Service Tax on Construction and Sale of Residential Property

As per the budget proposal for 2010-11, the finance ministry has suggested service tax on construction and sale of property. Service Tax is a tax levied on service providers in India. The objective behind levying service tax is to reduce the degree of intensity of taxation on manufacturing and trade without forcing the government to compromise on the revenue needs. As per the budget proposal, the finance ministry has suggested 10 per cent service tax on construction and sale of property.

Argument on Service Tax

Earlier service tax for construction was avoided as the builders argued to government that construction of building is not service but the nature of sale and hence requested to avoid service charge on construction activities. Government also came to the conclusion that any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax.Government even allowed buyer or builder to claim refund of service tax. However, Budget 2010-11, contains a very significant proposal seeking to bring such construction activities under the tax net. As per the budget, construction would be deemed to be a taxable service if the building or complex is still under construction and approval from the concerned regulatory authority hasn’t yet been granted.

Definition of ‘construction of complex services’

As per the budget proposal, accordingly, an explanation has been inserted in the definition of ‘construction of complex services’. The explanation reads:“For the purpose of this sub-clause, the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorized by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force ) shall be deemed to be service provided by the builder to the buyer.”

Increased time limit for the completion of projects

There are other positive measures that the Budget proposes such as allowing pending projects to be completed within a period of 5 years instead of 4 years, for claiming deduction of profits, as one time interim relief. Developers have welcomed the increased time limit for the completion of projects from four years to five years for claiming a deduction of their profits. On the other hand, two per cent increase in excise duty of cement and steel might not prove profitable for the real estate developers as the cost of construction would be expensive which will ultimately result in the increased cost of the project and hence the buyers will be affected.

Service Tax is levied only on 33 per cent of the value

There seems to be a misunderstanding that the Budget proposal would lead to levy of service tax on the entire value of the consideration which is paid to the builder / developer. The developer / builder is required to pay service tax, and perhaps recover it from the buyers, only on the labor or services portion and not on the material portion of the sale consideration, since VAT in the form of the works contract tax is already applicable on that portion.

There is a false impression being created that prices will go up by 10 per cent but the fact is that 10 per cent service tax is levied only on 33 per cent of the value.The contractor is entitled to claim abatement to the extent of 67 per cent of the value of services rendered by him. It must also be understood that similar to the VAT, input tax credits could be available to offset these service taxes and hence the net effect of the tax could be lesser than the 3.4 per cent, since construction attracts service tax only on 33 per cent of the value.

Developers have welcomed the increased time limit for the completion of projects from four years to five years for claiming a deduction of their profits. The objective behind levying service tax is to reduce the degree of intensity of taxation on manufacturing and trade without forcing the government to compromise on the revenue needs. There is a false impression being created that prices will go up by 10 per cent but the net effect of the tax could be lesser than the 3.4 per cent. 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.

Renting of property, rent of vacant land under agreement to undertake construction of building or other structures will be charged service tax.The common man will also be benefited by the continued subsidy of one per cent for affordable housing loans, which will help residential sector to grow. The government is considering for giving relief to buyers who booked their houses before the service is notified. So, a buyer who has booked a flat but will get possession only after the notification of the new service need not worry. The overall reaction on budget 2010 has been positive and the reaction from the real estate sector has been mixed. It is a growth oriented budget and growth in the economy always leads to growth in the real estate sector.

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