Amendment in Service Tax for Under Construction Property

The budget 2014-15 has proposed to levy service tax only on under-construction properties. Accordingly, property buyers have to pay the builder an extra amount towards towards service tax, which is deposited with the service tax department. Finance Bill 2010 has introduced eight new services to charge service tax. This includes Special services provided by a builder  to the prospective buyers such as providing preferential location or external or internal development of complexes on payment of 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

• 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 not yet commenced, is going on or has been completed but the completion certificate has not been 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 services   provided by a builder to the buyer in providing preferential location or external or internal development of complexes come with extra charges.

• Deletion of the word “service” from the 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 partial roll back of service tax that was imposed on the sector during the budget. Finance minister has rolled back Service Tax to 25 per cent from 33 per cent in the April session when the 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:

1. No exemption would be applicable for mere completion and finishing services
2. 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 3.09 per cent (25 per cent  * 12.36 per cent). Also by presumption the notification has indirectly considered value of land at 8 per cent (75 per cent – 67 per cent).
3. The abatement is subject to non-admissibility of Cenvat Credit on inputs, capital goods or input services.

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 to act 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, the following:

• 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, town, village, development or planning authority

who is authorized under any law currently in force, to issue a completion certificate in respect of residential, commercial or industrial complex, as a precondition for its occupation.

Service Tax Exemption

• From July 1, 2010, all sales of under-construction property have started  attracting service tax. However, resale properties have not attracted 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.