WORKS CONTRACT SERVICE AND CONSTRUCTION SERVICE

DEFINITION OF WORKS CONTRACT SERVICE

“works contract” means a contract wherein transfer of property in goods involved in the
execution of such contract is leviable to tax as sale of goods and such contract is for the
purpose of carrying out construction, erection, commissioning, installation, completion,
fitting out, repair, maintenance, renovation, alteration of any movable or immovable
property or for carrying out any other similar activity or a part thereof in relation to such
property.

Coverage of Services under Works Contract Service

The following will get covered under this definition

(a) erection, commissioning or installation of plant, machinery or equipment or structures

(b) Construction of building or civil structures
(c) Trunkey projects
(d) Maintenance Service relating to goods where goods and services both are involved as
composite contract (Annual Maintenance Service)
(e) Job work where job worker uses some of his own material

 In works contract service, property in goods should pass on the principle of (i)
Accretion- by means of imbedding (ii) Accession:- attachment (iii)Blending –
mixing

 In Works Contract Service, when both service provider and service recipient is the
person liable to pay tax, the service recipient has the option of choosing the valuation
method as per his choice, independent of the valuation method opted by the provider of
the service.
 If the property in goods passes after the execution of works contract service, it is sale
of goods and not transfer of property in goods involved in execution of works contract
service.
 If Job work includes transfer of property, it would be treated as works contract
service.
 No transfer of property in goods if material gets exhausted/evaporated in execution of
works contract service.
 Sale:- transfer of property in and delivery and possession of, a chattel as a chattel to
the buyer.
 If the contract is primarily for supply of materials at the price agreed and the work of
service is incidental to the execution of the contract, it will be a contract for sale. On
the other hand if the contract is primarily a contract of work and labour and materials
are supplied in execution of such contract, it is a works contract.
 TRUNKEY PROJECTS

Trunkey contract means contract for a supply of equipment in a state ready for operation.
In case of Trunkey contracts, the whole responsibility right from design, selection of
equipment, its procurement, installation, commissioning is on the supplier. He makes
everything ready and hands over the plant to the buyer for running. In case of Trunkey
projects the ownership is usually transferred from the original builder/ operator only after
ensuring that everything is turned on and is in a running condition.
Trunkey contract, found especially in the computer and construction industries, in which a
supplier provides complete customised package to a client, who has merely to trunkey and
take over the package.
Thus in trunkey contract, work of commissioning or erection may be involved but that is only
incidental to the main contract. In contrary to this, in case of a composite contract, the
supplier or manufacturer of the. Machinery may agree to commission or install the machine
at the site of buyer. Here commissioning and installation of machinery is not incidental to the
main contract.

VALUATION OF SERVICE TAX N WORKS CONTRACT SERVICE

2A. Determination of value of service portion in the execution of a works contract.- Subject
to the provisions of section 67, the value of service portion in the execution of a works
contract , referred to in clause (h) of section 66E of the Act, shall be determined in the
following manner, namely:-

(i) Regular Scheme:- Value of service portion in the execution of a works contract shall
be equivalent to the gross amount charged for the works contract less the value of property in
goods transferred in the execution of the said works contract.

Explanation.- For the purposes of this clause,-

(a) gross amount charged for the works contract shall not include value added tax or sales tax,
as the case may be, paid or payable, if any, on transfer of property in goods involved in the
execution of the said works contract;

(b) value of works contract service shall include, -

(i) labour charges for execution of the works;

(ii) amount paid to a sub-contractor for labour and services;

(iii) charges for planning, designing and architect’s fees;

(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of
the works contract;

(v) cost of consumables such as water, electricity, fuel used in the execution of the works
contract;

(vi) cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and services;

(c) Where value added tax or sales tax has been paid or payable on the actual value of
property in goods transferred in the execution of the works contract, then, such value adopted
for the purposes of payment of value added tax or sales tax, shall be taken as the value of
property in goods transferred in the execution of the said works contract for determination of
the value of service portion in the execution of works contract under this clause.

