITR 692) also emphasis on the money consideration with reference to
price defined u/s 2(10) of The Sale of Goods Act, 1930.
As per the pronouncements of M/s. Davi Dass Gopal Krishnan and Other (22
STC 430) (SC); M/s. Radhas Printers v. State of Kerela, (90 STC 201)
(Kerela) and Sales Tax Commissioner v. Ram Kumar Agarwal, (1967) (19
STC 400) (Allahabad High Court) it was held that ‘Other valuable
consideration’ must be interpreted on the basis of rule of ejusdem generic to
mean cheques, bills of exchange or such other negotiable instruments. Thus it
shall be concluded that unless consideration is in money terms, contractor cannot
be made liable to any tax under MVAT Act as the deal cannot be construed as
sale.
2. Owner of Land grants development rights to Developer who constructs the
superstructure. The Land and the superstructure are then separately conveyed by the
owner & developer respectively under tripartite agreement with the eventual buyer.
The Supreme Court in K. Raheja Development Corporation v. State of
Karnataka, 2006 (3) STR 337 (SC) delivered the judgment in context with the
arrangement of tripartite agreement between land owner, developer & prospective
buyer. The Supreme Court found that the developer was undertaking the construction
activity on the behalf of the prospective buyer. Under the Karnataka Sales Tax
Provision, the definition of a works contract being wide covers any type of agreement
reflecting construction, and the construction could be on behalf of owner of property
or even by Owner himself. The Court also stated that “if the agreement is entered
into after the flat or unit is already constructed, there would be no works
contract. But so long as the agreement is entered into before the
construction is complete, it would be works contract.”
Subsequently Definition of ‘sale’ in sec. 2(24) of the MVAT Act, 2002 was amended to
bring it in par with the Karnataka sales tax provision. As a result, works contract
came to mean “ the transfer of property in goods (whether as goods or in some other
form) involved in the execution of works contract including building, construction,
manufacture, processing, fabrication, erection, installation, fitting out, improvement,
modification, repair or commissioning of any moveable or immovable property.”
In Trade Circular No. 12T of 2007 dated 07.02.2007, the MVAT Department clarified
that tripartite arrangements would be liable to MVAT. VAT authorities interpreted the
judgment of K. Raheja as to mean that every agreement entered into before the flat
was constructed would become a works contract.
In the Re: Hare Krishna Developers 2008 (10) STR 357 (AAR), decision was
given in context with the arrangement as in case of K. Raheja for which AAR held it as
works contract service i.e. developer was carrying out construction for and on behalf
of the buyer.
3. Land owner himself undertakes construction and allots the flats to prospective buyers
but are subject to receipt of initial token money and execution of sale deed on
completion of construction. The land owner continued to enjoy rights and title over
the apartments till the execution of the registered sale deed.
In case of Assotech Realty Pvt. Ltd. v. State of UP [2007 (7) STR 129 (All)], Court held
that the developer was acting on its own behalf in constructing of flats & the right,
title and interest therein would only transfer over after sale deed was executed, after
construction had been completed. Court held that the arrangement was not a works
contract and that no sales tax would therefore be payable.
In the Re: Hare Krishna Developers 2008 (10) STR 341 (AAR), the arrangement
was similar to that of Assotech realty Pvt. Ltd. AAR held that the entry of
‘construction of complex service’ would cover all the activities relating to
construction of complexes including such an arrangement. It added that the time of
transferring of ownership would not determine the liability of service tax.
Controversy has been created after the decision of Gauhati High Court in case of Magus
Construction Pvt. Ltd. v. Union of India [2008 (11) STR 225 (Gau)], which referred to
tripartite agreement as outright sale and out of the purview of service tax. The decision
was based on the circulars during the period of 2004 to 2009 collectively point out
legislative intention that construction activity undertaken by the builder / developer
amounts to self service and will not be liable to service tax.
These different patterns of execution, terms of payment and legal formalities have given
rise to confusion, disputes and discrimination in terms of service tax payments.
Construction Activity
Developer agrees to undertake
construction
Transfer of property of goods, whether as goods or
in some other form, involved in the execution of
Works Contract
Agreement to sale of
immovable property which may be entered
before it is constructed.
Construction of Complex Service /
Commercial or Industrial
Construction based on nature of construction
Works Contract Service
Works Contract
chargeable to VAT
Controversy!!!!!
Summarization before entry of Explanation (Finance Act, 2010):
Builder Model Developer Model
Agreement to sell is executed between
purchaser and builder.
Developer enters into contract with the
prospective buyer.
Conveyance is executed by builder on post
completion and possession is handed over
to buyer.
Post construction, possession is handed
over & land is directly transferred to
society / owners of apartment (No separate
sale deed)
Contract for sale – No Construction
Contract
Construction Contract - No Contract for
Sale
Levy of Stamp Duty No levy of Stamp duty as the property in
goods involved in works contract passes by
attainment during process of work.
K. Raheja ModelK. Raheja Model
Models of construction activityModels of construction activity
Dealing of flat / space after the construction activity is completed
Dealing of flat / space after the construction activity is completed
Assotech & Magus Model
Assotech & Magus Model
No Service tax.Only Stamp Duty on
conveyance.
No Service tax.Only Stamp Duty on
conveyance.
