Service Tax on Construction of Residential & Commercial Premises – FAQ

CA. Pradip R. Shah

Introduction:

1.0 What changes have been effected by the Finance Bill, 2010 with respect to construction of commercial / industrial premises and residential complexes?

Following changes have been carried out by the Finance Bill, 2010.

1)  Deletion of the word “service” from title of section 65(25b) i.e. definition of commercial or industrial constructio

2) Deletion of the word “service” from clause 65(105)(zzq) i.e. commercial or industrial construction

3) Insertion of “Explanation” under sub-clause (zzq) in section 65(105) i.e. commercial or industrial construction

4) Insertion of “Explanation” under sub-clause (zzzh) in section 65(105) i.e. construction of a complex

5) Insertion of new clause zzzzu in section 65(105) i.e. levying of Service Tax (ST) on the amount collected towards preferential location or internal / external development.

1.1 What is the trigger point for invoking the Explanation? Is it construction of building which is intended for sale or payment received from the buyer for the same?

The wordings of Explanation inserted are not clear. It starts with the focus on activity of construction and, in between, gets shifted to payment by the buyer. Absence of the words viz. “receipt of any sum by the builder from the prospective buyer in respect of” creates confusion. Let us try to insert these words and see whether it can convey the proper meaning.

“Explanation.—For the purposes of this sub-clause, receipt of any sum by the builder from the prospective buyer in respect of the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer” (emphasis supplied)

1.2  How will insertion of Explanation impact the buyer of flat / commercial premises?

It will be applicable to the cases wherein the construction activity has yet not commenced, going on or having been completed but completion certificate not received and the buyer makes payment to the builder. It will not affect the transactions wherein the payments have been made before 1-7-2010.

1.3 During the month of January, 2009, the CBEC had issued a circular bearing no. 108/02/2009 – ST wherein it was stated that under both the models i.e. builder and the developer, there will not be any ST liability. Whether there is any change in that respect?

It will be interesting to see what the said circular tried to convey. An attempt has been made to dissect para 3 of the said circular and what emerges is as follow:

Sr No.	Activity	Buyer Model	Developer Model
1	Nature of initial agreement entered into between the promoters / builders / developers and the ultimate owner	It is in the nature of ‘Agreement to Sell’.	It is in the nature of contract for construction of a residential complex
2	Creation of title of the property	It does not create any title to the property under the Transfer of Property Act.	It does not create any title to the property under the Transfer of Property Act.
3	Creation of any charge or interest in the property	No	No
4	Ownership of the property	With the promoters / builders/developers	With the buyer
5	Transfer of ownership of property	On satisfaction of following three conditions viz.

i) after completion of the construction

ii)full payment of the agreed sum ; and

iii) execution of sale deedOn the principle of accession6Nature of service viz. design, planning and construction by the promoters / builders/developersSelf-service as the builder / developer is doing it for himselfServices are for personal use of the buyer which is covered under the exclusion clause of the definition of “residential complex”.7Applicability of STNONO

As can be seen from above, the view was clear that looking to the existing method of carrying out the transactions in this respect, and statutory provisions with respect to levying ST provision, the construction industry in the arena of residential and commercial premises cannot be brought within the tax-net. However, considering the fact that there being availability of huge untapped resources, it can not remain out of tax-net for a long time. By terming the payment by the buyer as deemed service, the Government has made clear that without going into the legality of both the models, perhaps, this is the only way in which ST can be levied.

1.4 Looking to above, is it not the case of marked change in views of the Government in this respect?

No. Look at the fact that the newly inserted clauses no where touches upon the controversial issues which have arisen in the recent past due to contradictory interpretations by various courts in this respect. Read the following para of letter no. D.O.F. No.334/1/2010-TRU dated 26th February 2010 explaining the justification for insertion of Explanation.

8.6 In order to achieve the legislative intent and bring in parity in tax treatment, an Explanation is being inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly. This would only expand the scope of the existing service, which otherwise remain unchanged.

Thus, in order to achieve the legislative intent of collecting more revenue, the changes have been carried out with a clear intention of expanding the scope of existing services.  There do not appear to be any intention on the part of the Government to plug the loop-holes in the existing statutory provisions.

EXPLANATION

2.0 What is the significance of inserting “Explanation”?

As will be evident from various amendments carried out through the Finance Bill 2010, off late, in many cases, amendments made in the statutes in the recent past have misfired. The courts have interpreted these amendments in such a way that it does not achieve the desired objective of the Government. According to the Revenue, these rulings are not in tandem with the thinking of the policy-makers. Therefore, as a safeguard, the draftsmen have started making extensive use of Explanation under the main provision with the idea of clarifying the intention behind the statutory provisions. This is done with the idea that the substantial provision in the statute will be interpreted by the Court on the expected line.

2.1 What is the scope of “Explanation”?

Explanation is a part of the main section and hence, it cannot be read in isolation. The idea of inserting it is, if anything is not clear in the main section, it shall be made clear by Explanation. It should be remembered that for the purpose of taking any action or interpretation, the main section will be the foundation and the Explanation will be a subordinate part. It helps in harmonizing and clearing up any ambiguity in the main section. In view of this, Explanation cannot be termed as an amendment of the section. In view of this, the question of the same being prospective or retrospective does not arise. Unless the Explanation purports to be a definition or deeming clause, it does not enlarge or limit the provision to which it is added.

2.2 The Government could have amended the existing definition as provided in clause 65(25b) and 65(30a). However, as against that an “Explanation” has been inserted. What can be the reason for the same?

At a first glance, clause (25b) and (30a) appears to cover the construction activity under the ST. However, due to certain court rulings and, more particularly, different models used for the purpose of carrying out construction activities, it was not possible to collect the ST. Therefore, the Government made clear its intention in the form of an Explanation which expanded the scope of these services.

