The Hindu Business Line : Construction service

I booked a flat a year ago and it is still under construction. The builder called to say that I have to pay service tax of Rs 84,000. Logically speaking, service tax should be paid by the service provider and not by the buyer. Does tax law spell out who should pay the service tax? This is a huge amount for any property buyer, and then there are also addition stamp duty and registration charges.

Abhishek K. Sharma

Service tax is applicable on construction of complex services w.e.f. June 16, 2005, which include residential complexes with more than 12 residential units. It appears that you might have booked the flat before that period (that is, before June 16, 2005) and as such, your builder/developer is now demanding service tax from you. This taxable service generally covers construction services in respect of residential complexes developed by builders, promoters or developers.

Section 65 (105) (zzzh) defines taxable services as any service provided or to be provided to any person, by any other person in relation to construction of complex. In such cases, tax liability is posed on both, builders and hired contractors.

According to CBEC (TRU) Circular No. B1/6/2005-TRU dated July 27, 2005, this service would generally cover construction services in respect of residential complexes developed by builders, promoters or developers. Such residential complexes are normally constructed after obtaining approval of the statutory authority for their layout.

The service is taxable only when it is provided by one person to another. Only provision of such services, not outright sale of flats, should be covered. Where a contractor provides services to the builder, service tax would be attracted. Thus, when builders hire a contractor the payment made to such contractor doing a particular job will be covered for service tax purpose. Repairs comprise all major and minor repairs, including those relating to floors, tiles, carpentry, civil work, plumbing, sanitation, drainage, etc. The only areas left out is kitchen garden, horticulture and water shed management, etc. (Refer Director General of Service Tax circular F. No. V/DGST/22/ Audit/Misc/1/ 2004/Mumbai dated February 16, 2006.)

In the recent Raheja Development Corporation vs State of Karnataka (2005 NTC Vol 27-243) case, the Supreme Court clarified "that the activities undertaken by builders for construction of flat/building for or on behalf of the prospective customers for consideration in cash or deferred payment is covered under the works contract and not under sale."

Considering this decision, if the construction is undertaken by the builder for a prospective customer under an agreement for sale, and, after construction, the rights in property have been transferred to the said customer, the activity will amount to `works contract' or taxable service.

It would be advisable to refer to the sale agreement. If there was a clause that future taxes would be to buyer's account, you may have to cough up service tax. However, the DGST's circular has been challenged by builders' associations and final outcome is yet to be known.

Send in your queries to MentorAtYourService@gmail.com

http://MentorQA.blogspot.com

Sanjiv Agarwal

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