LEVY OF SERVICE TAX ON COMMERCIAL/INDUSTRIAL CONSTRUCTION SERVICES – AVAILMENT OF CENVAT CREDIT ON RENTING OF IMMOVEABLE PROPERTY.
Pradeep K Mittal,*
In this Article, an humble attempt has been made to define the scope and levy of Service Tax on commercial and industrial construction services. Consequently, the extent upto which, the Excise Duty and Service Tax so paid for construction and development of Immoveable Property could be utilized as a Cenvat Credit for the purpose of payment of Service Tax while paying the Service Tax on renting of such immoveable property by such Developer. It would be beneficial to understand the scope and ambit of levy of Service Tax on Commercial Construction Service.
1.1.Definitions as per Section 65 of Finance Act, 1994:
“Commercial or industrial construction service” means –
a) construction of a new building or a civil structure or a
part thereof; or
b) construction of pipeline or conduit; or
c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or
d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,
Central Council Member:
The Institute of Company Secretaries of India, New Delhi.
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which is –
- used, or to be used, primarily for; or
- occupied, or to be occupied, primarily with; or
- engaged, or to be engaged, primarily in,
commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.
SCOPE OF TAXABLE SERVICE:-
2.The Government introduced Service Tax on Commercial or Industrial Construction w.e.f. 10.09.2004 and on Construction of (Residential) Complex from 16.06.2005. The persons engaged in construction activities are known in different names, such as real estate owners/builders/promoters, or developers, etc. The builders seldom use their own labour force for construction work. They entrust the work to different parties on contract basis. They employ different contractors for different works. Sometimes, there may be a main contractor and a number of sub-contractors under him for carrying out different type of work in the construction activity.
2.1The Ministry in its Circular No.80/10/2004-S.T. dated 17.09.2004 (2004 (172) E.L.T. T3) while explaining the scope of levy under Commercial or Industrial Construction Service had clarified that the estate builders who construct building/civil structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers. Similarly, Ministry in its letter F.No.332/35/2006-TRU, dated 01.08.2006 (2006) (3) S.T.R. 73) which was issued to clarify the applicability of Service Tax on real estate developers/builders has clarified that if no other person is engaged for construction work and the builder/promoter/developer undertakes construction work on his own without engaging the services of any other person, then in such cases in the absence of service provider and service recipients relationship, the question of providing taxable service to any person by any other persons does not arise.
3. The construction services provided by a Developer or Builder or Contractor to any person in relation to new construction, repairs, alteration or restoration of buildings, civil structures or parts thereof which are used, occupied or engaged for purpose of commerce and industry (excluding road, airport, railway, transport terminal, bridge, tunnel, long distance pipeline and dam) is subject to payment of Service Tax. However, if the construction is for educational, religious, charitable, health, sanitation or philanthropic purposes, the same is not taxable. Further, if the building is both for residential and commercial purposes, service tax is payable in case such immoveable property is treated as commercial property by the local/municipal authority.
4.In order to construct, erect and develop and Building, Factory, Malls, Office Complex, Flatted Factories and other immoveable properties meant to be let out for commercial purposes, the developer, builder or contractor has to purchase cement, steel, construction materials, electrical equipments, generators, electrical fittings, sanitary pipes and fittings, sliding windows, doors, glasses, tiling, paints, grills etc. Besides the above, the developer/contractor also avail the services of various professionals like Architects, Chartered Engineers, RCC consultants, security services, Consulting Engineer, Interior designer etc.
5.The Contractor would be raising a consolidated bill or running account bills from time to time for such construction services. The gross amount charged by any person providing the taxable service in relation to commercial or industrial building is the taxable value. When the consideration is partly in money and partly in terms of supply of cement, steel or other materials, the gross value shall be total of such monetary consideration and money equivalent of the other non monetary consideration. It is quite likely that non-monetary consideration could not be ascertained, gross amount charged by the same service provider for providing similar services shall be taxable value. The Notification No.15/2004 dt.10.9.2004 (now substituted by Notification No.1/2006 dt.1.3.2006) says taxable service provided by a commercial concern to any person in relation to construction service is exempt from service tax leviable under Section 66 of the Finance Act, 1994 as is in excess of Service Tax calculated on a value which is equivalent to 33% of the gross amount charged. Further the Notification says that abatement to the extent of 67% of the gross value of the taxable services would be allowed provided the gross amount charged is inclusive of the value of the goods and materials supplied or provided or used for this service and the service provider does not avail the benefit under CENVAT credit scheme or the benefit of Notification No.12/2003-ST dated 20.6.2003. This exemption is not admissible when the taxable services provided are only completion and finishing services in relation to building or civil structure (Notification No.1/2006-S.T. dated 1.3.2006)
CENVAT CREDIT OF EXCISE DUTY PAID ON MATERIALS USED AND SERVICE TAX PAID ON VARIOUS SERVICES AVAILED FOR PROVIDING CONSTRUCTION SERVICE:
6.In order to construct, erect and develop and Building, Factory, Group Housing Flats, Malls, Office Complex, Flatted Factories and other immoveable properties meant to be let out for commercial purposes, the developer/contractor has to purchase cement, steel, construction materials, electrical equipments, generators, electrical fittings, sanitary pipes and fittings, sliding windows, doors, glasses, tiling, paints, grills etc. Besides the above, the developer/contractor also avail the services of various professionals like Architects, Chartered Engineers, RCC consultants, Security Services, Consulting Engineer, Interior designer etc. The question then arises for consideration is as to whether the assessee will be entitled to avail the Cenvat Credit of the excise duty paid on purchase of construction material i.e. cement, steel, electrical equipments, generators, sanitary pipe fittings, sliding windows, glasses, tiling, paints, grills etc. and service tax paid to various professionals like architects, RCC consultants, security services, consulting engineer, interior designer etc.
