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In growing economies like India, infrastructure and real estate industry plays a major role in the development of a nation. It acts as a foundation based upon which growth of the nation depends. Economies can sustain actual growth only if supported by proper infrastructure. No economy can flourish without real estate development. Real estate sector shows actual growth of the nation. To achieve actual growth and GDP, Real estate sector needs to be developed simultaneously with other sectors. Government Policies and actions are taken keeping in mind growth of real estate sector.

Changes have been made in the Service Tax Law and Haryana VAT Act in respect of Real Estate Sector regarding abatement on construction contracts, valuation for levy of tax, assessment of tax etc.

Let us first have a look at the change made in service tax since enactment of Finance Act, 2013 in respect of the Real Estate Sector.

Finance Minister P. Chidambaram vide Finance Act 2013 introduced many changes to tax laws affecting various sectors of economies. Amendments also had effect on real estate sector which did not prove fruitful. The major change made in Service Tax with respect to real estate sector is enactment of Notification No. 02/2013-ST dated 1st March, 2013 to reduce abatement for the ‘Construction of Complex’ Service from 75% to 70% for high end houses and flats. The revised abatement as per the notification is as under:


Revised Rate of Abatement

For residential unit having carpet area upto 2000 square feet or where the amount charged is less than rupees one crore


In any other case


Before issuance of amendment by Finance Act 2013 abatement of 75% was available under S. No. 12 of Notification No. 26/2012-ST dated 20.06.2012 for ‘construction of a complex, building, civil structures etc.’ was available upon condition that CENVAT Credit on input will not be available and also value of land shall form part of taxable amount for levy of Service Tax. This rate has now been revised.

The main aim of reduction of abatement was that houses and flats with a carpet area of 2,000 sq ft or more or of a value of Rs 1 crore or more are high-end constructions and involves greater  component of service. Thus this abatement leads to increase in the service tax liability substantially. The effect of abatement is that for a house of Rs 1 crore or more having carpet area more than 2000 sq ft service tax will now be leviable at 30% of value instead of 25%.  . 

Now there were two issues in the above service tax notification:

a) Interpretation of word ‘or’ used in the notification

b) Carpet Area

The dilemma of use of word ‘or’ was that whether it should be construed as ‘or’ or as ‘and’. The word ‘or’ was read as ‘or’ only and the notification was interpreted as to avail abatement of 75%, either of the two conditions viz. carpet area of less than 2,000 sq. ft. and value of less than Rs. 1 crore needs to be fulfilled. But we have to construe this word ‘or’ purposively not literally so as to give correct meaning to notification issued.

This was a debacle which has been corrected by the government vide Notification No. 9/2013-ST and the following substitution has been made-


Rate of Abatement

Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,-

(a)  for a residential unit satisfying both the following conditions, namely:–

(i)  the carpet area of the unit is less than 2000 square feet; and

(ii) the amount  charged  for  the unit is less than rupees one crore;

(b) for other than the (a) above.



With the correction been made abatement of 75% shall be available when both the aforesaid conditions are fulfilled. In all other cases abatement of 70% shall applicable.

Another major issue in giving effect to this notification is computation of Carpet Area which is nowhere defined as such. Generally, real estate developers calculate amount of house or flats on the basis of Super Area which is comparatively more than carpet area and which may vary in margin of 18%-28%.

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 but only Bureau of Indian Standards by its Code IS 3861 of 2002 (Reaffirmed in 2007) titled “Method of measurement of plinth, Carpet and Rentable areas of buildings” gives a detailed definition of “Carpet area”.

As per this code “Carpet Area” shall mean “the floor area of the usable rooms at any floor level”.

Section 5 of the code defines “measurement of carpet area” as under. The carpet area (Section 5.1) shall be the plinth area less thickness of wall (inclusive of finishes).

Further section 5.2 of the Code defines that the carpet area shall be the area worked out as in 5.1 excluding the area of the following portions:-

Verandah, corridor or passage, entrance hall & porch, staircase & stair cover (mumty), shaft and machine roof 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, following areas of a structure are not to be accounted for while working out carpet area of a building. Floors without cladding (stilted floor), garages, stair cover (mumty), machine room, towers, torrents, domes projecting above the terrace level at terrace.

As B.I.S. codes are statutory in nature and give a comprehensive method of calculating carpet and plinth areas of buildings, they have to be followed in absence of any other specific definition.

