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Service Tax on Builders
SERVICE TAX ON BUILDERS
BACKGROUND:- The law related to service tax was introduced for the first time vide The Finance Act, 1994. Initially service tax was imposed only on 3 services. The net of service tax was widened by introducing new services phase wise year after year. Vide Finance Act, 2004, Central Government introduced new service category namely “Commercial or Industrial Construction Services” with an intention to expand the scope of service tax net & to levy service tax on construction, repairs, alterations or similar services in relation to new building or civil structures which is primarily used for commerce or industry. The said levy was made effective from 10th September, 2004. Thereafter, vide finance Act, 2005 a new category namely “Construction of Complex Service” was introduced with an intent to expand the scope of levy service tax & to cover service tax on construction of residential complex, w.e.f 16th June, 2005.
Section 65(25b) defines Commercial or Industrial Construction Service to mean:-
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 tilling, 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 structures; or
d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,
i) used, or to be used, primarily for ; or
ii) occupies, 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. As per section 65(105)(zzq) the “taxable service under Commercial or Industrial Construction” means any service provided or to be provided to any person, by any commercial concern, in relation to construction services”. The term “any commercial concern” in the definition of taxable service is replaced by words “any other person” w.e.f. 1st May, 2006 with a view to expand the scope of levy. As per section 65(105)(zzzh) the “taxable service under Construction of complex” means any service provided or to be provided to any person, by any person, in relation to construction of complex”. Section 65(91a) defines the term “residential complex” to means complex comprising of building(s) having more than twelve residential units. i.e. 12 or more single apartment intended for use as a place of residence , having common area and one or more facilities such as park, lift etc. and the layout of which is approved by local authority. The complex which is meant for “personal use1 ” is kept out of the purview of definition of “residential complex”. The new category that of “Construction of Complex Service” covers only the services provided by the contractors/sub contractors to the estate builders/developers in relation to the residential complex. CBEC had clarified from time to time that service tax on sale of property by estate builders was kept out of the levy.
To bring builders/developers under the service tax net, an explanation was inserted to the definition of “Commercial or Industrial Constructions Service” & “Commercial of Residential Complex” Vide finance Act, 2010 w.e.f 1st July, 2010 thereby the sale of flats by builder/developers to prospective buyer is treated as DEEMED taxable Service. Before dealing with the implication of amendments related to applicability of service tax on builders/developers effective from 1st July, 2010, let us deal with few of the landmark decisions & circulars which gave a birth to levy of service tax on builders/developers.
LANDMARK DECISIONS & CIRCULARS:-
In Para 13.1 of circular no.80/10/2004-ST dated 17th September, 2004 issued by Central Government, it was clarified that “Estate builders2 who construct buildings/Civil Structures for themselves (for their own use, renting it out or for selling it subsequently) are not taxable service providers”. With this clarification it was understood that the estate builders are not liable to service tax. However it was only the contractors or their sub contractors are liable to service tax for the services provided by them to the estate builders, developers or such other person in relation to construction.
The Hon’ble Supreme Court while deciding the case of M/s. K. Raheja Development Corporation Vs. State of Karnataka (2005 TIOL 77 SC CT) Vis-a-Vis The Karnataka State Sales Tax law held that activity undertaken by builder forconstruction of flat/building on behalf of prospective customer for consideration in cashor for deferred payment is works contract and not sale.
Based on the above decision of The Hon’ble Supreme Court, DGST vide Circular F.No.V/DGST/22/AUDIT/MISC./1/2004 dated 16th February, 2006 clarified that estate builders undertaking construction activity on behalf of the prospective customers are covered under the definition of service providers & are therefore liable to service tax under the “construction of complex services” or “Construction of Industrial or commercial Construction”. In another decision of Hon’ble Supreme Court in the case of M/s. Larsen & Turbo & ANR Vs State of Karnataka & ANR (2008-TIOL-186-SC-CT) Vis-a-Vis The Karnataka State Sales Tax law itself, the decision in the case of K.Raheja Development Corporation (supra) was not accepted. It was observed that if the decision of Raheja case to be hold good then there would not be any difference between works contract and a contract for sale of chattel as a chattel. The case of Larsen & Turbo has been referred to the larger bench for reconsideration & is still pending before the larger bench. The applicability of service tax on real estate developers/builders was again clarified vide ministry’s letter F.No.332/35/2006-TRU dated 1st August, 2006 by TRU that If the builder undertakes construction on his own without engaging the services of any other person, then in such cases in the absence of service provider & service recipient relationship, the builder is not liable to service tax.
1 “Personal Use’ includes permitting the complex for use as residence by another person on rent or without consideration.
2 The Term “ Estate Builder” is not defined for the purpose of Finance Act,1994The DGST circular F.No.V/DGST/22/AUDIT/MISC./1/2004 dated 16th February, 2006 was superseded by the Master Circular No.96/7/2007-ST dated 23rd August, 2007 issued by Central Government of India. The master circular dated 23rd August, 2007 clarified that the position of estate builders in line with the TRU circular dated 1st August, 2006.
