A new provision in Budget 2010 which captured construction of residential and commercial properties in the service tax net by separating the service element of the activity has fetched Rs 150 crore to the exchequer up to August this fiscal, double the amount collected in the corresponding previous period. The rise in collections comes despite strong resistance to the measure by the builders lobby and a spate of litigation.

According to the Budget provision that took effect in July, construction of such properties for sale is a service that is taxable. A dividing line was drawn between the service and sale element of the activity by prescribing that till the builder secures the completion certificate from the local authority, he has rendered a service to the buyer and the transaction of the completed property is a sale. While the former is subject to service tax, state-level value-added tax is payable on the sale.

The good collection figures mean that a number of builders have started paying the tax. This is even as many of them have also challenged the provision in various courts, an official said.

Industry bodies through writ petitions had challenged the constitutional validity of the Finance Act 2010 provision. Developers say it is unconstitutional and irrational to charge service tax on construction of property for sale. The tax could inflate sale price by 2.6%. Since land is a state subject and the cost of land is part of the value of the property, the Centre has allowed an abatement of 75%.

The service tax is leviable on housing complexes with more than 12 dwelling units. Sources said that tax evasion was particularly high in north Indian states where, unlike in the southern states, land is not separately registered.

Service tax is a growing source of revenue though collections suffered during the last slowdown when there was a 2% tax cut given by the government as part of a stimulus package to industry. During April-August this fiscal, service tax collections were up 20% to Rs 22,634 crore.

Thanks to amendments in Budget 2010, the government had projected an additional revenue of Rs 1,000 crore and another Rs 200 crore is expected from renting immovable property.