2.3 What implications it can have?

Any payment received by the builder on and from 1^st July, 2010 onwards will be subject to ST.

2.4 Whether the proposed insertion of “Explanation” can take care of all the aspects of the related industry?

No. Take a closer look at it. It is silent about various aspects of the services involved. For example, in the case of taxation of services, existence of SP and SR is essential. However, the tax is proposed to be levied even if there is no Service Receiver (SR).  Secondly, it is not possible to make out at what point of time rendering of service will begin and come to an end.  Thirdly, there is no clarity about valuation of the services.  Fourthly, what will happen if the prospective buyer cancels the booking and the builder refunds the amount received? This is for the reason that the builder must have paid the ST in the past on the amount already received.  Whether the same will be refunded? If so, how? If not, will it not amount to paying tax on the same service twice as the builder will sell the said flat to some other person in future?

The Concept of “Deemed Service”

3.0 As per the Explanation inserted, the act of payment by the prospective buyer has been termed as “deemed service”. Why?

The act of payment by the prospective buyer to the builder, as referred to in the Explanation, is such that, under the existing provisions, it does not get covered. In order to make sure that the tax proposal does not get embroiled in legal controversy, the same has been termed as “deemed service”. It conveys a clear message that though this is not a service, still the Government wants it to be treated as service and levy tax thereon.

3.1 What is “deeming” provision?

At times, for various reasons, it is not possible to cover certain transactions within the tax-net. In such cases, the draftsman resort to “deeming” provision. Under this scheme of taxation, a particular transaction when applied the touchstone of the charging section will not appear to be taxable. However, it is brought within the tax-net through “deeming” provisions. Insertion of “Explanation” in clause 105(zzzh) and (zzq) extend the scope of the services relating to commercial and industrial construction and complexes by treating the amount received by the builder as services rendered.

It is a legislative device. Under the same, what in fact has not been done is treated as having been done under fiction. Deeming section creates a legal assumption that a thing is true which is either not true or may be false or untrue. In construing the deeming provision, statutory fiction is required to be carried to its logical conclusion but the fiction cannot be extended beyond the language of the section by which it is created or by importing another fiction.

Applicability of the new clauses

4.0 How will the new clause apply in the following cases?

Case	Date of Execution of Contract between the builder and prospective buyer		Payments made by the buyer to the builder		Issue of CC by the competent authority
	Before 1-7-2010	After 1-7-2010	Before 1-7-2010	After 1-7-2010	Before 1-7-2010	After 1-7-2010
1	Yes	—	Yes	—	Yes	—
2	Yes	—	Yes	—	—	Yes
3	Yes	—	Yes	Yes	Yes	—
4	Yes	—	Yes	Yes	—	Yes
5	Yes	—	—	Yes	Yes	—
6	—	Yes	—	Yes	Yes	—
7	—	Yes	Yes	—	—	Yes

Case 1: The question does not arise as there is no payment involved and Completion Certificate (CC) has already been issued before 1-7-2010.

Case 2: In this case, no payments are taking place after 30-6-2010 and, hence, the question of tax liability should not arise. However, since the CC has not been received, it is a case of hanging sword. Any amount received by the builder will make it subject to tax.

Case 3: This is a unique case. However, CC having been issued, rendering of service has already come to an end. Hence, the question of charging the tax on payments made after 1-7-2010 should not arise.

Case 4: Since CC has been issued after 1-7-2010, question of payment of tax on the payments made to the buyer on and after 1-7-2010 till the date of issue of CC will be subject to tax.

Case 5: Payments has been received after issue of CC, the question of ST does not arise.

Case 6: As in case no. 5

Case 7: As there is no payment after 1-7-2010, the question of levy of tax does not arise.

As can be seen, entering into the contract between the buyer and the builder is of no consequence. Only two things are important for determining tax liability viz. date of payment by the buyer and issue of CC.

Scope of Changes

5.0 The way in which changes are proposed, it appears that there are minor changes in the structure of levying ST in this respect. What is the extent of change as proposed?

In order to appreciate the extent of changes, it will be better to read the amended provisions. For example in the case of commercial construction S. 65(105) (zzq) with the relevant definition will read as follow:

(105) (zzq) “Taxable service” means any service provided or to be provided to any person, by any other person, in relation to commercial or industrial construction

“Explanation.—For the purposes of this sub-clause, the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer;”;

65(25b) “commercial or industrial construction” means—

(a) construction of a new building or a civil structure or a part thereof; or

(b) construction of pipeline or conduit; or

(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,

which is—

(i)  used, or to be used, primarily for; or

(ii)  occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in,

commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;

As can be seen from above, there is no change in the definition of Commercial or Industrial Construction (CIC). By inserting Explanation, certain transactions which, according to the Government, were remaining out of tax-net, have been brought within. It should be noted that the transactions which were taxable under this head will continue to be so.

5.1 Whether the changes with respect to construction of complex are also on the same line?

Yes. Let us see how the relevant provisions in this respect henceforth will look like.

(105) (zzzh) “Taxable service” means any service provided or to be provided to any person, by any other person, in relation to construction of complex,

“Explanation.—For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer;”;

65(30a) “construction of complex” means—

(a)  construction of a new residential complex or a part thereof; or

(b) completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services; or

(c) repair, alteration, renovation or restoration of, or similar services in relation to, residential complex;

(91a)    “residential complex” means any complex comprising of—

(i)   a building or buildings, having more than twelve residential units;

(ii)  a common area; and

(iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system,

located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.

Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this clause,—

(a)   “personal use” includes permitting the complex for use as residence by another person on rent or without consideration;

(b)  “residential unit” means a single house or a single apartment intended for use as a place of residence;

As can be seen from above, there are no changes with respect to the definition of the term “construction of complex” or “residential complex”. As in the case of CIC, here also certain transactions which were remaining out of tax-net have been tried to bring within through the means of “Explanation”. It should be noted that the transactions which were taxable under this head will continue to be so.

5.2 Whether the Explanation is applicable to all the types of cases as described in clause 65 (25b) and (30a)?

Yes.

5.3 Provisions of clause 65(25b) are applicable to the premise which is used for commercial or industrial purposes. An organisation not carrying on commercial or industrial activity, proposes to buy an office in a building. Whether in view of Explanation, ST will be applicable to it?

Section 65(25b) is applicable to the cases wherein the premises are being used by the owner for commercial purposes. If the owner is not engaged in the commercial activity the question of applicability of ST does not arise.

5.4 At present the clause relating to residential complex is applicable to a building having more than twelve residential units. Whether the said condition will be still applicable?

Yes. There are no amendments in definition of “construction of complex” and “residential complex”. It means that, in the case of residential complex having less than twelve units, “Explanation” will not be applicable.

Consequences of withdrawal from the scheme

6.0 What will happen if during the period of construction the prospective buyer withdraws from the scheme and the builder refunds the amount received?

Rule 6(3) of Service Tax Rules takes care of such contingencies. It provides for adjustment of excess service tax paid, provided the Service Provider (SP) has refunded the value of taxable service and the service tax thereon to the person from whom it was received.

Impact of Discontinuation of construction activities

7.0 What will happen if the builder having collected the money from prospective buyer is not in a position to construct the property for various reasons for a long period of time? Whether refund of ST paid by the prospective buyer can be claimed after certain point of time?

There are no provisions for refund of tax paid. It should be noted that the liability is that of the builder which he has discharged. The prospective buyer has no right to claim any refund of the tax paid by him to the builder.

7.1 What will happen if the builder, for some reasons, does not carry out any construction activities, drop the project itself and informs the Government agencies accordingly? Whether the prospective buyer can claim any refund of ST paid?

No, the buyer will not be able to get any refund of tax paid. This is for the reason that ST has been paid by the builder against his liability to tax. Secondly, refunding the tax to the builder will amount to unjust enrichment as the builder has collected the tax and paid to the Government.

Builder

8.0 Who is liable to pay the ST?

As per the Explanation, the liability of paying the tax is that of the builder. However, the Finance Bill does not define the term “builder”. Therefore, it will have to be assigned the meaning as used in common parlance. Its dictionary meaning is as follow:

1. One that builds, especially a person who contracts for and supervises the construction of a building.

2. a person who builds, especially one who contracts for and supervises the construction or repair of buildings

3. One who constructs a building or other Improvement for the owner or developer.

8.1 At present different methods are being applied for carrying out activities in this respect. Who will be considered “builder”?

Primarily, following three methods are adopted.

Nature of activity	Model – I	Model –II	Model –III
Land owned by	Co-operative Housing Society (CHS) or Apartment Owners’ Association (AoA)	Builder / Developer	CHS or AoA
Development work carried out by	An outside agency known as Developer	Builder / Developer itself through various agencies	CHS or AoA by appointing various agencies
Mode of Payment by the buyer	To the developer	To the builder or Developer	To the CHS or AoA
Transfer of title in the property	Allotment of flat or premises through Allotment Letter	Execution of Conveyance Deed	Allotment of flat or premises through Allotment Letter

In the case of Model-II, the developing agency itself will be treated as builder. In the case of Model-III, CHS or AoA will be treated as the builder. All the agencies executing various types of work will be the contractors or other service providers. However, the real problem will arise in the case of Model-I. Who will be termed as builder, the CHS/AoA or the agency carrying out various types of work? If CHS or AoA is termed as “builder” what will be the nature of services rendered by the agency carrying out development activities?

8.2  If the CHS is deemed to be the builder, till what time it will remain so?

As per the “Explanation”, qua a specific project, the role of SP comes to an end only on receipt of completion certificate issued by the authority competent to issue it under the appropriate law. Till then the CHS will be deemed to be a SP requiring it to comply with the provisions of ST.

Role of Completion Certificate

9.0  As per Explanation, issue of CC appears to be end of services by the builder. Can it be said that there will be no liability of the builder thereafter?

No. The Explanation nowhere lays down that with the issue of CC the liability to ST will come to an end. It simply narrates that the payment by the buyer is also a kind of rendering of service by the builder to the buyer. It may so happen that, even after issue of CC, the builder may render services covered under 65(25b) or 65(30a) to the buyer. In that case, the question of payment of ST will arise not under the Explanation. However, it will arise under clause (zzzh) or (zzq).

9.1 After completion of construction and allotment of flat, there will be no activities taking place with reference to construction. However, under Model-I the CHS not having received the completion certificate, will it amount to continuing its role as SP?

Yes, till the CC is received, the CHS will have to comply with all the procedural requirement of ST.

9.2 In majority of the cases completion certificates are not issued for a long of period time. Meanwhile, the buyer takes possession of the flat.  After taking possession of the flat, but before getting the completion certificate by the CHS, it is sold to another person. No. ST is required to be paid on the amount which is being paid to the builder. No ST is required to be paid on consideration received / paid towards sale of immoveable property.

9.3 In the above case, new member pays transfer fee to the CHS. Whether the buyer of flat will have to pay ST on transfer fee paid to CHS?

Yes. Looking to the wordings of the Explanation, and if CHS is termed as builder, any amount received by the CHS prior to getting the completion certificate is subject to ST. Read the Explanation carefully, the context of receipt of money is missing. It has not been spelt out explicitly. Therefore, on a plain reading, it appears that any amount received by CHS before receipt of completion certificate will be subject to tax.