(ii) Standard Deduction Scheme or Composition Scheme :- Where the value has not been
determined under clause (i), the person liable to pay tax on the service portion involved in the
execution of the works contract shall determine the service tax payable in the following
manner, namely:-

From 01.07.2012 to 01.03.2013

A original works (new constructions, erection, commissioning or installation of 40%

plant, machinery, equipment or structure)
B maintenance or repair or reconditioning or restoration or servicing of any goods 70%
C Other works contract (other than A and B) including maintenance or repair or 60%
completion and finishing services such as glazing or plastering or floor and wall
tiling or installation of electrical fittings of immovable property
D If construction contract (need not to be works contract) includes value of land 25%

From 08.05.2013 to 01.10.2014

A original works (new constructions, erection, commissioning or installation of 40%

plant, machinery, equipment or structure) where total amount charged includes
goods but doesn’t include value of land or undivided share of land
B original works (new constructions, erection, (i) 30% of total amount if carpet area
commissioning or installation of plant, of residential unit exceeds 2000sq ft
machinery, equipment or structure) where or value exceeds Rs. 1 crore
total amount charged includes goods and also
includes value of land or undivided share of
land (ii) 30% of total amount in case of
industrial or commercial building

(iii) 25% if carpet area of residential

unit is upto 2000sq. ft. and value is
less than Rs. 1 crore

C maintenance or repair or reconditioning or restoration or servicing of any goods 70%

D Other works contract (other than A and B) including maintenance or repair or 60%
completion and finishing services such as glazing or plastering or floor and
wall tiling or installation of electrical fittings of immovable property
E If construction contract is for residential complex (need not to be works 25%
contract) includes value of land plus (a) the carpet area of residential unit is less
than 2000sq. ft and (b) the amount charged for residential unit is less than Rs. 1
crore.
F If construction contract is for residential complex (need not to be works 30%
contract) includes value of land and (a) the carpet area of residential unit is
2000sq. ft or more or (b) the amount charged for residential unit is Rs. 1 crore
or more.
G If construction contract (need not to be works contract) is for industrial or 30%
commercial construction and includes value of land

From 01.10.2014 to 01.04.2016

A original works (new constructions, erection, commissioning or installation of 40%

plant, machinery, equipment or structure) where total amount charged includes
goods but doesn’t include value of land or undivided share of land
B original works (new constructions, (i) 30% of total amount if carpet area of
erection, commissioning or residential unit exceeds 2000sq ft or value
installation of plant, machinery, exceeds Rs. 1 crore
equipment or structure) where total
amount charged includes goods and
also includes value of land or (ii) 30% of total amount in case of industrial or
undivided share of land commercial building

(iii) 25% if carpet area of residential unit is upto

2000sq. ft. and value is less than Rs. 1 crore

C All works contract (other than A) above including works contract of (i)
Maintenance or repair or reconditioning or restoration or servicing of any goods
(ii) maintenance or repair or completion and finishing services such as glazing
or plastering or floor and wall tiling or installation of electrical fittings of 70%
immovable property
D If construction contract is for residential complex (need not to be works 25%
contract) includes value of land plus (a) the carpet area of residential unit is less
than 2000sq. ft and (b) the amount charged for residential unit is less than Rs. 1
crore.
E If construction contract is for residential complex (need not to be works 30%
contract) includes value of land and (a) the carpet area of residential unit is
2000 sq. ft. or more or (b) the amount charged for residential unit is Rs. 1 crore
or more.
F If construction contract (need not to be works contract) is for industrial or 30%
commercial construction and includes value of land
 From 01.04.2016 to 31.03.2017

A original works (new constructions, erection, commissioning or installation of 40%

plant, machinery, equipment or structure) where total amount charged includes
goods but doesn’t include value of land or undivided share of land
B original works (new constructions, erection, commissioning or installation of 30%
plant, machinery, equipment or structure) where total amount charged includes
goods and also include value of land or undivided share of land
C All works contract (other than A) above including works contract of (i) 70%
Maintenance or repair or reconditioning or restoration or servicing of any goods
(ii) maintenance or repair or completion and finishing services such as glazing
or plastering or floor and wall tiling or installation of electrical fittings of
immovable property
D Construction of residential complex, building, civil structure or a part thereof, 30%
intended for sale to a buyer, wholly or partially, except where entire
consideration is received after issuance of completion certificate by competent
authority, where value of land is included in amount charged by service
receiver. Cenvat credit of input goods is not available.

