SERVICE TAX ON BUILDERS

Apoorva Mehta , Last updated: 28 June 2009
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SERVICE TAX ON BUILDERS

Construction of residential complex was brought under service tax net w.e.f. 01.06.2005.

Definition / Scope:

Any service provided or to be provided to any person, by any other person, in relation to construction of complex. [Section 65 (105) (zzzh)]

Value of taxable service:

It shall be the gross amount charged by the service provider for such service provided or to be provided by him.

In this context, it also becomes necessary to know some of the other related definitions which are discussed hereunder:

Construction of complex means:

a) Construction of a “new” residential complex or a part thereof; or

b) Completion & finishing services in relation to residential complex such as glazing, plastering, painting, floor & wall tiling, wall covering & wall papering, wood & metal joinery & carpentry, fencing & railing, construction of swimming pools, acoustic applications or fittings & other services; or

c) Repair, alteration, renovation or restoration of, or similar services in relation to residential complex.

“Residential complex” means any complex comprising of:

a) A building or buildings having more than twelve residential units

b) A common area; and

c) 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.

“Personal use” includes permitting the complex for use as residence by another person on rent or without consideration

“Residential unit” means a single house or a single apartment intended for use as a place of residence.

Doubts:

Certain doubts did arise w.r.t. applicability of service tax in cases where developers/ builders/ promoter enters into an agreement with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction or even prior & who makes construction linked payment. Different views were construed in this regard.

One view was that once an agreement of sale is entered into with the buyer, he becomes the owner of the residential unit & hence all the subsequent activity of a builder for its construction will be a service of “Construction of residential complex” to the customer & hence service tax would be applicable on it.

Another view / argument is that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit the transaction of sale is completed only after complete construction of the residential unit. Till the completion, the property belongs to the builder & any service provided by him towards construction is in the nature of self service which is not taxable. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of “residential complex” as defined for the purpose of levy of service tax & hence such construction would not attract service tax.

Clarification:

C.B.D.T. examined the matter & came out with the clarification in this regard vide circular no. 108/02/2009-ST dated 29.01.2009

The board is of the view that the initial agreement between the promoters/ builders/ developers & the ultimate owner is in the nature of “agreement to sell”. Further, as per the Transfer of Property Act, such a case does not by itself create any interest in or charge on such property & the property remains under the ownership of seller only. Only after successful completion of construction & on full payment of agreed amount, a sale deed is executed & ownership is transferred to the buyer. Thus, any service provided till the execution of such sale deed would be in nature of “self service” & consequently would not be liable to service tax. Further, if ultimate owner only enters into an agreement, even then, such activity would not attract service tax because this case would then fall under exclusion provided in the definition of “residential complex”.

However, in both cases, if services of any person such as contractor, designer or a similar service provider are received, then such person would be liable to service tax.

Further, any decision of A.A.R. in a specific case, which is contrary to above views would have limited applicability to that case only.

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