9.4 What will happen to the amount contributed by the members to CHS towards maintenance charges periodically?

Since the completion certificate has not been received, on a plain reading of Explanation, it appears to be taxable. This is going to be a controversial issue.

9.5 If it is so, will it not amount to double taxation as Club or Association’s services also cover it?

As long as the amount received is taxable under Club or Association’s Service, the question of double taxation should not arise. However, the cases wherein due to the monthly amount received being less than Rs. 3,000 per month it is not taxable, a problem may arise as it may become taxable.

Procedural Aspects

10.0 At what point of time, as per the Explanation, the builder is required to commence with the compliances under ST?

The wordings of Explanation are not clear. On a plain reading, it appears that the rendering of services starts with the commencement of activity relating to construction. Construction comprises various activities. The first activity of executing the Agreement to Buy or Conveyance Deed for land on which construction of building will take place can be said to commencement of rendering of services.

10.1 At what point of time the builder i.e. SP will have to report the amount of services rendered under ST-3?

The Explanation is silent about the trigger point of commencement of services. It simply refers to the point of time at which it will come to an end. For the purpose of ST-3 the SP is required to provide details of “Taxable Amount Charged” (see Section II of ST-3). According to the format of ST-3, the assessee is required to provide details of “Gross amount for which bills / invoice / challans are issued relating to service provided /to be provided”.  In these cases, the builder does not raise any bill to the buyer based on completion of certain percentage of work. This will also raise serious issue.

10.2  At what point of time it will come to an end?

Generally, once the SR makes the final payment towards the services rendered by the SP, it comes to an end. This is for the reason that completion of service depends upon the action of SP. However, in this case, completion of services has been made dependent on action of the Government Department issuing completion certificate.  Now, the issue of CC can get delayed for various reasons although the SR has already taken possession of the flat or premises. In view of specific provision in the Explanation, the services can not be termed as having come to an end till the CC is issued. Till then the law will presume that the builder continues to provide services to the SR i.e. buyers of flat / commercial premises.

10.3 It may so happen that the builder has nothing to do with respect to the said property. Only thing remains is that issue of CC is under process. Whether the builder will have to file ST-3 with respect to the same?

Yes, technically the process of rendering of service continues. Therefore, the builder will have to file ST-3.

10.4 If so, what will be the value of services?

If the builder has not received anything from the buyer during the relevant period, value of service will be “nil”. If the builder has received any amount, the said amount will be the value of service.

10.5 In many cases, it so happens that the builder provides certain facilities which were not planned originally. The builder incurs additional expenditure but does not charge for the same from the buyers. Whether the same will be considered as rendering of services?

Yes, it will amount to rendering of services. It should be remembered that Explanation is part of the section under which it is placed; it does not obliterate the main section. Therefore, the activity may not be deemed as rendering of service under the Explanation but may be so under the main section. Therefore, it will be subject to tax.

10.6 Whether incurring of such expenditure will have to be reported? Whether tax will have to be paid on the same? At what point of time the tax will be required to be paid?

Yes, it will have to be reported in ST-3. As far as payment of tax on the same is concerned, a dispute may arise as the builder is not collecting any money from the buyers. In any case, since the builder is not receiving any consideration from the buyer, the question of making payment of tax does not arise.

10.7 What will happen in the cases where construction has been completed long back but CC has not been received? Whether the CHS which is considered to be builder has to comply with the procedural requirements regarding filing of ST-3 etc.?

The Explanation is not clear about the applicability of the provision in this respect. In fact, there is no clarity about the starting point of rendering of services. If the amendment is made applicable to the cases wherein the activity of construction or receipt of money as advance is after a date as specified in the notification, it may give some relief to the tax-payers. However, its misuse also cannot be ruled out.

New building

11.0 What is new building?

In the case of CIC both, the Explanation and clause 65(25b) refers to “new building”. However, in the case of a residential complex, the word “new” is missing in the Explanation. But, the definition of “construction of complex” covers the “new” complexes. The word “new” denotes something which is not in existence. Therefore, the Explanation will cover the cases where new construction is going to take place. Therefore, if the building is already in existence and substantial amount is spent for refurbishing it without demolition of the structure, Explanation will not be applicable.

11.1 In cities like Mumbai large number of buildings is being demolished and new buildings with better amenities and additional Floor Space Index (FSI) are constructed. In such cases, the existing owners of the flat are required to make some payment for allotment of space in newly constructed building. This may include cost of additional floor space provided by the builder in the reconstructed building. Whether the amount so received will be taxable?

Here, it will be of interest to know that Explanation under clause zzzh i.e. relating to construction of a complex refers to “construction of a complex which is intended for sale”. However, in the case of commercial or industrial construction, reference is to “construction of a new building which is intended for sale”. Mark the absence of word “new” in the case of former. Does it mean that, in the case of construction of a complex, it is not necessary that the complex should be a new one? Putting it differently, can it be said that, in the case of residential complex, mere activity of construction will attract levy of ST?

If that is the case, demolishing a building and reconstructing on the same site another one will get covered under the said clause and will become taxable. This is for the reason that there was a building at the said site and, therefore, building constructed is not a new one. The “Explanation” covers the case of construction of a complex which need not be a “new” one. This is going to raise controversy.

11.2 If it is so, what is going to be the value of service in such cases? In these cases, existing owners pay token amount as against the others who are buying additional floor space made available, pay at the prevailing market rate which is substantially higher.