“Original works” means-

(i) all new constructions;
(ii) all types of additions and alterations to abandoned or damaged structures on land that are
required to make them workable;
(iii) erection, commissioning or installation of plant, machinery or equipment or structures,
whether pre-fabricated or otherwise;
“Total amount” means - the sum total of the gross amount charged for the works contract and
the fair market value of all goods and services supplied in or in relation to the execution of
the works contract, whether or not supplied under the same contract or any other contract, after
deducting-
(a) the amount charged for such goods or services, if any; and
(b) the value added tax or sales tax, if any, levied thereon.
 Total amount to include value of land also in composition scheme
Concept of “fair market value”
If fair market value of material supplied by the service receiver to the service provider is Rs. 1
lakh and if it is supplied free, then 1 lakh will be added to ‘total amount’. If the material is
supplied by the service provider and a charge of Rs. 60,000 plus vat of Rs. 3,000 is taken from
the SP, then Rs. 1 lakh will be added and Rs 63,000 will be deducted. Hence, a total of Rs.
37,000 will be added to the ‘ total amount’.

Cenvat Credit: –
1. As per Explanation 2 to Rule 2A of said Valuation Rules, the provider of taxable service i.e.
the works contract service shall not take CENVAT credit of duties or cess paid on any inputs,
used in or in relation to the said works contract, under the provisions of CENVAT Credit Rules,
2004.
2. According to sub-rule (7) of Rule 4 of CENVAT Rules, the CENVAT credit in respect of
input service shall be allowed, on or after the day on which the invoice, bill or, as the case may
be, challan referred to in rule 9 of the said rules, is received.
3. First proviso to Rule 4(7) provides that in case of an input service where the whole of the
service tax is paid on reverse charge by the recipient of the service (i.e. u/s 68(2) of Finance
Act, 1994), the CENVAT credit in respect of such input service shall be allowed after the
service tax paid.

WORKS CONTRACT SERVICE AND REVERSE CHARGE MECHANSM

If a works contract service is provided by any individual, HUF, firm, or Association of

Persons to a business entity as a body corporate, then 50% of service tax is paid by service
provider and 50% is paid by service receiver.
In case a works contract is provided by the government or local authority in the nature of a
support service, 100% of the service tax is paid by the service receiver. In all other cases,
100% of the service tax is paid by the service provider.

Build- Operate- Transfer Projects

Government gives many contracts on BOT basis to private parties. The private parties makes
its own investment in the project and then gets exclusive right to collect toll or other amount
for prescribed period of time. After the prescribed period is over, the ownership is transferred
to the government. This is not a construction contract given by the government. In case of
projects awarded by NHAI, the agreement is termed as “ concession agreement” and the
contractee is termed as “concessionaire” and not the “contractor”. The Concessionaire is
constructing the road for himself and not for the government. Transaction involving taxable
service usually takes place at three different levels.

(1) Between Government or its Agency and the Concessionaire :- Government or its
Agency transfer the right to use and develop the land to the Concessionaire, for a
specified period for construction of the building for furtherance of business or
commerce. Consideration for this service is the lease amount or annual charge paid by
the Concessionaire to the Government or its Agency. Here Government or its Agency
 is providing service of renting of immovable property to the concessionaire and the
concessionaire becomes the service recipient. This service is liable to service tax.
(2) Between the concessionaire and the contractor :- If the concessionaire himself doesn’t
have the exposure to construction sector, he may engage a contractor for undertaking
the construction of a building on the land, in respect of which right to use has been
obtained by him from the Government or its Agency. If the concessionaire is himself
a contractor, this level of transaction may not arise. The service provided by the
contractor to the concessionaire is liable to service tax.
(3) Between the concessionaire and users :- Here, the concessionaire enters into
agreement with different users for commercially exploiting the building developed by
him, during the lease period. The concessionaire here may provide his service in the
name of renting of immovable property, business support service, sale of space for
advertisement etc. The service provided by the concessionaire to the users is liable to
service tax.

