ST - Relief for Construction Sector - Service Tax can be paid by availing abatement under Notification No 1/2006 ST - CBEC Clarifies
IN DDT 2313 13.03.2014, we asked:
IT appears that Construction service has always been a complex matter to understand. While the service has seen a record number of disputes on various issues till 01.07.2012, even after the introduction of negative list, the uncertainties remain. As per Notification No 26/2012 ST dated 20.06.2012 (Sl No 12), service tax is payable on 25% or 30% of the value subject to certain conditions. Apparently, the abatement of 75% or 70% allowed is towards the value of materials used in the service as there will be transfer of property in construction service. From 01.07.2012, service tax is payable on works contracts in respect of original works on 40% of the value of the contract (Rule 2A(ii) of Service Tax - Determination of value Rules, 2006). In majority of cases, the tax payable under Notification No 26/2012 ST will be less than the tax payable under Rule 2A(ii). It appears the department is raising demand notices for the differential tax in such cases where the tax is paid under Notification No 26/2012 ST. This raises some fundamental questions which perhaps the Board should address:
1. Can a builder of residential complex not pay service tax by availing abatement under Notification No 26/2012 ST if the service is works contract?
2. If not, what is the reason? If all works contracts are to be taxed only under Rule 2A, where is the need for entry No 12 in 26/2012 ST? Can Board explain with illustration what are the cases covered under Notification No 26/2012 ST?
3. Is it not a fact that the abatement of 75% or 70% allowed under Notification No 26/2012 ST is towards transfer of property in goods while rendering construction service? If not, what does this 70% or 75% abatement represent?
During interaction with the Ashok Lahiri Committee in early 2015, TIOL made the following submission on behalf of the Trade:
Problem faced by construction industry:
Sl No 12 (a) of Notification No 26/2012 ST provides abatement of 75% for construction of specified residential units. If Rs 100/- is charged, the tax at the present rate of 12.36% payable on Rs 25/- (after abatement) would work out to 12.36*25 = 3.09%
All these constructions invariably involve transfer of property in goods and they are executed as works contracts. As per Rule 2A(ii)(A) of the Service Tax (Determination of Value) Rules, 2006, service tax is payable on 40% of the value. At 12.36%, on Rs 40/- the effective tax rate is 4.944.
So, same service attracts two different rates, one at 3.09% and the other at 4.944% - Assessees paying 3.09% are issued with demand notices by applying 4.944%. When two rates are applicable, Board should clear the confusion and clarify which rate is to be adopted.
All our efforts to get a clarification on this issue failed and just when we have given up on this and kept our fingers crossed waiting for judicial decision on this dispute, the good news came in.
The Board has reacted and clarified this as a reply to the Chief Commissioner of Customs and Central Excise, Visakhapatnam Zone, in the matter of representation by the Visakha Apartment Builders Association.
The good Board has clarified:
Considering the fact that construction of a complex, building, civil structure etc is a works contract, which involves not only transfer of property in goods, but also in immovable property, a higher abatement from the amount charged for providing such service has been provided under Notification No 1/2006 for the period from 01.07.2010 to 30.06.2012 and under Notification No 26/2012 for the period with effect from 01.07.2012.
It can be seen from Sections 65(105)(zzzh) and 65(105)(zzzza) for the period from 01.07.2010 to 30.06.2012 and Sections 66E(b) and 66E(h) of the Finance Act, 1994 for the period with effect from 01.07.2012, that Sections 65(105)(zzzh) and 66E(b) of the Finance Act, 1994 provide a more specific description of the activity of the applicant than the definition of Works Contract in Section 65(105)(zzzza) and Section 66E(h) of the Finance Act, 1994. Therefore, in terms of Section 65(A)(2)(a) for the period from 01.07.2010 to 30.06.2012 and Section 65 F (with effect from 01.07.2012), the services by way of construction of complex, building, civil structure etc is eligible for abatement as provided in Notification No 1/2006 ST (Sl No 10(a)) for the period from 01.07.2010 to 30.06.2012 and Notification No 26/2012 ST (Sl No 12) for the period post 01.07.2012, subject to fulfilment of the conditions prescribed therein.
The wait was worth it and it is now advantage assessee.
But why should such an important clarification be addressed only to the Chief Commissioner of Visakhapatnam and not to all Chief Commissioners? Why was the clarification not issued as a Circular? Is the benefit restricted only to builders in Visakhapatnam and is it confidential? Certainly the Board is aware that there is construction activity in other parts of the country too!
F.No. 332/22/2015-TRU dated 05.09.2016