It is important to note that right of the existing owners of the flats does not get transferred to the builder as there is no sale. Secondly, the existing owners forego their right to exploit additional FSI which they could have exploited. Therefore, foregoing the right itself is consideration for the existing owners for having the additional space at token amount.

11.3 Assuming that the existing owners do not get any additional floor space in the new building but are required to pay some amount to the builder, whether it can be subject to ST?

Looking to the wordings of the Explanation, it appears that it will not be taxable. Following points be noted here. Firstly, the builder is providing service to the existing owners. Secondly, the buyer is not a prospective one as he is already an owner of the flat.

A question that may arise is whether such services can be taxable under the main clause if not under the Explanation. Yes, it can be. It should be remembered that Explanation under zzzh and zzq does not exclude operation of the main clause. Therefore, if Explanation is not applicable for any reasons, provisions of the main clause will continue to apply.

11.4 Can the ST Department say that tax should be paid by the builder for the value of construction in respect of which no consideration has been received?

It should be noted that, in such cases, the builder recovers his cost from the additional space being made available. He has to pay ST on sale of this additional floor space. Consideration so received is subject to ST. Therefore, the question of paying the ST second time on the value of services rendered to the existing owner does not arise. It should also be remembered that there is consideration for the value of services by the builder. Only thing is that it is moving from the new buyer and not from the existing owners. Since, the liability of ST is attached to SP, it is immaterial whether the tax is borne by the new owners or others.

Construction:

12.0 What is the relevance of construction in the new scenario?

It should be remembered that the activity of construction has already been defined under clauses (25b) and (30a). There is no change in this respect and it continues to be so as such.

12.1 The word “construction” has been referred to in clauses (25b), (30a), (zzzh) and (zzq). Which types of activities are covered under “construction”?

The word “construction” has not been defined under the Finance Act. Hence, dictionary meaning of the same will have to be applied. Following are some of the activities which are performed by the builder for carrying out the activities of construction.

i) acquisition of land

ii) leveling, landscaping

iii) plotting

iv)  digging, laying foundation

v) raising wall

vi) plastering, colour, electrification etc

12.2 Whether few of the activities performed only will render it subject to tax?

There is no clarity. However, look at the wordings of section 65(25b)(a) defining the term “commercial or industrial construction”. It covers “part” of the building as well. Therefore, it is not necessary that for the purpose of it being taxable the builder should carry out all the activities.

12.3 At times, the builder, instead of carrying out full fledge construction activities, perform limited functions only. For example, whether activities (i) to (iii) only as shown above will be considered as construction making the builder liable to tax?

There being no well-defined term, it appears that such limited activities will also be covered.

Role of Co-operative Housing Societies (CHS)

13.0 Under Model-I role of a CHS is limited. It assigns all the functions related to development of properties to a developer. In that case, who will be considered as a builder i.e. whether the CHS or the Developer?

The term “builder” has also not been defined. According to the dictionary meaning it means “someone who contracts for and supervises construction (as of a building)”. In that case, CHS will be considered as the builder and will be subject to tax.

13.1 In that eventuality what will be the role of the Developer?

If CHS is considered as builder, the services rendered by the Developer will fall into the heading “business auxiliary services”.

13.2 Will it not amount to double taxation i.e. once on the CHS and the other on the person carrying out development activities?

It should be noted that functions of both the agencies are different. Therefore, one can say that there are two different types of services by two different persons. Hence, the question of paying ST twice does not arise.

13.3 Whether the CHS will have to seek registration under the ST Act?

Yes. If the provisions of S. 65(105) (zzq) are applicable, the CHS will have to obtain registration no.

Valuation of Services:

14.0 How will the value of services be determined?

Value of services will be determined on the basis of amount received from the prospective buyer.

14.1 At many places, it is the practice to collect “Electricity Connection Charges”, “Legal Expenses” etc. separately from the prospective buyer. Whether it will be subject to tax?

One will have to examine the provisions of Service Tax Valuation Rules. If such charges fit into it, tax will have to be paid thereon.

14.2 It is a common practice to collect Maintenance Deposit from the prospective buyers. The idea is to incur expenses from interest income derived there from. Whether receipt of such sum will be taxable?

As long as money is received by the builder, the question of chargeability to tax will arise. This is mainly due to absence of definition of the context in which the money is received. This is going to be one more controversial issue.

14.3 It is a common practice to get the additional work done by the prospective buyer from the builder. Whether the amount so paid will be taxable under this category?

The Explanation refers to receipt of money by the builder “before, during or after construction”. Therefore, amount paid for additional work carried out by the builder will be subject to tax.

Abatement in Value

15.0 In terms of Notification No. 1/2006 dt. 1-3-2006, abatement in the value was provided for. Are there any provisions of such nature in this respect?

Yes. Notification no. 29/2010 dt. 27^th June, 2010 has inserted two additional clauses viz. 7(a) and 10(a) in the Table forming part of Notification No. 1/2006-ST dt. 1-3-2006.

15.1 What are its salient features?

Firstly, it is not applicable in the cases wherein only completion and finishing services have been provided.

Secondly, if the SP has collected value of land separately, provisions in this respect will not be applicable.

Thirdly, rate of abatement will be 75.00% of the gross value charged.

15.2 What will happen if the builder has recovered value of the land separately? Whether abatement can be claimed under clause 7 instead of 7(a)?

There do not appear to be any bar in this respect. It should be noted that while replying to the discussion in the Parliament, the Finance Minister has stated that in the cases wherein value of the land is also covered in the gross amount charged, higher rate of abatement will be provided. Thus, clause 7 covers the cases wherein value of the land is recovered separately while clause 7(a) covers the cases wherein gross amount charged is inclusive of the value of land.