Under the ambit of Service Tax as per New
Explanation
Under the ambit of Service Tax as per New
Explanation
Under the ambit of Service Tax as per New
Explanation
Under the ambit of Service Tax as per New
Explanation
Introduction of explanation in the sub clause (zzzzh) of the S. 65(105) of the
Act by the Finance Act, 2010 with effect from 01.07.2010:
Construction of a complex with intended for sale, wholly or partially, by a builder or any
person authorized by the builder before, during or after construction (except in case of
no sum received from or on behalf of the prospective buyer by a builder or any person
authorized by the builder before grant of completion certificate from authority
competent to issue the same under any law for being in force) shall be deemed to be
service provided by the builder to the buyer.
The plain interpretation of above said provision is that sum received by the builder from
prospective buyer before completion of construction i.e. grant of “OC” is subject to
Service Tax w.e.f. 01.07.2010.
In order to achieve Legislative intent and bring in parity in tax treatment, to expand the
scope of existing service; the Explanation has been included. The three models of
construction activity are now covered under the ambit of service tax.
The amendment is introduced to enact a deeming fiction per which any amount received
prior to grant of Certificate of Completion are deemed to be consideration for the
performance of construction services by the builder to the buyer. However, exemptions
are provided incase such construction services are provided to Jawaharlal Nehru
National Urban Renewal Mission and Rajiv Awaas Yojana, services provided
wholly within a port for certain specified purposes and services provided wholly
within a port an airport.
The construction service provided for personal use of buyer would not be covered by
service tax.
Vide Notification 36/2010 dated 28.06.2010, the sum of money received in advance
from prospective purchasers towards any unit in a building by a builder / developer prior
to 01.07.2010 is not liable to service tax in case of construction services remaining
pending to be provided in the period post 01.07.2010
The Service tax (Removal of Difficulty) Order, 2010 dated 01.07.2010 widens the
scope of authority competent to issue Certificate of Completion by including an architect
registered under the Council of Architecture constituted under the Architects Act,
Chartered Engineers registered with the Institution of Engineers (India), or the licensed
surveyor of the respective local body or development or planning authority.
Options available under the Services applicable to Builders and Developers:
a. Commercial or Industrial Construction [S. 65(105)(zzq)] & Construction of Residential complex
[S. 65(105)(zzzzh)]
Option
s
Amount Payable as ST CENVAT Credit
1. 10.30 % on value of services CENVAT Credit on capital goods, input
services and input goods
2. 10.30 % on 33 % of gross
amount including value of
materials supplied
No CENVAT Credit.
3. 10.30 % on 25 % of gross
amount including value of
materials supplied and value of
land
No CENVAT Credit.
b. Works Contract service [S. 65(105)(zzzza)]
Option
s
Amount Payable as ST CENVAT Credit
1. 10.30 % on value of services
(excl. value of material
supplied)
CENVAT Credit on capital goods, input
services and input goods
2. 4 % of gross amount including No CENVAT Credit on inputs.
value of materials supplied
The deeming provision applicable to Builders / Developers was challenged by them
before various High Courts. The Bombay High Courts in case of Maharashtra Chamber of
Housing and Industry v. UOI (2010 TIOL 526 HC Mum. - ST) and Madras High Court in the
case of A. P. Ravi v. UOI (2010 TIOL 604 HC Mad. - ST) has granted an interim stay to
petitioners. However, recently in the case of G. S. Promoters v. UOI, 2011 (21) STR 100,
Punjab & Haryana High Court has pronounced its judgment and upheld the validity of the
explanation inserted in S. 65(105)(zzzzh). The petitioner pleaded that sale and purchase
was beyond legislative competence of Union Legislature. If construction activity is not
undertaken by a builder, then the builder cannot be considered to be service provider in
relation to services of construction activities. The High Court observed that “the entries
in the lists being merely topics or fields of legislation, they must receive a liberal
construction inspired by a broad and generous spirit and not in a narrow pedantic
sense.” Taxing of such transaction is not outside the purview of the Union Legislature
when it does not fall in any of the taxing entries of State List. From the observations
made by High court it can be contended that –
1. The presence of service or not has to be obtained not only from
builders point of view but also from the recipient’s angle.
2. Service is definitely involved when construction is carried out or
before construction and before flat is sold and therefore levy could not be held
unconstitutional.
In view of above it is obvious that decision would be challenged in Hon. Supreme Court.
Further, there may not be any further consequence of the judgment in the jurisdiction of
Bombay & Madras High Court. The ultimate burden of service tax would be borne by flat
buyers as department may continue attempts to recover service tax. The issue is highly
complex and multifaceted.
HOWSOEVER THE GOVERNMENT WOULD TRY THE LEVY OF STAMP DUTY, SERVICE TAX
AND VAT WILL INDIRECTLY LEADS TO HIGHER CASH OUTFLOW FROM THE FINAL BUYER
POINT OF VIEW.
THE BASIC NEEDS OF SHELTER IS SOMEWHERE BEING NEGLACTED BY THE
GOVERNMENT , AND UNDER CURRENT CIRCUMSTANCES IT SEEMS THAT LACK OF
CLARIFICATION ON THESE MAATERS ARE RESULTING INTO LOTS OF AMBIGUITY AND IT
MAY WIDEN THE SCOPE OF OTHER METHODS OF TAX PLANNING WHICH MAY NOT BE
ETHICAL FFROM THE POINT OF VIEW OF LEGISLATION AND SOCIETY.