Go for a builder who doesn't outsource to avoid service tax
August, 18th 2006
If you want to be spared service tax on your dream flat, remember to keep a tab on the structure of your contract with the builder. Tax authorities will examine the nature of agreement between the buyer and builder before granting service tax exemption.
This could be done on a case-to-case basis. If the builder gets an exemption, the buyer will not have to bear any extra cost on the flat. Generally, the contract between the builder and the buyer is an agreement for sale. A builder will not have to pay service tax on an outright sale of a flat.
The burden will, however, be passed on to him if he hires a contractor for constructing the flat. In this case, the contractor is the service provider. The revenue department will examine the facts of each case as it is not possible to give a blanket service tax exemption, said a senior official.
The exemption will be granted if the facts establish that the builder is not a service provider. The finance ministry recently made it clear that a builder is not a service provider if he does construction work on his own without engaging the services of a contractor.
Officials said the ministrys clarification reiterates the fundamental principle for levying service tax the existence of a service provider is a must for levying this tax. While the clarification was made in response to queries raised by builders in Patna, it holds good for all builders.
Realty developers in Maharashtra reckon that it resolves their dispute with the tax department. The states builders moved the Mumbai High Court after they received show-cause notices to pay service tax on the sale of residential flats with more than 12 units.
The ministrys clarification, according to them, vindicates their stand that a builder, per se, is not a service provider. Under the Maharashtra Ownership Flats Act, the builder has to get the plan approved and also give specifications and amenities that he will provide to the flat owner in the agreement.
The agreement is for the sale of a flat and there is no service involved, said Rohit Gera, director, operations, Gera Developments. While the dispute over service tax on builders of residential units has been settled, the finance ministry has also made it clear that a builder will be charged service tax if he constructs a commercial complex for himself and puts it on rent or sale.
The rationale is that commercial complex does not fall within the scope of a residential complex for personal use. Builders are weighing the pros and cons of seeking a further clarification on this issue or filing another writ in the high court. Residential complexes were brought under the service tax net from June 05.
The government had said that 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, an abatement of 67% on the value of the contract will be allowed if the contract of construction is turnkey the contractor supplies the material and labour.