Repairing the Controversy of Service Tax on Repair of Roads

REPAIRING THE CONTROVERSY OF SERVICE TAX ON REPAIR OF ROADS

The matter of levy of service tax on maintenance of roads has passed through many controversies. No service tax is leviable on construction of roads. But what about the service tax liability on maintenance and repair of roads? Will it be chargeable to tax? This was subject to great controversy. The matter has been finally settled by the Finance Minister granting exemption to repair and maintenance of services.

SERVICE TAX ON SERVICES RELATING TO ROADS:

The construction of roads does not fall under service tax net. It is specifically excluded from the purview of ‘commercial or industrial construction service’ as well as from ‘works contract service’. The said definition of ‘commercial or industrial construction service’ under Section 65 (25b) of the Finance Act, 1994 has been reproduced hereunder for ready reference:-

( 25b) "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, which is—

( i) used, or to be used, primarily for; or

( ii) occupied, or to be occupied, primarily with; or

( iii) 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;']

The definition of ‘Works Contract’ under Section 65 (zzzza) of the Finance Act, 1994 has been reproduced hereunder for ready reference:-

(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation.—For the purposes of this sub-clause, “works contract” means a contract wherein,—

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out,—

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;

CIRCULARS OF BOARD

However, maintenance and repair of roads was held to be taxable under the “management, maintenance and repair service” by the revenue authorities. As per the clarification given by the Board letter bearing F.No.B1/6/2005-TRU, dated 27.07.05, the tax on maintenance and repair of roads was leviable from 16.06.05. The relevant portion of the said Letter is reproduced hereunder for ready reference:-

16.2 Prior to 16/6/2005, such services covered maintenance or repair or servicing of any goods or equipment, excluding motor vehicles. However, since 16/6/2005, services relating to maintenance or management of immovable property (such as roads, airports, railways, buildings, parks, electrical installations and the like) have also been covered under the purview of service tax. Such services would be taxable when provided under a contract or an agreement by any person or by a manufacturer or any person authorized by a manufacturer.

16.4 Prior to 16/6/2005, maintenance or repair carried out under a maintenance contract or agreement was covered under service tax. Repair or servicing carried out under a contract other than a maintenance contract or agreement was not covered within the purview of service tax. Maintenance or repair, including reconditioning or restoration or servicing of any goods or equipment, except motor vehicle (which is taxable under the category of authorized service station), undertaken as part of any contract or agreement (not necessarily maintenance contract or agreement) is now liable to service tax under this category of taxable service. To attract service tax under this category, the contract or agreement need not necessarily be a maintenance contract / agreement.

The Board issued Circular No. 110/4/2009-ST dated 23.02.09 clarifying that maintenance and repair of roads is taxable under ‘Management, Maintenance or Repair Service’. It was also clarified as to what will constitute construction of road and will not fall under service tax net as well as what will constitute as maintenance and repair of roads and will be exigible to service tax. The said Circular is reproduced hereunder for ready reference:-

Circular No. 110/4/2009-ST Dated 23/2/2009

Reference from Commissioner Nashik seeking clarification in respect of levy of service tax on Repair/ renovation/ widening of roads – Regarding.-Representations have been received by the Board pointing out divergent practices being followed by field formations with regard to levy of service tax on maintenance and repair of roads.

2. Commercial or industrial construction service [section 65(105) (zzq)] specifically excludes construction or repairs of roads. However, management, maintenance or repair provided under a contract or an agreement in relation to properties, whether immovable or not, is leviable to service tax under section 65(105) (zzg) of the Finance Act, 1994. There is no specific exemption under this service for maintenance or repair of roads etc. Reading the definitions of these two taxable services in tandem leads to the conclusion that while construction of road is not a taxable service, management, maintenance or repair of roads are in the nature of taxable services, attracting service tax.

3. The next issue requiring resolution is the types of activities that can be called as ‘construction of road’ as against the activities which should fall under the category of maintenance or repair of roads. In this regard the technical literature on the subject indicate that the activities can be categorized as follows,-

(A) Maintenance or repair activities:

I. Resurfacing

II. Renovation

III. Strengthening

IV. Relaying

V. Filling of potholes

(B) Construction Activities:

I. Laying of a new road

II. Widening of narrow road to broader road (such as conversion of a two lane road to a four lane road)

III. Changing road surface (graveled road to metalled road/ metalled road to blacktopped/ blacktopped to concrete etc)

4. The cases may be decided/ revenue should be protected based on the above classification. Suitable Trade and Public notices may be issued for information of the trade and field formations.