Further the Hon’ble Gauhati High Court in the case of Magus Constructions Pvt Ltd Vs. UOI (2008-TIOL-HC-GUW-ST) held that:-
• Circular dated 1st August, 2006 is binding on the department.
• The sale of flat is not service hence not liable to service tax &
• The advance made by a prospective buyer to builder is against consideration for sale of flat & not for the purpose of obtaining service.
• Service tax is not applicable the amount received by the builder from the prospective buyer before/during or after the completion of services. Based on the above decision of Hon’ble Gauhati High Court, CBEC vide circular No.108/02/2009-ST dated 29th January, 2009 concurred the facts & clarified that the sale of under construction flats are not liable to service tax.
AMENDMENTS MADE VIDE FINANCE ACT, 2010:-
With a view to reverse the decision of Hon’ble Gauhati High Court in the case of Magus Constructions Pvt Ltd Vs. UOI (2008-TIOL-HC-GUW-ST) & the CBEC circular No.108/02/2009-ST dated 29th January, 2009 & thereby to bring the transaction of sale of flats/commercial units under the service tax net, an explanation to the definition of taxable services was inserted vide finance Act, 2010 & made applicable w.e.f 1st July, 2010. Thereby the levy of service tax was made applicable to sale of flats/units by a builder/developer to the prospective buyers by a deeming fiction. The affect of the amendment was that the transaction of sale of premises in case the prospective buyer pays any amount towards consideration for the same to the builder before his obtaining completion certificate would be treated as deemed service & liable to service tax under the respective category. If no amount is received by builder/developer before obtaining completion certificate from the competent authority, the whole transaction is kept outside the purview of service tax. The above explanation is draconian for the reason that if any payment towards sale consideration is received before the grant of completion certificate by the authority prescribed, the entire transaction of the sale of flat/unit will be liable to service tax & not restricted to the incomplete part of construction carried out after receiving the consideration. Let’s take a practical scenario of a customer or buyer of flat who pays a token money of Rs.1 lakhs to the builder for a purchase of flat of Rs 1 Crore at the time when the work completed for the construction about 95%. Then in that case Service tax will become payable on whole Rs1 Crore for the reason that the builder has received a sum prior to obtaining the completion certificate.
Besides any government authorities Central government vide MF (DR) Order No. 1/2010 dated 22nd June, 2010 prescribed the following persons as persons of competent authority for issuing the completion certificate:-
i) architect registered with the Council of Architecture constituted under the Architects Act, 1972; or
ii) chartered engineer registered with the Institution of Engineers (India); or iii) licensed surveyor of the respective local body of the city or town or village or development or planning authority; The resale of premises would be out of the purview of service tax even if completion certificate is not issued for the same since it is not a transaction between builder and prospective buyer.
In view of Notification No.36/2010-ST dated 28th June, 2010 any consideration received as advance before 1st July, 2010 in relation to sale of premises by the builder to prospective buyer will be fully exempted from the service tax. Further Notification no.1/2006-ST dated 1st March, 2006 provides for the exemption for the material cost for certain service categories. Serial no. 7 & 10 of this notification provides for 67% exemption for the category “Commercial or Industrial Constructions” & “Construction of complex” respectively. Vide notification no.29/2010-ST dated 22nd June, 2010 new serial no. 7(a) & 10(a) in notification no.1/2006-ST is inserted so as to provide for 75% abatement from the gross amount provided the cost of land is not charged separately. Thereby the service tax is payable only on 25% of the value of flat. Central Government, in Para 6.2 of Letter DOF No.334/03/2010-TRU dated 1st July, 2010, has clarified that abatement of 75% would be applicable only if the gross value includes cost of land. Otherwise, the existing rate of abatement of 67% would continue to apply.
CBEC vide Circular No.334/1/2010-TRU dated 26th February,2010 has clarified following:
o Para 8.2 & 8.3…..builder continue to remain legal owner of the property in case of payment made by buyer in installments as per the terms of agreement to sale. In this type of transaction, the builder is deemed to have provided services to self since the legal ownership/transfer of property from builder to buyer takes place only after completion of building and handing over the possession along with executing conveyance deed. o Para 8.4 & 8.6….in many cases, two agreements are executed. One for sale of undivided portion of land and the second for construction of building thereon. This mode of transaction is devised to pay lesser stamp duty. In order to achieve parity in tax treatment, explanation is inserted to Section 65(105)(zzq) to treat the amount received towards sale of premises as services subject to exception that entire payment is received after obtaining completion certificate from prescribed authorities.