15.3  Provisions of clause 7 and 7(a) appear similar. In what respect they differ?

Clause 7 provides for abatement in value @67.00% while clause 7(a) provides for @ 75.00%. Secondly, clause 7(a) is applicable in the cases wherein value of land is part of the value of services rendered. This condition has been provided for negatively. It means that inclusion of value of land in the total value of service is not required to be proved. As long as the SP is not recovering value of land separately abatement @75.00% will be applicable.

15.4  What will happen if the builder recovers value of the land subsequently? Whether abatement availed while paying ST in the past will have to be revised?

Yes. It will amount to violation of the condition laid down under clause 7(a). Such cases will be covered by the clause 7. Tax liability arising on account of reduction in abatement value will have to be paid with interest.

15.5 What will happen if the contract between the builder and the buyer has been entered into prior to 1-7-2010 and value of the land has already been recovered separately. Whether clause 7(a) will be applicable?

No. Since the fact that the SP has already recovered the value of land separately, clause 7(a) will not be applicable. In such cases abatement will be @ 67.00% only.

15.6  Are there any other conditions to be complied with for availing abatement @75.00%?

Yes. The objective of providing higher abatement is to compensate for the value of goods used while rendering services. Therefore, the cases wherein only completion and finishing services are rendered, abatement at higher cannot be availed.

15.7  What are completion and finishing services?

Clause 25(b) describes it as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure;

Intended for sale:

16.0 “Explanation” refers to intention of selling the flat etc. How should one gather intention of a person?

There is no clarity about it. However, one will have to gather it from various approvals obtained from government and local bodies.

16.1 What will happen if the builder commences the construction activities with the intention of not selling the building and later on changes his intention? Whether ST will be applicable?

Explanation proposes deeming services. Therefore, as long as the builder has no intention of selling the building, the question of treating it as rendering of services does not arise.

16.2 Whether construction of building for the purpose of giving it on rent will be covered by the said clause?

The Explanation specifically refers to the cases where the builder is collecting money as advance from the prospective buyer. The builder is required to have the intention of selling the proposed building. If the builder is not having the intention of selling it, the question of applying the provision does not arise. In this case, the builder is building the property for his requirements and will remain the owner of the said building. Hence, there is no question of paying ST.

16.3  Does it mean that, in the case of a person or a company, constructing the building for its requirements will not be covered under the above clause?

Yes.

16.4 What will happen if the buyer is buying the property with the intention of giving it on rent basis to others?

As far as the builder is concerned, receipt of money from the prospective buyer is rendering of service and, hence, taxable. What use the proposed buyer makes of the property is not relevant.

16.5 Whether the builder will be entitled for CENVAT Credit for inputs, capital goods and input services?

No. In view of abatement being provided, no CENVAT credit can be availed.

16.6 Whether the buyer of flat / office can avail the amount of ST paid as CENVAT Credit?

In the case of immoveable property being residential flat, there is no question of availment of CENVAT Credit. As far as premises used as office is concerned, the same being immoveable property it will have to be examined whether rule 2(a) covers it or not. Under Rule 2(a) of CENVAT Rules, Capital Goods have been assigned restricted meaning. It does not cover premises. In view of this, it will not be possible to avail CENVAT Credit of the amount paid as ST to the builder.

Applicability to Contractors

17.0 Whether the new provisions are applicable to contractors?

The role and functions of the “builder” and “contractor” are quite different. Type of services rendered by the builder is different from the contractors. New provisions are not applicable to contractors.

17.1 Whether the contractor instead of paying ST under the service as Works Contract can treat it under this clause?

As explained above, both the services are quite different. Hence, it is not possible to treat the WC service under this category.

17.2 A view has been expressed that CHS are not covered under the amended provisions. Whether CHS can be said to be a builder as referred to in “Explanation”?

Explanation refers to sum of money being received by the builder from the prospective buyer. A question that will arise, as shown in Model-I above, who is considered to be a builder? The Finance Act does not define the term “builder”. Therefore, we will have to look to its dictionary meaning. It is claimed that construction of building by CHS is self-service by the members of CHS. Therefore, ST is not applicable. However, it should be remembered that CHS is a separate entity quite distinct from its members. It is having statutory recognition being registered under Co-operative Societies Act of the respective State.

It may also be noted that in the case of club or association services, ST Department has recognised the CHS as distinct entity from its members. See the Trade Notice below:

Letter F. No. V/ST/HQ/Tech/Ref-25/06/1596, dated 7-3-2006, Issued by Commissioner of Service Tax, Mumbai

……..

4. A housing society which is registered under the Co-operative Societies Act is a legal entity, which provides services and facilities to its members for a consideration and accordingly would fall within the scope of the above definition.

Stamp Duty

18.0 In the case of builder model, stamp duty is required to be paid at the time of execution of conveyance deed. In view of liability of ST on payments made to the builder whether the buyer will get any relief?

No. Payment of ST has nothing to do with stamp duty payable by the buyer at the time of execution of conveyance deed. Hence, the question of any relief thereof does not arise.

18.1 What will be the value of property at the time of execution of conveyance deed i.e. whether it will include ST payable by the buyer?

Liability to Stamp duty is governed by local laws. Whether value of the property will include ST payable or not will depend on specific clauses of the local laws in this respect.

Miscellaneous Issues

19.0 What will happen in the cases wherein total consideration has already been agreed upon between the buyer and the builder but certain instalments are yet to be paid as on 1-7-2010. Whether payments thereafter will be subject to tax? If so, who should bear the tax on such payments?

Let us understand certain basic issues under the ST.

1)  It is the liability of the service provider to pay the tax.