WORKS CONTRACT UNDER SALE TAX LAWS

Any contract to carry out any work will be a works contract under CST and State Vat Act.
However the tax is on ‘goods involved in works contract’ and not on “works contract”.
Hence, unless the contract involves transfer of property in goods, the transaction will not be
taxable under CST Act.

CONSTRUCTION SERVICE

“Construction” includes addition, alteration, replacement or remodelling of any existing

civil structure.

This is actually a “deemed service” introduced w.e.f. 1-7-2010. As per the provisions
introduced in the definition of commercial or industrial construction and construction of
residential complex, if a builder/ developer received any payment towards sale of flat or
shop or commercial/ industrial gala (*one unit in a constructed complex) before obtaining
completion certificate from the concerned authorities, it will be treated as taxable service. If a
builder/developer receives the entire 100% consideration only after obtaining the completion
certificate, no ST will be levied, however, if a builder/ developer receives even 1% advance
before obtaining the completion certificate, the entire amount of the flat, shop or commercial/
industrial gala will be leviable to ST.

The provision as introduced w.e.f. 1-7-2010 is being continued under new provisions also.
Section 66E(b) of Finance Act, 1994 (inserted w.e.f. 1-7-2012) reads as follows:-
construction of a complex, building, civil structure or a part thereof, including a complex or
building intended for sale to a buyer, wholly or partially except where the entire
consideration is received after the issuance of completion certificate by the competent
authority.

*If the advance of 1 flat is received before the receipt of completion certificate, then ST
would be leviable on 100% of the price received for that flat and not on 100% of the price
received on the entire residential complex.

Thus practically in all the cases, the builder will be leviable to pay ST except in case of few
flats/ shops or commercial galas, which he usually keeps for sale at a later date at a higher
price. Even in this case, the builder will not be liable to pay ST only if the entire transaction
takes place only after completion certificate from the competent authority.

 Till the agreement is executed with the buyer, the builder/ developer is not providing
service to anyone. He is doing activity for himself
 Service Tax is payable only on that portion of construction undertaken after entering
into agreement.

LAND DEVELOPMENT RIGHT

In the case of construction projects, it is common to enter into development

agreements where the developer undertakes to develop property (residential /
commercial) in exchange for the development rights given by landlord. Pursuant to
this agreement, land owner transfers his ‘Development Rights’ to the developer.
These development rights are generally transferred to the developer permanently,
exclusively and on irrevocable basis.
The consideration charged by land owner for such transfer of development rights may
be in pure monetary terms or may be as a revenue share arising out of the sale
proceeds of the project by the developer or in terms of specific number of flats and /or
shops in the constructed building to be given to landlord.
In some States (in Southern India), two separate agreements are executed
– one between land owner and customer and other between developer
(service provider) and customer. The developer also has separate
agreement with land owner where he agrees to give him some flats/galas
(shops) free.

Supply of some flats/ shops/ commercial unit free of cost to the land owner
In normal practice some flats/ shops/ commercial unit free of cost to the land owner who has
given the land for construction. Actually, these flats/ shops/ commercial unit are not given
free but ae given in lieu of land cost. Service Tax is payable when consideration is received
in. form of land. Valuation of flats/ shops/ commercial units given to land owner should be
on basis of value of similar /identical flats or on basis of cost plus profit, as stated in circular
dated 10.02.2012 and not on basis of value of land. In case the prices of flats/ houses undergo
a change over the period of sale (from the first sale of flat to the last sale of flat), the value of
similar flats as are sold nearer to the date on which land is being made available for
construction should be used for arriving at the value for the purpose of tax.

Point of Taxation in case of Land Development Right

Circular No. 151/2/2012-ST dated 10.2.12, issued by CBEC, about taxability of flats given
to landlord, under its Para 2 (B) expressed a view that Service tax is liable to be paid at the
time when the possession or right in the property of the flats are transferred to the land owner
by entering into a conveyance deed or similar instrument.

