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No Service Tax to Developers

It is a known fact that developers across India charge service tax on construction of flats on a percentage of the total sale price of the flat. Service tax is levied by the Central Government and therefore is levied in all the states. Some states also levy VAT (Value Added Tax) on the sale of under construction property, which is over and above the service tax charged. At the time of sale of property, the amount paid by the purchaser to the builder is for the value of land as well as the construction service provided by the builder/developer.

Also Read- HARYANA RERA JUDGMENTS AND ORDERS

 

Service Tax to Developers

However, service tax is only levied on the construction service provided by the builder/developer as per the rate in force.Service tax on under construction property is levied on the services provided by builders or real estate developers or any person, where building complexes, civil structure or part thereof are offered for sale but the payment is received before the issuance of Completion Certificate by a competent authority. Exemption from service tax on under construction property is only available in the circumstances pertaining to services provided in the following cases-

  1. Construction of a single residential unit (Single Residential Unit has been defined as self-contained residential unit designed for use of a single family);
  2. Construction of low cost houses upto a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the scheme of “affordable housing in partnership” framed by the Ministry of Housing and Urban Property Alleviation by Government of India.

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However, the Delhi High Court, in the 2016 judgment of the case of Suresh Kumar Bansal v. Union of India, announced that service tax would not be levied on sale of under construction property. The relevant part of the judgement reads as – “There is no statutory authority or mechanism to determine the value of undivided share of land acquired by buyers of dwelling unit or on value of goods which are incorporated in project by developers. This results into levy of tax on constituent goods or land which results into the intrusion into legislative field reserved for the states under the Constitution of India.”

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This judgement of the court has set aside the provision of Section 65(105)(zzzh) of the Finance Act, 1994 which included services from any person to another person in relation to construction of complex within the ambit of service tax. As per this Section, the construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction shall be deemed to be service provided by the builder to the buyer, except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force.

Also Read- HOW TO CHECK WHETHER PROJECT IS REGISTERED WITH RERA PUNJAB

 

The court has struck down the provision saying that rules framed under Service Tax Rules, 2006 don’t determine the value of services in the case of composite contract involving the sale of land. It was held that Rule 2-A of the Service Tax Rules, 2006 doesn’t provide any mechanism to calculate the component of “service” in a contract between a buyer and a builder. Rule 2-A of Service Tax Rules, 2006 talks about the determination of service portion in the execution of a works contract. This rule states that-

  • 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.
  • Where the value has not been determined underthe above mentioned clause, the person liable to pay tax on the service portion involved in the execution of the works contract shalldetermine the service tax payable in the manner as prescribed in these rules.
  • “Total  amount”  means  the  sum  total  of  the  gross amount  charged  for  the  workscontract  and  the fair  market  value  of  all goods  and services  supplied  in or  in  relation to the execution of the works contract, whether or notsupplied under the same contract or any other contract, after deducting the amount charged for such goods or services, if any, and the value added tax or sales tax, if any, levied thereon:

Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.

Absence of any required mechanism in such rules leaves no way to distinguish between different components of cost of the flat, which would include cost of land, construction material and other charges.

Also Read- DELAY COMPENSATION IN HRERA PANCHKULA

 

Therefore, neither the Finance Act, 1994 nor the Service Tax Rules, 2006 provide a machinery provision for determining the value of services to arrive at the measure of service tax for under construction flats. Hence, no service tax can be levied on such services. Further, service tax can not be charged on transfer of property, as it is covered under other laws, including stamp duty.

Going a step further, the court had also ordered the Government to refund the amount of service tax to the petitioners with an interest of 6 per cent from the date of deposit till the date of refund. It has directed the government that in case any amount has been collected, the same shall be refunded to the respective individuals after the officers of service tax department have examined the correctness of collection of service tax by the builders. This order has opened a window for the homebuyers to approach the department seeking refund of service tax paid to the developers or builders.

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An appeal against this order of Delhi Hight Court is pending in the Supreme Court.

On the same lines, recently, the Punjab and Haryana High Court, in the case of Balvinder Singh v. Greater Mohali Area Development Authority (GMADA), has also held that homebuyers are not liable to pay service tax to the developers/builders and has also ordered refund of the service tax if collected. This has come as a great relief for many homebuyers. However, this judgement is also subject to the awaited decision of the Supreme Court on the pending appeal case filed against the Delhi High Court order.

Also Read- POPULAR PUNJAB RERA JUDGMENTS

 

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