GROUNDS IN SUPPORT OF CHALLENGING THE APPLICABILITY OF ST ON BUILDERS:-
1) Article 366(29A) was inserted in the constitution of India to make indivisible contracts of Works contract divisible to find value of goods by deeming fiction. The above explanation/amendments widen the scope of levy beyond the concept of service by including therein sale & taxing of sale and purchase is beyond the legislative competence of the Union Legislature. Recently the Hon’ble Punjab & Haryana High Court in the case of M/s. G S Promoters Vs UOI (2010-TIOL-813-HC-P&H-ST) has upheld the constitution validity of service tax on builders under the category of “Construction of complex”. The constitution validity was challenged on the ground that the sale of flats amounts to sale & purchase which is not the subject matter of the union to levy tax on. The Hon’ble HC observed that whether or not service is involved has to be seen not only from the point of view of the builder but also from the point of view of the service recipient. The constitutional validity was upheld on the ground that taxing of such transaction is not outside the purview of the Union Legislature as the same does not fall in any of the taxing entries of State list.
2) Service tax is applicable only for the service provided to the complex. The term complex is defined thereby a building consisting more than 12 residential units be termed as complex for the purpose of this levy. When the prospective buyer enter into a agreement with the builders for a single flat, one can argue that the builder is rendering service of construction of single flat & not for entire complex & services in relation to construction of single flat is not leviable to service tax inspite of amendment to the definition of “Construction of Complex”.
Hon’ble Chennai CESTAT in the case of Macro Marvel Projects Ltd. (2008) 12 STR 603 has held that
• The definition of residential complex (Section 65(91a)) covers building having more than 12 residential units.
• Individual residential unit is not to be considered as residential complex or part thereof.
• Legislative intention is not to levy service tax on construction of individual residential unit as reflected from definition of taxable service (Section 65(105)(zzzh)) which provides that services provided in relation to construction of complex.
3) The term “residential complex” excluded a case of person directly engaging any person for designing & constructing the construction of complex & the complex is for personal use as residence by the person. As per the definition of “personal use” the premises intended to be purchase by prospective buyer will always fulfil the criteria of personal use & thereby service tax will not be applicable on the transaction related to construction of residential units. In that case there should be no service tax even due to deeming fiction.
Central Government vide Letter F.No.332/16/2010-TRU dated 24th May,2010 has clarified on the issue related to leviability of service tax on construction of residential house by National Building Construction Corporation Ltd. (NBCC) for Central Government officers. In para 2 of said the circular, it is clarified that the definition of residential complex (Section 65(91a)) does not include a complex which is intended for personal use as residence by recipient of service. The term “personal use” is defined to include permitting the use of complex as residence by another person on rent or without consideration. In para 3 of the said circular, it is further clarified that the residential complex built by NBCC for personal use of Government of India is not leviable to service tax. Hon’ble Mumbai High Court has granted stay for recovery of service tax to the members of MCHI in response to the writ petition filed by Maharashtra Chamber of Housing Industry (2010-TIOL-526-HC) challenging the constitutional validity of the amendment through finance Act, 2010. The Hon’ble Court also instructed the Department not to initiate coercive steps against the petitioners till next hearing. However it was clarified that assessment against the assessee may be initiated. Vide Notice Of Motion no.100 of 2011 dated 18th February, 2011, The Hon’ble Mumbai High Court has withdrawn the stay & directed the members of MCHI to deposit the service tax with the “Prothonotary & Senior Master” of Mumbai High Court till the final disposal of the case. The court further directed that the service tax so deposited shall be refunded back along with accrued interest thereon in case the petition is decided in the favour of MCHI. Many writ petitions are being filed with different High Courts challenging the levy, for which decisions are still awaited.
SPECIAL SERVICES PROVIDED BY BUILDER ETC. TO PROSPECTIVE BUYER:-
Apart from the above 2 categories for levying service tax on builders, an additional category “Special Services provided by builder etc. to prospective buyer” is notified w.e.f
1 st July, 2010. This category sought to tax the amount charged by builders to buyers for special services such as prime/preferential location such as sea facing, park facing, corner flat etc. laying of sewerage & water pipelines, providing access roads & common lighting etc., charges for fire fighting installation & power back up etc. The amount recovered towards parking space is specifically excluded from the levying the service tax. For this category, no abatement or exemption is being provided except under notification no.36/2010-ST dated 28th June, 2010 which provides that any consideration received as advance before 1st July, 2010 will be fully exempted from the service tax.
CONCLUSION:- Of late during last 5 years or so, the real estate business has experienced a boom which tempted the government to recover its pie from this industry. Resulting thereby is the amendment to the statue & services of construction per se is treated as taxable service. The amendment made the intention of the government clear that:-
• When it comes to VAT, it becomes sale of immovable property so as to levy VAT,
• When it comes to Stamp Duty, it becomes transaction of sale of immovable property &
• When it comes to Service Tax it becomes services provided for constructing so as to levy Service Tax.