Issues regarding Service Tax on Real Estate Transactions
Builders and developers are deemed to be service providers in respect of under construction units/flats and are made liable to service tax w.e.f. 1-7-2010 in respect of consideration received from the buyers against such construction of flats/units. Sale of under construction flats/units is liable to service tax only where any part of sale consideration was received by the builder or his authorised agent before the grant of completion certificate. Where full consideration is received by the builder or his authorised agent after grant of completion certificate it is a pure transaction of sale of immovable property and is not liable to service tax. Construction of residential complex under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Gandhi Awas Yojana etc. is exempt from service tax. So also houses up to 60 sq. mtrs. built for urban poor is not liable to tax.
Some issues in relation to service tax on Real Estate Transaction are clarified as under questions.
Q-1 Whether levy of service tax on real estate is Constitutionally valid?
Ans. The Hon’ble Bombay High Court in case of the
Maharashtra Chamber of Housing Industries and Other vs. Union of India has upheld the Constitutional validity of levy of service tax of similar construction service provided by builder.
Q-2 Whether sale of land is chargeable to service tax?
Ans. Sale of land by the land owner to the prospective buyer is not service much less a taxable service, hence such activity is not chargeable to service tax. (Refer Circular No. 151/2 of 2012-ST dated 10-2-2012).
Q-3 Where the land owner has allowed builder/developer to construct flats on the land belonging to him and against that has agreed to accept two flats/units to be constructed on this land, is there any taxable service rendered by the builder/developer to the land owner? If yes, what will be the value of taxable services?
Ans. The builder/developer is providing service to land owner for construction of two flats. If any part of the payment/development rights of the land is received by the builder/developer before the issuance of completion certificate, service tax is required to be paid by the builder/developer on the flats given to the land owner. However, if as per the agreement of the flats/units is to be transferred after completion certificate is received from the competent authority and if there is no performance as per agreement before that then it would not be service and no tax would be payable. In case it is held that it is taxable service then the value is required to be calculated in terms of Section 67(1)(iii) read with Rule 3(a) of Service tax (Determination of Value) Rules, 2006. As the consideration of the flats etc. i.e. value of land/development rights in the land may not be ascertainable the value of the flats be taken equal to the value of similar flats to other buyers sold nearer to the date on which land is made available for construction.
Q-4 Whether a sub-contractor doing a part of the work contract is liable to tax if the service of the main contractor is not liable to tax?
Ans. No, a sub-contractor providing services by way of works-contract to the main contractor is exempt from tax if the main contractor is providing exempt service (Ref. 29(h) of mega exemption Notification No. 25 of 2012).
Q-5 Whether a sub-contractor doing pure labour job for a main contractor whose services are exempt from Service tax?
Ans. No. The exemption to the services rendered by a sub-contractor is limited only to the service by way of works contract. Pure labour work is not a works contract. Hence sub-contractor will not be exempt from service tax under entry 29(h) of mega exemption Notification No. 25 of 2012.
Q-6 Whether an architect service and/or consulting engineer services provided to a contractor who is executing a construction work which is exempt from tax, is also exempt from tax?
Ans. No. Such services will not be exempt. As per clause (1) of section 66F reference to a service by nature or description in the Act will not include reference to a service used for providing such service. Therefore, such architect & consulting engineer will be liable to pay tax.
Q-7 Whether abatement of 70% or 75% can be claimed by a provider of residential complex service where there are two separate agreements, one for sale of undivided share of land & the other for super structure?
Ans. Yes. Since the intention of the parties is to avail the service of construction of a complex etc. i.e. buy & sell as unit/flat with an undivided share in land, the abatement will be available. However, the value as per both the agreements will be aggregated and then the abatement percentage of 70% or 75% is to be applied.
Q-8 A builder has offered a flat for Rs. 95 lakhs whose super built-up area is 2050 sq.ft., whether abatement @70% will be allowed or 75%?
Ans. Since the super built-up of the flat is up to 2050 sq.ft., carpet area is always being lesser than super built up area by around 20% to 25% in this case carpet area will work out lesser than 2000 sq. ft. Thus, the abatement of 75% is admissible and service tax will be chargeable only on 25% of the value.
Q-9 Whether a builder/promoter availing abatement of 70% or 75% can claim input tax credit in respect of inputs and/or services?
Ans. A builder/provider availing abatement cannot claim input tax credit in respect of duty paid on input goods. However he can claim input tax credit of tax paid on input services and capital goods.
Q-10 Whether repairs, maintenance of Airport, Ports and Railways are liable to service tax?
Ans. Services by way of construction, erection, commissioning or installation of original work pertaining to airport, port or railway, including Mono rail or Metro is exempt tax. Since the repairs and maintenance of airport, port and railway cannot be said to be an original work, the same will be liable for service tax. This position has been clarified by CBEC vide para 7.9.8 of the Education Guide on Service tax.
Q-11 Whether painting contract awarded by an owner of one of the units in a residential complex on the occasion of Diwali will be exempt from service tax?
Ans. No. As the services only by way of construction, erection, commissioning or installation of original work pertaining to a single residential unit are exempt from tax, the repairs is not covered by exemption the tax will have to be paid on such services.
Q-12 Whether painting contract given by a Government Hospital is liable to service tax?
Ans. No. Services provided to Government, a local authority or a Government Authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of a civil structure or any other original work meant predominantly for use other than for commerce ,industry or any other business, profession is exempt from tax. However, the cold storage is not infrastructure for agricultural produce position may change on facts.