COMPLETION CERTIFICATE

Upon the completion of the building construction, the builder or the developer of the
apartment has to apply for the ‘building completion certificate’ with the local authorities. If
the building construction is completed as per the building approval plan and if it also
meets other building standards like distance from road, height of the building, if rain water
harvesting system is in place etc., the civic authorities will issue CC. It is the builder/
developer who can apply for this certificate.

OCCUPANCY CERTIFICATE AND POCESSION CERTIFICATE

Once the builder receives the Completion Certificate, they have to obtain Occupation
Certificate from the civic bodies. OC certifies that the building has complied with all the
required building standards, local laws and it is safe to occupy. Occupancy certificate is
issued by local municipal authorities or building proposal department that provides no
objection to occupy the building under reference for its specified use. The OC is issued only
once the building has been completed in all respects and can be occupied. The builder has to
obtain OC. However, the Flat owner can also apply for OC. The legal possession of the Flat
by the Owner is valid only with the Occupancy Certificate. Occupying a property without an
OC is considered as illegal and local civic bodies can ask you to vacate the property.Without
an OC, it may be very difficult to obtain Khata Certificate.

 If these documents (CC and OC/PC)are not available with the seller or builder then
there is every possibility that the building may not be constructed as per the approved
plan or local building standards.

Issue of cenvat credit relating to unsold flats and unsold units

Though Service Tax will not be applicable on these unsold flats, proportionate reversal of
cenvat credit relating to unsold flats will surely apply.

Distinction between Works Contract and Construction Service

If the work is pure labour work, it is Construction Service. If during execution of work,
property in goods is transferred from contractor to customer, it is Works contract. Thus any
abatement scheme or composition scheme would apply to ‘ works contract’ of construction
also.
DISCLOSURES IN CONSTRUCTION SERVICES AS PER AS7 OF INCOME TAX
ACT, 1961

Disclosure

38. An enterprise should disclose:

(a) the amount of contract revenue recognised as revenue in the period;

(b) the methods used to determine the contract revenue recognised in the period; and

(c) the methods used to determine the stage of completion of contracts in progress.

39. An enterprise should disclose the following for contracts in progress

at the reporting date:

1. (a) the aggregate amount of costs incurred and recognised profits (less recognised
losses) upto the reporting date;
2. (b) the amount of advances received; and
3. (c) the amount of retentions.

40. Retentions are amounts of progress billings which are not paid until the satisfaction of
conditions specified in the contract for the payment of such amounts or until defects have
been rectified. Progress billings are amounts billed for work performed on a contract whether
or not they have been paid by the customer. Advances are amounts received by the contractor
before the related work is performed.

41. An enterprise should present:

(a) the gross amount due from customers for contract work as an asset; and

78 AS7
(b) the gross amount due to customers for contract work as a

liability.

42. The gross amount due from customers for contract work is the net amount of:

1. (a) costs incurred plus recognised profits; less

2. (b) the sum of recognised losses and progress billings

for all contracts in progress for which costs incurred plus recognised profits

(less recognised losses) exceeds progress billings.

43. The gross amount due to customers for contract work is the net amount of:
 1. (a) the sum of recognised losses and progress billings; less
2. (b) costs incurred plus recognised profits

for all contracts in progress for which progress billings exceed costs incurred

plus recognised profits (less recognised losses).

44. An enterprise discloses any contingencies in accordance with Accounting Standard (AS)
4, Contingencies and Events Occurring After the Balance Sheet Date. Contingencies may
arise from such items as warranty costs, penalties or possible losses.

Disclosure of Accounting Policies

The following are illustrations of accounting policy disclosures:

Revenue from fixed price construction contracts is recognised on the percentage of

completion method, measured by reference to the percentage of labour hours incurred upto
the reporting date to estimated total labour hours for each contract.

Revenue from cost plus contracts is recognised by reference to the recoverable costs incurred
during the period plus the fee earned, measured by the proportion that costs incurred upto the
reporting date bear to the estimated total costs of the contract.

