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Service Tax on Re Development of Society
Background of redevelopment:
In Mumbai, many building are becoming building older than 35 to 40 years and such building require redevelopment. Also due to shortage of land, rising population innovative concept of redevelopment of old properties has brought. In such redevelopment, society appoints developer and developer construct new flats with modern amenities and facilities. Members of society gets newly constructed flat free of cost and also get rent allowances, corpus and other allowances. Hence, in such transaction whether service tax would be applicable or not needs to be anaylzed.
Crux of redevelopment transaction
Party Activity done Consideration Service provider: Developer
Service receiver: society :- Developer provide construction service to society Developer receives development right for construction of additional saleable flats Service provider: Society
Service receiver: Developer :- Society grants development potential for construct saleable units to developer Society receives construction service from developer Service provider: Members
Members relinquish occupancy rights in existing flat and grant consent for redevelopment to developerMembers receives rights in reconstructed flat from developer. Based on above, redevelopment transaction is a barter transaction between society, members and developers. Service tax implication for developer on construction of new flats to existing members up to 30th June, 2012
Chargeability of service tax
As per section 65 (105) (zzzh) of Finance Act, 1994 (hereinafter referred “Act”), any service provided or to be provided to any person, by any other person, in relation to construction of complex would be liable for service tax.
Definition of construction complex, In connection of above, meaning of construction of complex needs to analyze. As per section 65(30a) of Act, construction of complex means construction of a new residential complex or part thereof; or repair, alteration, renovation or restoration of, or similar services in relation to, residential complex.
Definition of residential complex, In connection of above, meaning of residential complex needs to be analyzed. As per section 65(91a) of Act, residential complex means any complex comprising of—
i. a building or buildings, having more than twelve residential units;
ii. a common area; and
iii. any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system, located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.
In above, society and members would be constructing flat for personal use. Hence, construction of any residential complex with intent to personal use would not be liable for service tax.
Clarification from CBEC
Further, The Central Board of Excise and Customs (CBEC), vide their circular 151/2/2012- ST dated 10th February, 2012, clarified as follow:
“Re – construction undertaken by a building society by directly engaging a builder/developer will not be chargeable to service tax as it is meant for the personal use of the society/its members.”
Conclusion:- Hence, re-construction undertaken by a society by directly engaging a builder/developer up to 30th June, 2012 will not be chargeable to Service tax as it is meant for the personal use of the society/its members. Accordingly, developer would not be liable for service tax on services provided for construction of new flats to existing members. Service tax implication for developer on construction of new flats to existing members after 1st July, 2014. New service tax legislation from 1st July, 2014
From 1st July, 2014, Service tax legislation has been entirely changed. From positive list of taxation to negative list of taxation approach has been adopted. In such new legislation, 1st time definition of “service” has been introduced.
Definition of “Service”
As per section 65B(44) of Act, (44) “Service” means
i. any activity carried out by a person for another for consideration, and
ii. includes a declared service,
iii. but shall not falling in “Negative List of Services” as listed u/s. 66D of the Act; and under Notification no. 25/2012 dated 20-06-2012
However, meaning of “activity” has not been defined in Act. In terms of the common understanding of the word activity would include an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a facility etc. It is a term with very wide connotation.
In connection of redevelopment, applicability of definition can be analyzed as follow:
i. Developer does activity of construction of flat for existing members.
ii. Developer receives development rights for construction of additional saleable flats.
iii. Developer provides construction service which is declared in section 66E
Hence, redevelopment of flats for existing member would be “service” under definition of section 65B(44) of Act. Such service is provided within taxable territory. Hence, such service would be “taxable service” as per section 66B of Act.
Clarification from Mumbai Commissioner :- Further, The Maharashtra Chamber of Housing Industry (MCHI) has sought clarification from the Service Tax Commissioner, Mumbai-I on the issue whether Builders/Developers are liable to Service tax in respect of rehab flats/units allotted to society members in redevelopment project. The Commissioner,vide his letter F.No.V/ST-I/Tech-II/463/11 dated 31-08-2012, clarified that Service tax is leviable on construction of such rehab flats/units/ free of cost area received by members.
Development service would be “work contract” or “construction of building”
The issue will arise whether the development service would be “works contract” or “Construction of building”. The effective tax rate, date of service tax applicability, valuation and relevant Rules and notifications etc., are different for construction of building and for works contract. In the redevelopment, the developer usually does not get title to or rights in land pertaining to rehab portion. Developer constructs on the land belonging to the society. Hence, service
provided by the developer would be a “works contract” for construction of rehab flats in a redevelopment. Accordingly, developer would be works contractor for service provided to society.
Conclusion on applicability of service tax from 1st July, 2012
Based on above analysis of definition of service tax in respect of redevelopment activity and clarification from Mumbai commissioner, service tax would be applicable on construction of flat to existing members which are given free of cost to existing society members. Such services would be works contract service.