2) Whether to collect the said tax from the SR or not is a commercial decision. The law nowhere lay down that the SP should collect the tax from the buyer. If the SP so whishes, he can bear the tax and the SR need not pay it. In the eventuality of SP bearing the tax, reverse working will have to be made and element of ST will have to be removed from the total consideration.

3) The statutory provisions permit the SP to collect the ST from the SR. If the SP collects the tax from SR, it becomes necessary to pay the same to the Government.

4) The ST Department does not look into the fact of collection of tax or the commercial understanding between the parties in this respect. ST Department will look into the transaction, its valuation and receipt of the consideration by the SP.

5) How to enter into the transaction i.e. to collect the tax or not is dependent upon both the parties i.e. SP and SR.

Looking to the above, amount received after 1-7-2010 will be subject to tax. The builder will have to pay the tax thereon. Whether the buyer should pay the same to the builder or not will depend upon the understanding between the two parties. Primary responsibility of paying the tax on such amount is cast on the builder.

19.1  Whether the buyer can pay the tax for and on behalf of the builder?

Making payment of tax, require certain information about the SP. If it suits both the parties, the buyer can pay the tax instead of the builder paying it. However, the challan for payment of tax will be bearing the name and number of the builder i.e. the SP. The buyer cannot make the payment in his name and say that the liability has been discharged. Secondly, in this case, the buyer will have to provide copy of receipted challan for payment of tax to the builder as he will have to provide these data in ST-3 returns to be filed by him. This will only ensure that the ST paid by the buyer has reached the Government. If the buyer does not provide copy of the challan, the builder will not be able to fill-up the relevant column in ST-3 return. If the details are not filled-up to that extent he will be considered as defaulter in payment of tax even though the buyer might have paid the tax.

19.2 Whether the buyer can make payment to the builder by two separate cheques viz. one for the consideration for the flat and other in the name of the Government towards ST liability arising thereon?

Yes, if it suits both the parties, it can be done so. In this case, the builder will have to deposit the cheque for ST with the Government instead of depositing it in his account and paying thereafter.

19.3 The builder has failed to make payment of tax in time and is required to pay interest and penalty thereon. Whether the buyer will have to pay the same to the builder?

No. Payment of tax is the liability of the builder. If he fails to do so, the consequences will be on him. The buyer i.e. the SR cannot be called on to bear or reimburse the same.

19.4  Amount paid by the prospective buyer will be an additional burden. How to ensure that the builder has paid the amount of ST collected?

At present, there is no system under which the buyer of flat can confirm payment of ST by the builder. The ST Department does not provide such data on its website. Therefore, the cases of unscrupulous builders collecting the tax and not paying to the Government cannot be ruled out.

19.5 In the eventuality of the builder having collected the tax but not paying to the government or being unable to pay, whether the ST Department can recover the same from the buyer of flat?

No. The Finance Act does not empower the ST Department to recover it from the SR. The ST Department will have to recover the same from the builder only.

19.6  Is there any system under which the ST Department can identify such defaulters?

There is no mechanism under which such cases come to the knowledge of the ST Department automatically. Based on information received, the ST Department carries out search and seizure operations for concealment and non-payment of tax.

Extension of Scope of ST

20.0 Finance Bill, 2010 has also introduced taxation of services called as “providing preferential location or external or internal development of complexes on extra charges” [Section 65 (105) (zzzzu)]. What does this cover?

The Finance Bill, 2010 has extended the scope of services by levying tax on additional amount charged by the builder for preferential location and external / internal development of complexes. It reads as follow:

(105) (zzzzu) “Taxable service” means any service provided or to be provided to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorised by such builder, for providing preferential location or development of such complex but does not include services covered under sub-clauses (zzg), (zzq), (zzzh) and in relation to parking place.

Explanation.—For the purposes of this sub-clause, ‘‘preferential location’’ means any location having extra advantage which attracts extra payment over and above the basic sale price;’.

20.1 What does the clause zzzzu consist of?

It tries to bring in its scope two types of amount received by the builder from the prospective buyer. They are:

1. providing preferential location

2. development of complexes on extra charges

First clause is with reference to a specific flat or premises for which the prospective buyer makes additional payment to the builder. Under this case, the buyer makes the payment more than what others might have paid for the same type of premises in the same complex or structure. This additional payment by the prospective buyer may be due to opting for the flat at a particular floor or direction or bearing a specific number. Looking to the demand the builder charges higher prices in such cases. This additional amount charged is brought within the tax-net.

Second clause covers the external / internal development activities carried out by the builder. However, the Finance Act does not define the same. But the letter issued by The Joint Secretary (TRU-II) throws some light on various types of items which will be covered. At present, it will cover the cases wherein the builder provides for additional facilities like swimming pool, club-house etc. and levies additional charges for it. It should be noted that the prospective buyer does not possess any specific right in these properties. They are permitted to make use of the said facilities in future. These common facilities belong to the CHS. It has become general practice to charge separately for it. It is this additional amount which has been collected from the prospective buyer which has been brought within the tax-net.

20.2  What is the justification for covering these two services?

The builder, apart from the cost of construction, also charges additional amount under various names. In order to bring the said amount within the tax-net a new clause has been inserted. Annexure- A of letter no. D.O.F. No.334/1/2010-TRU, New Delhi, dated 26th February 2010 issued by Joint Secretary (Tax Research Unit-II), describes it as follow:

The scope of the existing services includes construction, completion and finishing, repairs, alterations, renovation or restoration of complexes. It has been reported that in addition to these activities, the builders of residential or commercial complexes provide other facilities and charge separately for them and these charges do not form part of the taxable value for charging tax on construction.

…..

Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, such charges are being brought under the new service. Charges for providing parking space have been specifically excluded from the scope of this service. Development charges, to the extent they are paid to State Government or local bodies, will be excluded from the taxable value levy. Further, any service provided by Resident Welfare Associations or Cooperative Group Housing Societies consisting of residents / owners as their members would not be taxable under this service.