The Real Estate (Regulation & Development) Bill 2011 defines “Carpet area” as:

(j) “carpet area” means 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.

Presently the entire system of the real estate industry i.e. Application Form, invoicing, software, etc. is based upon Super Area only. In the absence of definition of carpet area and any clarification from the department in this respect, it is difficult for the builders to implement its system in line with the meaning defined under any other law. As the system is based on super area, it is resulting in charging of excess service tax from the customer which leads to extra money outflow from customer’s pocket, since carpet area is always less than super area.

Super Area vs. Carpet Area – An Example

Mr. A booked a flat having the super area of 2100 sq. ft. at the rate of Rs. 4500 per sq. ft. (super area); hence purchase price of said flat is Rs 94,50,000/- and service tax extra. If the builder calculates the carpet area it comes to 1680 sq. ft.


Calculation as per Super Area (A)

Calculation as per Carpet Area (B)

Difference (A-B)


2100 Sq. ft.

1650 Sq. ft.

450 sq. ft.


Rs. 94,50,000

Rs. 94,50,000


Abatement available




Amount on which Service Tax leviable

Rs. 28,35,000

Rs. 23,62,500

Rs. 4,72,500

Service Tax @12.36%

Rs. 3,50,406

Rs. 2,92,005

Rs. 58,401

Total Cost of Flat to Mr. A

Rs. 98,00,406

Rs. 97,42,005

Rs. 58,401

In present market scenario where inflation is so high and GDP so low extra burden on pocket on account of extra service tax will affect customer badly. To resolve the issue of carpet area and super area a clarification must be issued by the Ministry of Finance keeping in view the complex system of real estate industry. Looking into the complexity in real estate business we suggest that clarification should provide for calculation of Carpet Area from Super Area on the basis of ad hoc deduction which may fall in range of 20% - 28%; for granting relief to the customers from extra burden of service tax.

After considering the impact of amendment by Finance Bill 2013 in respect to service tax for Real Estate Sector now let us throw light on the effect of changes made in VAT in respect to Real Estate Industry.

The Haryana Government recently issued a clarification instruction vide its Memo No. 952/ST-1 dated 07-05-2013 where in it was held that agreements or contracts entered into by the developers or others with prospective customers for sale of fully constructed apartments or flats or other buildings before the commencement of actual construction or before completion of construction, should be treated as agreements or contracts for works contract for construction of building.

The clarification was issued relying on the judgement made by Supreme Court in case of K. Raheja Development Corporation V/s State of Karnataka.

As per clause (ii) of Section 2(1) (ze) of Haryana Value Added Tax Act, 2003 “sale” includes the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.

As per Section 2(1) (zt) of Haryana Value Added Tax Act, 2003 “Works Contract” includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the assembling, construction, building, altering, manufacturing, processing, fabrication, installation, fitting out, improvement, repair or commissioning of any moveable or immovable property.

It is very much clear from the above definition that scope of works contract is not restricted to what we understand normally but would include any type of agreement wherein construction of building takes place either for cash or deferred payment or other valuable consideration. Hence, Works Contract would also include agreements or contracts entered into by the developers or others with prospective customers for sale of fully constructed flats or buildings before the commencement of actual construction or before completion of construction.

After issuance of clarification instructions by the department now an assessee have to consider such agreements or contracts with prospective buyers as Works Contract and will form part of sales and hence gross turnover for calculation of VAT liability under Haryana VAT Act. Thus an assessee will now will be liable to pay extra tax on such transactions leading to extra burden. But only portion of goods involved in transfer of property will be liable to VAT as it cannot be charged on portion of services.

Since the segregation of works contract in goods and services is not possible in many cases therefore the assessee may go for composition scheme issued under relevant State VAT Act to calculate the liability under VAT.


From the above discussion it is clear that the changes made in Service Tax and VAT have a negative impact on the Real Estate Sector and will hinder the growth of the sector. A single transaction of sale of flat is now leviable to both Service Tax and VAT which will have an overall effect on the customer with both the taxes. It would result in increase of cost of infrastructure in the economy.

The industry is expecting for the GST (Goods and Services Tax) to be introduced soon so as to easily switch to a simplified system of working against the current complex system of taxation. With the introduction of GST the company will have to charge single tax rate on a single transaction thereby keeping the cost of Real Estate low and affordable.


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Swati rathi
Category Service Tax   Report

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