How Service Tax to be calculated:
7(a).The gross value charged by the building contractors include the material cost, namely, the cost of cement, steel, fittings and fixtures, tiles etc. Under the Cenvat Credit Rules, 2004,the service provider can take credit of excise duty paid on such inputs. In case of Construction Services, Service Tax can be paid by two methods viz., the Contractor/Developer, can avail abatement to the extent of 67% of the gross value of the taxable services would be allowed provided the gross amount charged is inclusive of the value of the goods and materials supplied or provided or used for this service. In other words, if the gross value works out to Rs.1 Crores, the service tax at the applicable rate would be payable at Rs.33 lacs (Rs.1,00,00,000/- minus Rs.67,00,000/-). The abatement of 67% is subject to condition that Builder/Developer/Contractor does not avail the benefit under CENVAT credit scheme or the benefit of Notification No.12/2003-ST dated 20.6.2003. The option to avail 67% is optional. One can pay the Service Tax on the full gross value of the contract (without availing the 67% abatement) and can avail the Cenvat Credit on (a) capital goods (b) inputs and (c) input services.
7.(b)Composition Scheme is conditional i.e. it is available only if conditions prescribed are fulfilled. One of the important conditions is that the service provider shall not take Cenvat Credit of duties/cess paid on any inputs used in or in relation to such works contract for which composition option is exercised. Therefore, one cannot set-off or adjust Cenvat Credit taken on inputs for payment of Service Tax under Composition Scheme. As the restriction applies only to inputs, you can utilize Cenvat Credit taken on Capital Goods or input services for payment of Service Tax @ 2.06%. Though option for Composition Scheme can be exercised project-wise or contract-wise, there is no correlation of goods procured visa-a-vis the project. There is no compartmentalization or segregation of Cenvat credit taken on goods procured for one project as not available to other. In fact, restriction on capital goods or input service credit is not provided because, capital goods are always capable of being used in more than one project and are not consumed in the project itself. Similarly, input services are, by its very nature, capable of being used on a continuous basis spanning over more than one project/contract. Cenvat Credit accumulated under non-composition scheme is available for payment of Service Tax under Composition Scheme subject to the exclusion of input credit. The only broad condition for credit admissibility is use in providing output service and Rule 3 of Cenvat Credit Rules, 2004 does not contain any restriction based on such composition scheme.
LEVY OF SERVICE TAX ON “RENTING OF
8.The Service Tax has been imposed on “renting of immovable property service” with effect from 1.6.2007. Though the legality of this levy itself is now before corridors of the Courts of law, the levy is in place, as of now. Obviously, the Service Provider (i.e. the person who has given the premises on lease or on some other arrangement) under this category of service would also be entitled to the benefit of Cenvat credit in respect of the inputs, capital goods and input services, in terms of the provisions of Cenvat Credit Rules, 2004 and subject to the condition explained in para 7(a) and 7(b) above. Though, the scope of availing such Cenvat Credit on inputs and capital goods is very much limited, there is enormous scope for availing Cenvat Credit on various input services, such as commercial/industrial construction services, insurance services, repairs and maintenance services, architects’ services, interior decoration services, etc.
9.I have already explained that Service Provider i.e. Contractor/Developer/Builder will not be entitled to take Cenvat Credit on excise duty paid for procuring various construction materials such as Cement, Steel, Electrical Equipment, Sanitary Pipe Fittings, Sliding widows, glasses, tiling, paints, grills etc and also while availing various taxable services of professionals if the Service Tax has been paid either (i) after availing benefit of abatement of 67% of gross value or on composition scheme i..e. 2% (now after budget 4%) since the basic condition is that no Cenvat Credit is permissible. However, the Principal would be well within its right to take the Cenvat Credit in respect of the service tax charged by the Service Provider in his running account bills raised from time to time.