20.3  What is preferential location?

The Finance Act does not define the term “preferential location”. For the purpose of this clause its meaning has been assigned as follow:

Explanation.—For the purposes of this sub-clause, ‘‘preferential location’’ means any location having extra advantage which attracts extra payment over and above the basic sale price;’.

However, Annexure- A of letter no. D.O.F. No.334/1/2010-TRU, New Delhi, dated 26th February 2010 issued by Joint Secretary (Tax Research Unit-II), describes it as follow:

(a) prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastu – having the bed room in a particular direction; Number- lucky numbers);

20.4  Whether tax is required to be paid in respect of these items only or other items of similar nature as well for which additional payment is required to be made?

Criteria for evaluating the taxability will be based on the meaning as assigned in the clause zzzzu. Examples provided in the above said letter are various types of nomenclature under which additional payment is being made. Therefore, any payment which falls under the meaning assigned under the Explanation but not covered in the above said letter will be subject to tax.

20.5 What are internal/external development charges?

Clause 65(105)(zzzzu) does not define the same. However, Annexure-A of letter no. D.O.F. No.334/1/2010-TRU, New Delhi, dated 26th February 2010 issued by Joint Secretary (Tax Research Unit-II), describes it as follow:

(b) internal or external development charges which are collected for developing / maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc; (c) fire-fighting installation charges; and (d) power back up charges etc.

20.6 In the case of a CHS the building is old one requiring removal of existing plaster, painting etc. involving substantial amount. The CHS collects money from its members for the purpose of funding of these expenses. Whether the amount collected by the CHS will be subject to tax under clause zzzzu?

No. This is for the reason that the CHS is collecting money for the purpose of maintenance of the building and not for the purpose of development. By spending such amount, the members of the CHS will not get any additional facilities.

20.7  Letter no. D.O.F. No.334/1/2010-TRU dated 26th February 2010 refers to “maintaining parks …”. Whether maintenance activities carried out by the CHS will be covered under this clause?

Refer to clause zzzzu which provides for “development of complex on extra charges”. It nowhere refers to “maintenance” of the building. Development cannot be equated with maintenance. Tax can be levied on the services as defined in the Finance Act and not on the basis of interpretation placed by any executive authority. The administrative authority cannot extend the scope of the service nor can it demand tax on the services which are not provided for under the statute.

20.8 What will happen if the builder provides for these facilities but does not charge separately for it?

In such cases, the builder will be liable to pay ST on the value of such amenities even though no separate charges are collected from the prospective buyers.

20.9 In such cases, how the value of services will be determined?

This is also going to be a debatable issue. The builders who have loaded cost of such facilities in the cost of flat may find them into serious problem of having to pay tax twice. In view of separate provisions for levying taxes for such services, it may be advisable to charge separately rather than loading in the cost of flat. But, in that case other issues like paying the tax at higher rate may crop-up.

20.10 Whether the provision in this respect and that of zzzh and zzq are pari materia same?

No. There is substantial difference between these clauses. In the case of clauses zzzh and zzq receipt of consideration itself has been deemed to be rendering of service. Whether construction of flat has taken place or not is not important. However, in the case of zzzzu, construction of swimming pool and other developmental activities etc. for enjoyment of the prospective buyers is necessary.

20.11 What are the criteria for determining rendering of such services?

As referred to above, the letter no. D.O.F. No.334/1/2010-TRU provides instances under which additional amount is being collected by the builder. No criteria have been laid down or declared for identifying such cases. In fact, the above referred letter is silent on this issue.

20.12  In the case of Commercial and Industrial Construction and Construction of Complex services, abatement in value of services provided for. Whether such abatement in value is available for computing taxable value of services?

Circular No. 29 dt. 22-6-2010 provides for abatement in value in respect of only two services viz. Commercial and Industrial Construction and Construction of Complex. In view of this, there is no question of abatement in value.

20.13 Whether the CHS will be entitled for CENVAT credit for services taxable under this clause?

It has to be examined from the perspective of nature of inputs and input services.

20.14 Whether tax can be levied in the case of an existing CHS wherein CC has already been issued and which is proposing to construct club house for its members?

Looking to the wordings of clause zzzzu, it appears that ST can be levied in such cases also. It should be noted that the said clause refers to “builder” and the said term has not been defined. Secondly, it does not provide for any time limit for receipt of money as in the case of Explanation under clause zzzh or zzq. And more importantly service as defined under clause zzzzu is independent of the clauses zzzh and zzq. They do not have any relationship as such. Therefore, for the purpose of clause zzzzu, CC is not relevant at all. Whether it has been issued or not, ST will have to be paid.

20.15 Whether tax can be levied in the case of an existing CHS constructing RCC road for its members?

As explained above, cases of an existing CHS wherein completion certificate has not been received will also be covered under this clause.

20.16 Whether routine maintenance expenses incurred by the existing CHS will also be covered under this clause?

The word used is “development”. It does not cover the case of expenses incurred by CHS for routine repairs and maintenance of the building. No definition of the activities covered within the term “development” has been provided. Hence, one will have to go by its dictionary meaning.

Secondly, the amount collected by the CHS towards maintenance etc. is governed by clause viz. Club or Association Service. The said clause being specific clause, covering the services in this respect, the question of levying tax under clause zzzzu will not arise.

20.17 Whether the provisions in this respect will be applicable to the complexes having less than twelve members?

No. If the complex does not satisfy the conditions as laid down in clause 65(91a), the provisions of clause zzzzu will not apply.

CA. Pradip R. Shah

E-mail: [email protected]