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Flat buyers may not have to pay service tax
August, 08th 2006
You could well be spared from paying a 12.2% service tax on your dream house in a swank apartment complex. The government has made it clear that a builder or a realty developer who does construction work on his own will not have to pay service tax. Simply put, there will be no service tax on sale of a flat, which means the buyer will not have to bear any extra cost. Builders, though, are awaiting a final verdict from the Bombay High Court to seal the issue. Realty developers in the state Promoters and Builders Association of Pune and Maharashtra Chambers of Housing and Industry among others had moved the HC, challenging the governments move to levy service tax on sale of flats in housing complexes with more than 12 units. According to them, builders or realty developers per se were not service providers. Normally, the tax is levied on the service provider who, in turn, passes the burden on to the user (in this case, the owner of the flat). The finance ministrys Tax Research Unit (TRU) appears to have endorsed the builders stance, though the matter is still sub-judice. The TRU has clarified that a builder or a developer will not have to pay service tax if he does the construction on his own without engaging the services of any other person. In such cases in the absence of a service provider-service recipient relationship, the question of providing taxable service to any person by any other person does not arise, the clarification states. PBAP office bearers declined to comment as the matter is sub-judice. The clarification vindicates the stand taken by developers, said R Vasudevan, CMD, Vascon Engineering. Some builders, who have added the service tax component to the cost of the flat, have parked these proceeds in an escrow account. Its possible the money may be refunded. The finance ministry has, however, held that in a case where the builder, promoter or the developer builds a residential complex with more than 12 units by engaging a contractor, the contractor will be liable to pay service tax on the gross amount charged for construction services. Builders did not contest the levy of service tax on contractors. They have only opposed levy of service tax on the sale of a flat, said an industry analyst. Residential complexes were brought under the service tax net from June 05. The government had said service tax will be charged only on the value of the contract for constructing the block. Land value will be excluded while computing service tax. Further, the abatement of 67% on the value of the contract will be allowed if the construction contract is turnkey the contractor supplies the material and labour. PABP had filed a writ petition after show cause notices were issued by the revenue department to builders who did not pay the levy. Builders contended they are not liable to pay the levy simply because they have the rights to develop the property. They have cited a CBEC notification (September 04) which said estate builders who construct buildings or civil structures for their own use or rent it out or sell it out subsequently were not taxable service providers. However, if such real estate owners hire a contractor, payments made to them will attract service tax. However, the directorate of service tax went by a SC ruling which said that a works contract included in any agreement for carrying out either for cash or for deferred payment or for any valuable consideration, the building and construction of any movable or immovable property would attract a turnover tax.
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