The Determination of Contract Revenue and Expenses

The following illustration illustrates one method of determining the stage of completion of a
contract and the timing of the recognition of contract revenue and expenses (see paragraphs
21 to 34 of the Standard). (Amounts shown hereinbelow are in Rs. lakhs)

A construction contractor has a fixed price contract for Rs. 9,000 to build a bridge. The initial
amount of revenue agreed in the contract is Rs. 9,000. The contractor’s initial estimate of
contract costs is Rs. 8,000. It will take 3 years to build the bridge.

By the end of year 1, the contractor’s estimate of contract costs has increased to Rs. 8,050.

In year 2, the customer approves a variation resulting in an increase in contract revenue of

Rs. 200 and estimated additional contract costs of Rs. 150. At the end of year 2, costs
incurred include Rs. 100 for standard materials stored at the site to be used in year 3 to
complete the project.

The contractor determines the stage of completion of the contract by calculating the
proportion that contract costs incurred for work performed upto the reporting date bear to the
latest estimated total contract costs. A summary of the financial data during the construction
period is as follows:

(amount in Rs. lakhs)

YEAR 1 YEAR2 YEAR3

Initial amount of revenue agreed in 9,000 9,000 9,000
contract
Variation ----------- 200 200
 Total contract revenue 9,000 9,200 9,200
Contract costs incurred upto the 2,093 6,168 8,200
reporting date
Contract costs to complete 5,957 2,032 ——
Total estimated contract costs 8,050 8,200 8,200
Estimated Profit 950 1,000 1,000
Stage of completion 26% 74% 100%

The stage of completion for year 2 (74%) is determined by excluding from contract costs
incurred for work performed upto the reporting date, Rs. 100 of standard materials stored at
the site for use in year 3.

The amounts of revenue, expenses and profit recognised in the statement of profit and loss in
the three years are as follows:

Upto the Reporting Recognised in Recognised in

Date Prior years current year
Year 1
Revenue (9,000x .26) 2,340 2,340
Expenses (8,050x .26) 2,093 2,093
Profit 247 247
Year 2
Revenue (9,200x .74) 6,808 2,340 4,468
Expenses (8,200x .74) 6,068 2,093 3,975
Profit 740 247 493
Year 3
Revenue (9,200x 1.00) 9,200 6,808 2,392
Expenses 8,200 6,068 2,132
Profit 1,000 740 260

Contract Disclosures
A contractor has reached the end of the first year of operations. All its contract costs incurred
have been paid for in cash and all its progress billings and advances have been received in
cash. Contract costs incurred for contracts B, C and E include the cost of materials that have
been purchased for the contract but which have not been used in contract performance upto
the reporting date. For contracts B, C and E, the customers have made advances to the
contractor for work not yet performed.

The status of its five contracts in progress at the end of year 1 is as follows:

(amount in Rs. lakhs)

A B C D E TOTAL
Contract Revenue recognised in 145 520 380 200 55 1300
accordance with paragraph 21
Contract Expenses recognised in 110 450 350 250 55 1215
accordance with paragraph 21
 Expected Losses recognised in --- ---- ------ 40 30 70
accordance with paragraph 35
Recognised profits less recognised 35 70 30 (90) (30) 15
losses
Contract Costs incurred in the period 110 510 450 250 100 1420
Contract Costs incurred recognised 110 450 350 250 55 1215
as contract expenses in the period in
accordance with paragraph 21
Contract Costs that relate to future ----- 60 100 ------ 45 205
activity recognised as an asset in
accordance with paragraph 26
Contract Revenue (see above) 145 520 380 200 55 1300
Progress Billings (paragraph 40) 100 520 380 180 55 1235
Unbilled Contract Revenue 45 ------ ----- 20 ------ 65
Advances (paragraph 40) ------ 80 20 ------- 25 125
Recognised profits less recognised
losses

The amounts to be disclosed in accordance with the Standard are as follows:

