The budget 2010-11 has proposed to levy service tax on all sales of under-construction properties from July 1, 2010. The property buyers have to shell out an extra for payment made for purchase of property. Finance Bill 2010 has introduced eight new services to charge service tax. This includes Special services provided by a builder etc. to the prospective buyers such as providing preferential location or external or internal development of complexes on extra charges. There have been further amendments to the Finance Bill, 2010, which have been passed when the Bill became law. The following major changes have been made by the Finance Act 2010 for under construction property.
Amendment made by the Finance Act 2010
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- An Explanation is added to section 65(105)(zzq) and (zzzh) which deems construction of a new building and complex intended for sale, wholly or partly, by a builder to a person before, during or after grant of completion certificate by the competent authority to be services provided by the builder to the buyer/prospective buyer except in situations where entire amount is paid by the buyer only after the receipt of completion Certificate.
- Insertion of Explanation will be applicable to the cases wherein the construction activity has yet not commenced, going on or having been completed but completion certificate not received and the buyer makes payment to the builder. It will not affect the transactions wherein the payments have been made before 1-7-2010.
- Service Tax exemption is provided to construction done under the Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana by notification no. 28/2010 dated 22nd June 2010.
- Insertion of new clause zzzzu in section 65(105) i.e. levying of Service Tax (ST) on the amount collected towards preferential location or internal / external development. Such as services provided by a builder to a buyer in providing preferential location or external or internal development of complexes on extra charges.
- Deletion of the word “service” from title of section 65(25b) and deletion of the word “service” from clause 65(105)(zzq) i.e. definition of commercial or industrial construction.
Contractor is entitled to claim abatement
There was some relief for the real estate sector with the finance minister offering for partial roll back of service tax that was imposed on the sector during the budget. Finance minister has rolled back Service Tax to 25% from 33% in the April session when house discussed and passed the finance bill. Abatement scheme, under notification number 1/2006 dated March 1, 2006, says that the contractor is entitled to claim abatement to the extent of 67 per cent of the value of services rendered by him. The finance minister has increased abatement from 67 per cent to 75 per cent. The abatement is subject to the following conditions:
- No exemption would be applicable for mere completion and finishing services
- The increased abatement of 75% would not be applicable in cases where the cost of land has been separately recovered from the buyer by the builder or his representative. This means that the abatement would have to be calculated on the entire value of sale of flat/unit. Effectively the rate of service tax shall be 2.575 (25% * 10.3%). Also by presumption the notification has indirectly considered value of land at 8% (75%-67%). This in my view is not correct.
- The abatement is subject to non-admissibility of Cenvat Credit on inputs, capital goods or input services.
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Authorities for issuing completion certificates
It should be noted that the service tax would be levied only on under construction property. A property is considered “under construction” till the builder receives a “completion certificate” from the relevant authorities. However the ministry has sought legal opinion as local authorities in some states do not issue completion certificates. The government is thinking of allowing some independent authorities, such as architects or builders’ associations, as a sufficient proof of completion.
For the purpose of issuing “completion certificate” by “competent authority” it has been clarified by notification no.1/2010 that for the purposes of sub-clauses (zzq) and (zzzh) of clause (105) of section 65 of the Finance Act, the expression ‘authority competent’ includes, besides any Government authority,-
- Architect registered with the Council of Architecture constituted under the Architects Act, 1972(20 of 1972); or
- Chartered engineer registered with the Institution of Engineers (India); or
- Licensed surveyor of the respective local body of the city or town or village or development or planning authority
who is authorized under any law for the time being in force, to issue a completion certificate in respect of residential or commercial or industrial complex, as a precondition for its occupation.
No Service tax
- From July 1, all sales of under-construction property will attract service tax. However, resale properties would not levied service tax as resale properties would essentially have obtained a completion certificate.
- No service tax if entire payment for the property is paid by the buyer after completion of the construction including certification by the local authorities.
- The low-cost housing segment (property worth less than Rs. 20 lakh) will be exempt from service tax when the same is rendered as part of Jawaharlal Nehru national Urban Renewal Mission (JNNURM) and Rajiv Awaas Yojana. The taxable service of construction of complex in the context of these two development schemes have been kept out of the ambit of service tax.
The property buyers have to shell out an extra for payment made for purchase of property from July 1. It should be noted that the service tax would be levied only on under construction property. The ministry has sought legal opinion as local authorities in some states do not issue completion certificates. The low-cost housing segment (property worth less than Rs. 20 lakh) will be exempt from service tax when the same is rendered as part of Jawaharlal Nehru national Urban Renewal Mission (JNNURM) and Rajiv Awaas Yojana. Service Tax would not be levied on parking lot and resale property. All sales of under-construction houses from July 1 will attract service tax with the finance ministry notifying tax on new services. Service tax has also been levied on any payment made by buyer to the builder for getting a preferential location.
Tags: abatement, Amendment in Service Tax, Amendment made by the Finance Act 2010, completion certificates, exempt from service tax, Finance Act 2010, Insertion of Explanation, Service Tax exemption, Service Tax for Under Construction Property, service tax on construction, Service Tax on realty, under construction property, under-construction
My agreement has been done in june 2010 but all payment and registry has been done after july2010.In agreement builder has written in one place that the 3125000/- including tax(as per govt. rule) and in last they have written that if any tax liblities imposed on builder by govt. in neer future then purchaser has to pay that amount to builder.Please guide me in this case.