The latest Master Circular No. 96/7/2007-ST dated August 23, 2007, issued by the Tax Research Unit (TRU), clarifying technical issues related to service tax, has compounded the confusion in respect of the extent of applicability of service tax on the real-estate sector.
The first step in taxing construction industry services was taken by the Government in 2004, when it brought Commercial and Industrial Construction Services within the service tax net, effective September 10, 2004, which was expanded to cover Completion and Finishing Services, effective June 16, 2005.
The Government also expanded the scope of the service tax levy on the sector by bringing services rendered in relation to construction of residential complexes having 12 or more units into the tax net, with effect from June 16, 2005.
Applicability of service tax
There has been a lot of confusion on the applicability of service tax on the various players in the sector pure developers/estate builders, builder-developers, contractors, sub-contractors, and so on due to the inconsistent stand taken by the various arms of the Government, from time to time.
The CBEC (Central Board of Excise and Customs), through a Circular No. 80/10/2004-ST dated September 17, 2004, had clarified that Estate Builders (presumably this was supposed to mean developers/builders who had contracted out the construction activity to contractors) are not covered under the ambit of these services and it is only the hired contractors engaged by these builders who are to be taxed.
Based on this clarification, pure developers who had employed contractors, took a view that no service tax was applicable to them.
Though this Circular was issued in relation to Commercial and Industrial Construction Services, the logic was equally applicable to services rendered in the construction of residential complexes as well.
This clear view of the Government was changed by a Circular issued by the Director-General of Service Tax, Mumbai, dated February 16, 2006, wherein a contrary view was taken, to the effect that builders who employ contractors would also be liable for service tax, based on the Supreme Courts decision in K. Raheja Development Corporation vs State of Karnataka [2005 NTV (Vol 27)-243].
The fact that the Supreme Courts decision was rendered in the context of applicability of sales tax on a civil works contract and had nothing to do with service tax, was not appreciated. It was, however, apparent that the Department was more concerned with the huge differentials that exist between the rates charged by contractors to developers and those charged by the latter to the purchasers of flats, in terms of loss of service tax revenues rather than the legality of the levy on developers. Based on the DGs circular, developers/estate builders who had employed contractors came under a lot of pressure to pay service tax.
Even as the CBEC and the Service Tax Department took contradictory stands, the TRU issued a Clarification dated August 1, 2006, on the levy of service tax on the construction of residential complexes.
S. Sivakumar (The author is a Chartered Accountant and Director of S3 Solutions Pvt Ltd, Bangalore.)