5. Receipt of this Circular may please be acknowledged.

6. Hindi Version will follow.

F. No. 345/ 17 /2008-TRU

Yours faithfully,

(Unmesh Sharad Wagh)

Under Secretary (TRU)

Circular No. 110/4/2009-ST Dated 23/2/2009

(A) Maintenance or repair activities:

I. Resurfacing

II. Renovation

III. Strengthening

IV. Relaying

V. Filling of potholes

(B) Construction Activities:

I. Laying of a new road

II. Widening of narrow road to broader road (such as conversion of a two lane road to a four lane road)

III. Changing road surface (graveled road to metalled road/ metalled road to blacktopped/ blacktopped to concrete etc)

4. The cases may be decided/ revenue should be protected based on the above classification. Suitable Trade and Public notices may be issued for information of the trade and field formations.

5. Receipt of this Circular may please be acknowledged.

6. Hindi Version will follow.

F. No. 345/ 17 /2008-TRU

Yours faithfully,

(Unmesh Sharad Wagh)

Under Secretary (TRU)

*******

JUDICIAL PRONOUNCEMENTS

However, the Commissioner (Appeals), Vishakhaptnam in Appeal No. 5/2008 (V-I) S.Tax dated 16.03.09 delivered order-in-appeal no. 27/2009 (V-I) ST held that no service tax is leviable at repair of road. The Commissioner (Appeals) held that since repair service provided in respect to roads has been specifically excluded from Section 65 (25b) of the Finance Act, 1994, the same cannot be subjected to any tax. It was further held that by reading the definitions of Commercial or Industrial construction service given in Section 65 (25b) it is implied that management or maintenance of all immovable properties including roads, airports, transport terminals, railways, bridges, tunnels and dams are liable to tax but not repairs.

The Commissioner (Appeals) relied upon the Board’s letter F.No.B1/6/2005-TRU, dated 27.07.05 and held that with regard to immovable property, the words maintenance or management have found place in the letter but the word ‘repair’ is conspicuously absent. Therefore, the activity of repairs carries out on roads was not exigible to service tax.

EXPERT’S OPINION

Experts in the field are of the view that there should not be any service tax on the repair or maintenance of road. It is a well settled principle that specific law prevails over the general law. Therefore, the exclusion clause under ‘Commercial or Industrial Construction services’ and under ‘Works Contract’ are specific provision which will prevail over the general provision under ‘Management, Maintenance and Repair Service’. Furthermore, the commercial construction and work construction includes not only construction of new civil structures but also repair, renovation or restoration of such civil structures. When it is included then why it is not included for roads. If the road is exempted under these categories then the repair and renovation will fall under this category only and no service tax is imposable on the same.

Another expert has stated that it is highly irrational to presume that there is no service tax on original construction of road but when the said road is being relayed or repaired then there is service tax leviable on the same.

Moreover, as the Government and Local Bodies are incharge of construction, repairing and maintaining of roads then payment of service tax by them would not benefit the Revenue in any way.

Thus, the controversy continued.

FINANCE MINISTER’S ANNOUNCEMENT:

The controversy came to an end when the Finance Minister Pranab Mukherjee stepped up and announced in his speech on Budget on 27.07.09, exempting maintenance and repair of roads falling under the category of ‘Management, Maintenance or Repair Service’ from service tax. This exemption has been granted with immediate effect vide Notification No. 24/2004-ST dated 27.07.09.

The problems and controversies related to road repair were solved but the issue has not resolved completely yet.

REMAINING ISSUE:

Although by exempting repair and maintenance of roads under the category of ‘Management, Maintenance or Repair Service’ has solved the controversies. One issue still remains and will continue to create problems. The issue is regarding the applicability of exemption. The Finance Minister has granted the exemption with prospective effect from 27.07.09. This means that for the period prior to 27.07.09, service tax was leviable on road repair under ‘Management, Maintenance or Repair Service’. The Government should have granted the exemption retrospectively so that the relief would have been complete for State Governments, Local Bodies and Contractors which are involved in the construction, maintenance and repair of roads.

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Repairing the Controversy of Service Tax on Repair of Roads

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