The Hindu Business Line : One-time maintenance charges

There is this story about a house-seeker walking into the office of a reputed builder in Mumbai to home in on a flat, as the house rates were moving down the builder had bundled in a lot of freebies to lucky winners.

In addition to the cost structure of the house, the prospective buyer was also told to give an undertaking for payment of service tax and an undated blank cheque of the service tax amount, with an assurance that the same will not be touched unless they are forced to cough it up.

Finally, the buyer was informed that, in the interest of the residents of the housing society, at the time of possession, the builder would be collecting a ‘One-Time Maintenance Charges’ from the flat owner which would be deposited in a bank as ‘fixed deposit’ and the interest accruing thereon would be used for discharge of commercial taxes on the property, water , electricity, security and club charges, etc. To complete the picture, it was also mentioned that the fixed deposit would be transferred to the society once it was formed.

Tricky business

Taxation of real estate has always been tricky business. Just as in shares, critical issues in real estate appear to crop up first in Mumbai. If one goes by the decision of the Mumbai Tribunal in Kumar Beheray Rathi Vs CCE (Pune III 2008-TIOL-1721-CESTAT-MUM), the prospective buyer would have to cough up service tax on the one-time maintenance charge.

The Department contended that it would fall under Sections 65(64) and 65(105)(zzg) of the Finance Act, 1994 — management, maintenance or repair service. The arguments of the appellants that they are collecting the amount as ‘deposit’ in form of a trust and it is not an act of volition but a statutory obligation as per the Maharashtra Ownership of Flats (Regulation of promotion of construction, sale, management and transfer) Act, 1963, did not impress the Department.

The Revenue argued that the activity gets directly covered under the definition of ‘Management, Maintenance and Repair Service’ inasmuch as maintenance of immovable property is also covered therein. It was also pointed out that prior to denying full waiver of the deposit how far the provisions of the Maharashtra Ownership of Flats Act would apply to the provisions of the Finance Act, 1994, has to be gone into in detail.

Pay it anyways

As far as a builder goes, if he is developing a residential/commercial complex and collects amounts towards maintenance, he is likely to be held a service provider under the category “Management, Maintenance or Repair”. And if a registered co-operative housing society/resident welfare association collects such amounts from its members towards meeting the maintenance expenses of the society, it is held to be a service provider under the category “Club or Association”.

The levy of works contract VAT as well as service tax on the same transaction is still being debated and litigated although there have been a few decisions and a good section of the taxpayers have come to accept this as inevitable. The writing on the wall is clear: Property prices may plummet but service tax will remain where it is.

(The author is a Hyderabad-based chartered accountant. blfeedback@thehindu.co.in)

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