Contract revenue recognised as revenue in the period (paragraph 38(a)) 1,300

Contract costs incurred and recognised profits (less recognised losses) upto the 1,435
reporting date (paragraph 39(a))
Advances received (paragraph 39(b)) 125
Gross amount due from customers for contract work— 220
presented as an asset in accordance with paragraph 41(a)
Gross amount due to customers for contract work— (20)
presented as a liability in accordance with paragraph 41(b)

(amount in Rs. lakhs)

A B C D E TOTAL
Contract Costs incurred 110 510 450 250 100 1420
Recognised profits less recognised losses 35 70 30 (90) (30) 15
145 580 480 160 70 1435
Progress billings 100 520 320 180 55 1235
Due from customers 45 60 60 ------ 15 220
Due to customers ------ ------- ----- (20) ----- (20)

The amount disclosed in accordance with paragraph 39(a) is the same as the amount for the
current period because the disclosures relate to the first year of operation.
TRANSFER OF DEVELOPMENT RIGHTS (TDR)

1. WHAT IS TDR?
Transfer of Development Rights (TDR) means making available certain amount of
additional built up area in lieu of the area relinquished or surrendered by the owner
of the land, so that he can use extra built up area either himself or transfer it to
another in need of the extra built up area for an agreed sum of money.

2. Purpose of TDR:
The process of land acquisition in urban areas for public purpose especially for road
widening, parks and play grounds, schools etc., is complicated, costly and time
consuming. In order to minimize the time needed and to enable a process, which
could be advantageously put into practice to acquire land for reservation purposes
mentioned above.

3. Legal Basis for TDR:

The Government of Karnataka felt it necessary to amend the K.T.C.P Act 1961 in
order to empower the local bodies (Corporations / Planning Authorities) to permit
additional FAR for the land handed over free of cost whenever such lands are
required for road widening, and / or for formation of new roads or for development of
parks, playgrounds and other civic amenities etc. As a result the Government has
inserted a new section 14B in the K.T.C.P Act 1961.

4. Development Rights Certificate (DRC), whether transferable / Inheritable:

If the owner of any land which is required for road widening for formation of new
roads or development of parks, play grounds, civic amenities etc., those proposed in
the plan shall be eligible for the award of Transferable Development Rights. Such
award will entitle the owner of the land in the form of a Development Rights
Certificate (DRC). Which he may use for himself or transfer to any other person.

5. Calculation of Development Right (DR):

ILLUSTRATION FOR USE OF TRANSFER OF DEVELOPMENT RIGHTS

Illustration No. 1: In a plot area of 500 square meters at road “A”, where floor area
ratio is 1.5:-

I Plot area 500 sqm

II Permissible floor area 1.5
III Buildable Floor Area 500 x 1.5 sqm =750 Sqm.
IV Area surrendered 100 sqm
V Additional floor area in the form of Development rights 150 sqm
VI Plot area after surrender 500 – 100 = 400 sqm
VII Buildable floor area in plot area of 400 sqm (after
surrender)
a) If Additional Floor area is not utilized in the same 750 sqm
plot
b) If Additional Floor area is utilized in the same plot 750 + 150 = 900 sqm
Illustration No. 2: In a plot area of 500 square meters at road “B”, where floor area
ratio is 0.75:-

I Plot area 500 sqm

II Permissible floor area 0.75
III Buildable Floor Area 500 x 0.75 = 375 sqm
IV Area surrendered 100 sqm
V Additional floor area in the form of Development rights 150 sqm

VI Plot area after surrender 500 – 100 = 400 sqm

VII Buildable floor area in plot area of 400 sqm (after
surrender)
a) If Additional Floor area is not utilized in the same 375 sqm
plot
b) If Additional Floor area is utilized in the same plot 375 + 150 = 525 sqm

The effect of the change is that the service tax will not apply only when a builder sales a
ready flat or shop or industrial unit (gala) after Building completion certificate is obtained
from local authority (like Municipal Corporation, Municipality, Gram Panchayat
etc.) and entire consideration is obtained only after building completion certificate is
obtained. In all other cases, the builder will be liable to pay the service tax.

 Cannot be applied if the contract is covered under works contract service