Q-13 Whether construction of building used as cold storage is liable to tax?
Ans. No. Construction of a building used as a cold storage is not liable to tax as services by way of construction, erection, commissioning or installation of original works pertaining to post harvest storage infrastructure for agricultural produce including a cold storage for such purpose is exempt from tax (by value of Entry No.14(h) of mega exemption Notification No. 25/2012).
Q-14 Where a
builder/developer has decided to give cement, steel etc. free of
cost to the contractor engaged in constructing the flats in order to
ensure quality of material, can the value of such material be
included in the value of taxable service?
Ans. The Larger Bench of CESTAT in the case of Bhayana Builders (P) Ltd., & others, held that value of goods supplied free of cost by a service recipient to the provider of service is neither monetary nor a non-monetary consideration paid by or coming from the service recipient accruing to the benefit of the service provider and therefore would be outside the taxable value.
Q-15 Construction of flat in a complex involves transfer of property in goods also, hence can be considered as works contract. Whether the assessee should opt to pay service tax by treating the service as works contract or tax be paid as construction of complex service?
Ans. “Works contract’ is a general term & includes many more transactions where both service & goods are involved, whereas ‘construction of complex service’ is a special term, a specified works contract. A special entry prevails over general entry, hence such activity is to be classified as ‘construction of complex service’. Further in case of residential complex, service tax is payable only on 25% or 30% of the total consideration. Whereas in case of works contract, service tax is payable on 40% of the total consideration. Therefore, also (unless land value is very high) it is beneficial to pay tax under the category of ‘construction of complex service’.
Q-16 Whether service tax is applicable on Transfer of Development Rights (TDR)?
Ans. As per section 65B(44) of Finance Act, 1994 “Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—
a) an activity which constitutes ‘merely’,––
a ‘transfer of ‘title’ in goods or immovable property, by way of sale, gift or in any other manner; or
TDR is sale. The activity of permanent and irrevocable sale of development rights is a mere transfer of title of immovable property by way of sale and hence shall be outside the purview of service tax.
Q-17 Whether service tax can be paid at abatement rate in case of Preferential Location Charge (PLC) collected from buyers?
Ans. If consideration in respect of these charges is not charged separately and is clubbed as total consideration, abatement of 70% or 75% of the gross amount charged will be available. However, if consideration is charged separately full amount charged on account of PLC is taxable No abatement will be available as while rendering Preferential Location Services there is no transfer of material from the service provider to the service recipient. Abatement in Service Tax is granted only in respect of such services where there is transfer of materials also.
Q-18 What ‘carpet area’ as mentioned in Notification No. 26/2012-ST dated 20-6-2012, in order to claim abatement for construction for residential complex?
Ans. The word ‘carpet area’ is not defined in the Finance Act, 1994. The word “carpet area” is mentioned under N.B.C., B.I.S Codes and under the Building Bye Laws. Only BIS Code IS 3861 of 2002 (Reaffirmed in 2007) gives “Method of measurement of plinth, carpet and Rentable areas of buildings”.
As per this code “carpet area” shall mean “the floor area of the usable rooms at any floor level”. As per Section 5 of the code “measurement of carpet area” shall be the plinth area less thickness of wall (inclusive of finishes). Further as per section 5.2 of the Code, the carpet area shall be the area worked out as in 5.1 excluding the area of the verandah, corridor or passage, entrance hall & porch, staircase & stair cover, shaft and machine room of lift, bathroom and lavatory, kitchen & pantry, store, canteen, air conditioning duct & plant room and shaft for sanitary/water supply installations & garbage chute, electrical & fire fighting, air conditioning, telecommunication, lift.
Besides this, areas of floors without cladding (stilted floor), garages, stair cover (mumty), machine room, towers, torrents, domes projecting above the terrace level at terrace are not to be accounted for while working out carpet area of a building.
As B.I.S. code is statutory in nature and gives a comprehensive method of calculating carpet and plinth areas of buildings, it may be followed in absence of any other specific definition.
The Real Estate (Regulation & Development) Bill 2011 defines “carpet area”: to mean the net usable floor area of an immovable property, excluding the area covered by the walls and the common areas.
Hence, in the absence of definition of “carpet area” in the Finance Act, 1994, the aforementioned method will apply for determining the carpet area.
Q-19 In case of reverse charge mechanism, whether service provider and service receiver can follow different valuation methods?
Ans. As clarified in para 10.1.3 of the Education Guide issued by the CBEC, the liability of the service provider and service recipient are different and independent of each other.
In this regard Explanation II of the Notification No. 30/2012-ST, dated 20-6-2012 provides that in works contract services, where 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 choice, independent of valuation method adopted by the provider of service.
Q-20 Works contract allotted on ‘inclusive of service tax’ basis, liability of service recipient to pay service tax under reverse charge mechanism?
Ans. Payment of service tax under reverse charge mechanism is required to be made in terms of sub-section (2) of section 68 of the Act read with Notification No. 30/2012 ST dated 20-6-2012. The liability of both service provider as well as service receiver is separate and independent. There is no exception under the law for works contract allotted to service provider on ‘inclusive of service tax’ basis.
The contractual understanding between service provider and service recipient that the contract is ‘inclusive of service tax’ does not prevail over statutory provisions. Hence the service recipient is liable to pay service tax even in case of a contract allotted on reverse charge mechanism.
CA Ashok Chandak