CA Santosh Thapliyal

Background

Levy of Service Tax on Resideantial / Commercial Construction has been matter of dispute which was settled by virtue of Notification No. 29/2010 dated 22nd June 2010 content of which is reproduced below:

S. NoSub-clause of clause (105) of Section 65Description of taxable serviceConditionsPercentage
(1)(2)(3)(4)(5)
“7(a).(zzq)Commercial or Industrial ConstructionThis exemption shall not apply in cases where the taxable services provided are only completion and finishing services in relation to building or civil structure, referred to in sub-clause (c) of clause (25b) of section 65 of the Finance Act.

Explanation.- The gross amount charged shall include the value of goods and materials supplied or provided or used for providing the taxable service by the service provider.

This exemption shall not apply in cases where the cost of land has been separately recovered from the buyer by the builder or his representative.

25″
“10(a).(zzzh)Construction of ComplexThis exemption shall not apply in cases where the taxable services provided are only completion and finishing services in relation to residential complex, referred to in sub-clause (b) of clause (30a) of section 65 of the Finance Act.

Explanation.- The gross amount charged shall include the value of goods and materials supplied or provided or used for providing the taxable service by the service provider.

This exemption shall not apply in cases where the cost of land has been separately recovered from the buyer by the builder or his representative.

25″

Hence by issuing above notification Govt has been construction service liable for service tax and onus of payment was on builder / developer. As per above notification builders / developers were made liable to pay service tax @25% of effective rate of service tax. Further above notification make clear that abetment is not available in case value of land is not included in the amount charged to the customer.

Changes in Rate of Service Tax for Construction Service

  • From 1st July 2010 till 28th Feb 2013 rate of Service Tax for Developer was 25% of effective rate of Service Tax
  • From 1st March 2013 by virtue of Notification 02/2013 rate of Service Tax

for a residential unit satisfying any one of the following  conditions, namely:–

(i) the carpet area of the unit is upto 2000 square feet; or

(ii) the amount charged for  the unit is less than rupees  one crore;

then rate of Service Tax was 25% of effective rate of Service Tax otherwise it was 30% of effective rate of Service Tax including commercial construction.

for a residential unit satisfying both the following  conditions, namely:–

(i) the carpet area of the unit is less 2000 square feet; and

(ii) the amount charged for  the unit is less than rupees  one crore;

then rate of Service Tax was 25% of effective rate of Service Tax otherwise it was 30% of effective rate of Service Tax including commercial construction.

Further to harmonize the rate of service that on Residential and Commercial Construction abetment @70% has been introduced in Budget 2016 making effective rate of @30% of 14.5%.

Recently Delhi High Court in case of Suresh Kumar Bansal v. UOI (2016) has held that Construction Service not liable to service tax for a period prior to 1st July 2012. The judgment of court is based on the ground that there is no valuation mechanism prescribed in the law and rate of service tax prescribed by notification is not valid.

During the course of appeal Respondents has failed to draw the attention of the Court to Section 93(1) which is as follow:

Sub Section 1 – If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally or subject to such conditions as may be specified in the notification, taxable service of any specified description from the whole or any part of the service tax leviable thereon.

Hence by virtue of above power Central Government has issued Notification No. 29/2010-ST dated 22nd June 2010 read with Notification No 1/2006-ST dated 1st March 2006 making construction services liable for service tax @25% of effective rate of service tax.

On the basis of above, the stand taken by Delhi High Court that rate of service tax cannot be determined by way of notification and such determination is bad in law. Further in the judgment court was of the view that as the consideration include value of land and hence valuation mechanism fail however due importance is not given to the above notifications where it was clearly mention that abated rate is applicable only in case if value of land is included in the gross amount charged.

Further, in the above judgment as well as in case of Maharashtra Chamber of Housing Industry and Another v. UOI and Others (Bombay High Court) both courts has accepted that construction undertaken by the developer is a service, levy of service tax on construction services in as per the Constitution of India and developers are liable for service tax on construction service.

Furthermore, above decision given by Delhi High Court is for a period prior to July 2012. From July 2012 with introduction of Negative List, all the services other than those specified in the negative list and those exempt from service tax, shall be liable for service tax.

(Author can be reached at caasantosh@gmail.com)

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