The following major changes have been made for real estate builders post the Finance Act 2010, which are made applicable from 1.7.2010. It may be noted that the said amendments would be effective only from this date onwards. The following are these amendments:
1. Services provided by a builder to a buyer such as providing preferential location or external or internal development of complexes on extra charges have been newly brought to tax.
2. An Explanation is added to section 65(105)(zzq) and (zzzh) which deems construction of a new building and complex intended for sale, wholly or partly, by a builder to a person before, during or after grant of completion certificate by the competent authority to be services provided by the builder to the buyer/prospective buyer except in situations where entire amount is paid by the buyer only after the receipt of completion Certificate. This amendment takes a position contrary to the one taken by the courts and also in the Circular No.108/02/2009-ST dated January, 29, 2009 issued by the Board.
3. For the purpose of issuing “completion certificate” by “competent authority” it has been clarified by notification no.1/2010 that for the purposes of sub-clauses (zzq) and (zzzh) of clause (105) of section 65 of the Finance Act, the expression ‘authority competent’ includes, besides any Government authority,-
(i) Architect registered with the Council of Architecture constituted under the Architects Act, 1972(20 of 1972); or
(ii) Chartered engineer registered with the Institution of Engineers (India); or
(iii) Licensed surveyor of the respective local body of the city or town or village or development or planning authority;
who is authorised under any law for the time being in force, to issue a completion certificate in respect of residential or commercial or industrial complex, as a precondition for its occupation.
This is a welcome clarification as regards the competent authority.
4. Increased percentage of abatement provided by way of notification no. 29/2010:
During the course of debate on the Bill, the finance ministry had already clarified that the benefit of abatement of 75% in terms of Notification No. 1/2006-ST dated 01.03.2006 would be available to the Builders who are being brought under the levy. The abatement is subject to the following conditions:
a) No exemption would be applicable for mere completion and finishing services
b) The increased abatement of 75% would not be applicable in cases where the cost of land has been separately recovered from the buyer by the builder or his representative. This means that the abatement would have to be calculated on the entire value of sale of flat/unit. Effectively the rate of service tax shall be 2.575 (25% * 10.3%). Also by presumption the notification has indirectly considered value of land at 8% (75%-67%). This in my view is not correct.
c) The abatements is subject to non-admissibility of Cenvat Credit on inputs, capital goods or input services.
5. Exemption provided to construction done under the Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana by notification no. 28/2010 dated 22nd June 2010.
Some Practical Issues
(i) There would be many ongoing constructions/agreements and buyers would have paid part amounts, the Section does not set out the manner in which these transactions would need to be dealt with. What should be done?
In my view as per the provisions of the service tax law “services provided or to be provided” are taxable from the date of the levy. Hence since the amendment is effective from 1.7.2010, then all the payments before this date should be exempt. Further even work completed (deemed services rendered) before this date but payments received after this date would also be exempt.
(ii) Services provided by a builder to a buyer such as providing preferential location or external or internal development of complexes on extra charges. How would this impact.
The tax is being fundamentally being proposed to be levied on consideration which is actually going to form part of sale price of immovable property. For eg. As explained by the TRU in its clarification extra premium charged for a sea facing flat or for floor rise would be taxable under service tax. Realistically whatever may be the reason, the consideration is still only for sale of flat & not for any service. As per the definition only amounts received over and above the sale price would be taxed. This means anything forming part of the consideration towards the price of flat would not be taxed, leaving no scope for taxing preferences like “floor rise”. What remains to be taxed is extra work receipts done for some internal changes etc which is not a part of the sale price. In my view even this cannot be taxed under the current scenario.
(iii) Is the composition option (of abatement of 75%) compulsory?
It may be noted that the composition option of paying tax on 25% value is not compulsory. Hence the builder/developer shall have the option of paying service tax based upon the following methods:
Let’s take an example for the purpose of calculating taxes in a real life case, based upon the above 2 methods:
|Single Agreement to sale entered on||28-2-2010|
|Total consideration of flat||Rs. 5000000|
|Amounts received till notified date (01.07.10)||Rs. 1500000|
|Amounts received after 01.07.10 for services rendered till notified date (01.07.10)||Rs. 500000|
|Amounts received after 0 1.07.10 for work done after 01.07.10||Rs.3000000|
|Option 1 (abatement of 75%)||Option 2 (payment @ 10.3% on labour charges)|
|Amounts received till 1.7.10||Nil||Nil|
|Amounts received after 01.07.10 for services rendered till notified date (01.07.10)||Nil||Nil|
|Amounts received after 0 1.07.10 for work doneafter 01.07.10||25% of balance||Value of proportionate labour charges over the entire flat value. (This would be linked to the Work In Progress.)|
(iv) Is there any other method by which tax can be paid?
If we make a close reading to the notification no. 29/2010, the abatement of 75% is not applicable “in cases where the cost of land has been separately recovered from the buyer by the builder or his representative”. This means that in cases where there are Principal to Principal Agreements or where the land owner directly receives his share of revenue towards the transfer of the rights in the land (like it happens in the State of Karnataka for instance), then the abatement under this new notification is not applicable. In such a case by presumption the land value is considered what is charged and the builder can avail the benefit of notification no. 1/2006 and claim abatement of 67% on the value excluding the land. He can also alternatively decide to pay on the entire value and claim full Cenvat Credit or even pay merely on labour charges.
Illustration depicting the effective tax burden being less than the above composition rate of 2.575% and further offering benefits to the builder.
(Actual Flat Value: 50,00,000; Land transferred separately : 20,00,000 and Construction agreement value : 30,00,000 out of which 10,00,000 is labour)
|Method of tax||Computation of tax||Effective rate on flat
|Payment on labour||10,00,000 * 10.30%||2.06% *|
|Abatement method (67%)||30,00,000*33%*10.30%||2.04%|
|Full Rate||30,00,00 * 10.30% less CENVAT on inputs, input services and capital goods||!!!**|
* Under this method CENVAT credit can be availed in relation to input services and Capital goods thereby reducing the net outflow of the builder to a great extent.
** Under this method the tax outflow can be substantially lower considering the Excise, CVD and service tax impact on all goods and services, thereby giving a chance to leverage the same, without affecting the customers pockets.
The above however is possible clearly in a principal to principal agreement between a land owner and a builder. In other cases, where builder himself transfers by way of a different agreement then the question of valuation of land comes into play. In such cases what should be the value of land would always be a bone of contention. In my view the Fair Market value of the land can be considered as per the laws for the time being in force for stamp duty valuation purposes.