10.However, the Department has now issued a Circular No.98/1/2008-S.T., dated 4.1.2008 (2008) (9) S.T.R. C43. The levy of Service Tax on various construction related services (commercial/industrial construction service, residential construction service, etc) is always beset with lot of practical complications, due to the unique nature of this industry and the nuances of this new levy, compounded by half baked instructions issued by the CBEC, in the guise of “clarifying”. The recent attempt of the CBEC to “clarify” would beat all its siblings, in terms of its utter disregard to the legal provisions and portrayal of lack of even elementary knowledge of the subject.
11The present clarification has laid down that a service provider under the category of “renting of immovable property” service would not be entitled to avail Cenvat Credit in respect of the commercial/industrial construction service availed by him. The clarification reads as under:-
“Right to use immovable property is leviable to service tax under renting of immovable property service. Commercial or industrial construction service or works contract service is an input service for the output namely immovable property. Immovable property is neither subjected to central excise duty nor to service tax. Input credit of service tax can be taken only if the output is a “service” liable to service tax or a “goods” liable to excise duty. Since immovable property is neither “service” or “goods” as referred above, input credit cannot be taken”.
12.At the outset, describing the “building” as an output is quixotic. It is a basic fact that if a property has to be let out, first of all, it has to be built, by availing the services of a construction service provider. If this could not qualify as an input service, what else would quality? The circular goes on to say that since the said “immovable property” i.e. the building, is neither “goods” attracting excise duty nor a “service” attracting Service Tax, Cenvat credit of Service Tax paid on the above input services cannot be availed. For example, in the context of Central Excise, Cenvat Credit of inputs used in the manufacture of capital goods, which are meant for captive use, would be admissible in terms of Explanation 2 under Rule 2(k) ibid, notwithstanding the fact that no duty of excise would be paid on such capital goods, in view of the Notification 67/95-C.E. The reasoning behind such provision is that, ultimately, the goods manufactured out of such capital goods would be subjected to duty of excise and the proverbial Cenvat chain should not be broken, in the spirit of the Cenvat scheme. Unfortunately, the present clarification has thrown into wind the rationale of the Cenvat scheme itself.
13.It is humble submission that the clarification is also in blatant violation of the statutory provisions. The definition of the term “input service” as per Rule 2(1) of the CCR, 2004 refers to “service used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises”. In other words, if a manufacturer builds a factory (which is nothing but an immovable property), and avails the above input services, he is entitled to take Cenvat Credit of the service tax paid on such input services, notwithstanding the fact that no excise duty is paid on the “factory” as such. Similarly, if any other service provider builds his premises, he is very much entitled for taking Cenvat Credit of these input services, notwithstanding the fact that his premises is neither “goods” nor “services”. The present clarification has been drafted, in total disregard to the above statutory provision.
14.In order to buttress the points raised above, the situation can be compared with the situation under Central Excise. The taxable event for the levy of duty of excise is “manufacture” of dutiable goods and the point of its collection is the “time of removal”. While paying duty of excise, the dutiable goods have to be properly classified and the duty at the appropriate rate has to be applied. Let us assume that the tariff heading of a particular commodity has been amended with effect from a given date. If the good which were manufactured prior to such amendment were cleared after such amendment, while paying duty of excise at the time of their removal, the goods have to be classified only under the new heading and not under the heading, which was in force on the date of manufacture of such goods. In Service Tax, while rendering of service can be equated to manufacture, realization can be equated to time of removal. Service Tax is payable, upon realization of consideration. At the time of paying Service Tax upon realization, the service has to be classified accordingly. Accordingly, classification of taxable service is a continuous process and has to be done at each and every time of payment of Service Tax, i.e. upon every receipt of consideration. If a more specific category of taxable service is introduced subsequently, the services rendered after such new levy shall be classified only under the new category of taxable service, whenever Service Tax is payable on the said service, in respect of the payments received after the introduction of the new levy.
15.Notwithstanding the circular issued by the Department, there is hardly any doubt that the Principal would be entitled to avail/earn the Cenvat Credit of Service Tax paid on the Running Account Bills raised by the Builder/Contractor for constructing the Buildings, Malls, Commercial Complex and other immovable properties. The Service Tax so paid by the Principal on the aforesaid Running Account bills can be utilized for payment of Service Tax on taxable service of Renting of Immovable Property i.e. Malls, Shopping Complex, Office Complex, Commercial Complex and other immoveable property put to commercial use.