By S Sivakumar, CA
FOR an industry that has already been drastically affected on account of unclear policies on levy of service tax, the developments over the last few weeks are bound to create further confusion.
Abatement Scheme cannot include value of land
As we know, the President has given her assent on May 8, 2010 to the Finance Act proposals, passed earlier by both the Houses of Parliament. The Finance Minister had announced on the floor of the House on April 29, 2010 that the Abatement Scheme the Abatement Scheme for the construction industry is being amended to provide that service tax is now payable only on 25% of the amount received and that too only in cases where the gross value includes the value of land constructed upon. The exact wordings used by the FM, in his Budget speech, are reproduced below:
�The construction sector has requested for a review of the changes in the service tax law proposed in this year’s Budget. Several suggestions have been made by the trade associations. Considering all the inputs, I propose to provide tax relief to this sector by enhancing their rate of abatement from 67% to 75% of the gross value where such value includes the value of the land constructed upon. Certain procedural bottlenecks relating to the completion certificate prescribed in the law would also be simplified.�
A lot of confusion would arise here, in terms of the reference to the value of the land for purposes of levy of service tax, in as much as, the Abatement Scheme covered by Notification No. 1/2006-ST dated 1-3-2006 never included the value of land, in the first place. In fact, it would be unconstitutional for the value of land to be included for the levy of service tax by the Government. One does not quite understand then, the import of the FM’s statement, in the absence of a clear Notification/Circular from the CBEC, which has not been issued, as aforesaid. Moreover, we must remember that, when service tax was first levied on �Construction of Complex’ services effective from June 16, 2005, the Board had clarified vide Letter No. F.No.B1/6/2005-TRU dated 27-7-2005 that, service tax would be payable only on the gross amount charged by the service provider for the construction service provided and it would not include the cost of land and stamp duty paid for registration of land’. Hence, in my view, there is absolutely no way that the land cost could be brought into the service tax net, under the provisions applicable to the Abatement scheme.
One does not quite understand the Government’s continued fancy for the Abatement scheme, when the fact remains, that most realty players have switched over to the Composition Scheme under the Works Contract services, in respect of all new contracts entered into on or after June 1, 2007. Moreover, many players are also availing the benefit of the Notification No. 12/2003-ST dated 20-06-2003. As we know, no changes have been announced for the Works Contract Scheme in the Budget and given the current confusion related to the statement of the FM regarding the value of land for purposes of levy of service tax, it is best that the Realty players avoid the Abatement Scheme and go under the benefit of Notification No. 12/2003. On a comparative basis,
Developers/Builders can opt for any of the three schemes
As things stand now, post Budget, Developers and Builders have three options or schemes, under the service tax law. They can opt to pay service tax under �Construction of Complex Services’, which is in the statute book since June 16, 2005. In terms of the Abatement Scheme applicable to these players, service tax is to be paid on 25% of the gross value received, in terms of the FM’s Budget speech, from a date to be notified. Alternatively, they can opt to pay service tax under Notification No. 12/2003-ST dated 20-06-2003, as per which, the service provider is exempted from paying service tax on the value of goods sold/transferred. The benefit of this Notification is very much available to Developers/Builders/Works Contractors. Alternatively, the Realty players can opt to pay service tax under the Composition Scheme, applicable to works contractors.
I’ve tried to summarize the merits and demerits of each of these Schemes, in the table given below:
|Issue||Abatement Scheme-Notn. 1/2006||Notification No. 12/2003||Works Contract-Composition Scheme|
|Does gross amount include value include land value||No, despite FM’s statement in Parliament||No||No|
|Value of gross amount on which ST leviable||25%, from date of notification||30%||Not Applicable|
|Effective rate of service tax||2.575%, from date of notification||3.09%||4.12%|
|Is cenvat credit available on service tax paid on input service?||No, with effect from 1-3-2006||Yes||Yes|
|Is cenvat credit available on excise/CVD paid on capital goods?||No, with effect from 1-3-2006||Yes||Yes|
|Is service tax leviable on the free supply of materials by Developers?||Doubtful, in the light of decisions of Madras and Delhi High Courts. Department however is issuing Notices||No||Yes, in respect of contracts the execution of which has already started on or after 1-7-2009|
|Is the Developer/Builder required to exercise his option and inform the Department||No||No||Yes|
|Can the Developer/Builder change to another scheme, once he has exercised the option?||Not Applicable and Developer/ Builder can change any time||Not Applicable and Developer/ Builder can change any time||No|
The major disadvantage associated with the Abatement Scheme is that, cenvat credit is denied in respect of service tax paid on input services and excise/CVD paid on capital goods, unlike the other two schemes. Though the Department has been taking a view that the benefit of Notification 12/2003-ST dated 20-06-2003 cannot be extended to Developers and Builders, the Bangalore CESTAT, in the case of Sobha Developers Ltd v. CCE & ST (2009-TIOL-1188-CESTAT-BANG) has categorically held that the Developer is entitled to the benefit of Notification No. 12/2003.
Developers who have contracted out the construction activity would be better off, going under Notification No. 12/2003 or the Composition Scheme for Works Contractors, given the significant benefit arising out of availment of cenvat credit. Developers and Builders would be well advised that they are entitled to follow any of the above referred schemes in respect of each of their contracts. There is a wide spread incurred belief that the composition scheme has to be opted for, in respect of each project. This is not quite true, in as much as, every contract for construction of a flat is a works contract and consequently, there are as many works contracts as there are flats, in a housing project. There is a stipulation that a Developer cannot changeover to the works contract scheme, in respect of a contract for which service tax has already been paid under �Construction of Complex’ services as of June 1, 2007. No such conditions exist, in respect of Notification No. 12/2003 and consequently, the Developer can always shift to Notification No. 12/2003 from the Abatement Scheme at any point of time.
Recent decision of the Delhi HC in the Home Solutions case would not impact the levy
As we know, many Landlords and Lessors had stopped paying service tax, on the basis of the Delhi High Court’s ruling in Home Retail Solutions v. Union of India dated 18-04-2009 ( 2009-TIOL-196-HC-DEL-ST). With the Finance Act 2010 having been passed, many of us thought that the retrospective levy on renting services would put an end to all controversies surrounding the subject matter. However, the decision of the Delhi High Court dated May 18, 2010 2010-TIOL-341-HC-DEL-ST involving, Home Solutions, yet again, has come as a bit of a surprise. However, in my view, this decision, staying the recovery of service tax from the parties till the disposal of the writ petitions filed, will have a very limited implication and will not affect the impact of the statutory provisions which are now retrospectively applicable with effect from 01-07-2007. In my view, with the introduction of the validating provisions, the Department would be entitled to recover interest and levy penalty, in respect of Landlords/Lessors who have not paid the service tax on the rents received by them from 01-07-2007, post May 8, 2010.
(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)