Valuation on free cost/rehab construction service
Determination of gross value as per Valuation method under section 67, Section 67 of Act specifies manner of valuation of taxable service. As per section 67, in following manner valuation needs to be done: Section Nature of transaction Value of service 67(1)(i)the provision of service is for a consideration in money the gross amount charged by the service provider for such service 67(1)(ii) provision of service is for a consideration not wholly or partly consisting of money but value is ascertainable value of taxable service shall be the equivalent money value of such consideration 67(1)(iii)the provision of service is for a consideration which is not ascertainable Valuation needs to be done as per Rule 3 of Service Tax (Determination of Value) Rules 2006 Valuation method applicable on rehab/ new construction of flat to members developed by developer
Developer receives development rights for construction of additional saleable flats. In connection of such consideration, in following manner valuation would be done:
Sale value of rehab / new flats constructed for existing flat owner:
In redevelopment, developer provides service of construction of rehab / new flats for existing owners. Hence, developer is “work contract” service provider. In such case sale value of new flats available in market which would be similar to flats constructed by developer could not be apply. Since, sale value of new flat usually includes value
attributable to land; whereas in redevelopment, land is never transferred to developer by society. Hence, market value of such construction service cannot be arrived at by applying sale rate of new flats.
Value of Development agreement as per stamp duty valuation
Development rights agreement entered between developer and society for re-development building. Such development agreements are liable for stamp duty. For levy of stamp duty on such development agreement, construction cost of rehab portion, corpus allowance, rent allowance are considered and on such total cost, value of stamp duty would be
payable. In such case, as per section 67(1)(ii) where value of consideration is ascertainable then such value needs to be considered for valuation purpose.
Hence, value of development agreement would be gross value of service provided by developer to society member for construction of new flats to members.
Determination of net value as per service tax (Determination of value) Rule, 2006
As per above para, gross value of construction service provided by developer has been determined. Such gross value includes goods portion and service portion. As per Rule 2A of service tax (determination of value) rules, 2006, the value of service portion in the execution of a works contract shall be determined in the following two manners:
(i) Specific Valuation Method [Rule 2A (i) of Valuation Rules]
Under specific valuation method, value of service portion needs to be determined by deducting value of material used for executing works contract. However, gross value of consideration of construction has been determined based on development agreement. In such case, it would not be possible to deduct value of material used for executing works
contract. Hence, specific valuation method would not be applicable to determine net value of consideration.
(ii) Presumptive Valuation Method [Rule 2A (ii) of Valuation Rules]
Under Presumptive Valuation Method, the value of service portion in the works contract for original works is deemed to be 40% of gross consideration/contract value excluding VAT. Thus in the redevelopment, the effective service tax rate under presumptive method would be 4.944% of the value of development rights.
Point of taxation for rehab portion construction
The point of taxation arises when service provider is legally entitled to receive consideration from service recipient. Accordingly, the point of time when developer receives irrevocable development rights in the land would be a point of taxation for rehab construction. Such rights developer would get on any of following probable dates–
Date of execution of development agreement
Date of developer getting vacant possession free from all encumbrances
Date on which developer gets necessary permission – IOD,CC
Further, only development agreement executed after 1st July, 2012 would be liable for service tax.
Taxability on society
A Society transfer development rights to developer for reconstructed flats. Whether any activity is ‘service’ needs to be determined as per definition of service stated in section 65B(44). As per section 65B(44)(a)(i) of definition of service, any activity which constitutes merely a transfer of title in immovable property, by way of sale, gift or in any other manner would not be considered as service.
However, “Immovable property” has not been defined in the Act. Therefore the definition of immovable property in the General Clauses Act, 1897 will be applicable which defines immovable property to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. Based on such definition of immovable property Development rights are squarely covered under definition of immovable property. Transfer of such immovable property is outside the ambit of Service tax.
Taxability on members
Members usually get Corpus allowance, rent allowance, shifting allowance, hardship allowance etc. For taxability of such allowance two views are possible which are as under:
All the allowances are consideration for only transfer/relinquishment of rights in the property by the members to the developer. In such case, such transaction would be considered as a transaction of immovable property and same would not be liable to Service tax. Such allowances are a consideration for not only transfer or relinquishment of members’ rights in immovable property but also such allowances are received by the members for having agreed to vacate, shift and tolerate the hardship associated with shifting during the reconstruction of the society’s building, for compensating consequential increase in maintenance and property tax on redeveloped buildings.
As per section 66(E)(e) of the Act, “agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act” would be considered as declared service. Hence, if such allowances are considered as tolerate an act or a situation then such allowance if received more than threshold limit of Rs. 10 lakh would
be regarded as taxable service Sale of additional area to members and sale of saleable flats/units:
The developer would be a builder in respect of sale of additional area to members and sale of saleable flats to third party. Such Sale of under construction flats would be liable to service tax @ 3.09% or 3.708%.
Cenvat eligibility on or after 01-07-2012
Rehab portion and saleable portion are taxable activities. Hence, the developer is entitled to claim Cenvat in respect of input services and capital goods used in redevelopment subject to provision of Cenvat Credit Rules, 2004.