Taxability of Construction Service –New Provisions

By Finance Act, 2010, an Explanation has been inserted w.e.f. 01.07.2010, to the definitions of Commercial and Industrial Construction Services and Construction of Residential Complex Services, which is as follows –

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.

The said explanation will be operative w.e.f 01.07.2010 by virtue of Notification No. 24 / 2010 – ST Dt. 22.06.2010.

Though the amendment is inserted as an ?Explanation‘ to existing definition, it is a deeming provision to fetch builders and developers under the net of Service Tax, which were earlier not under the net due to various judgments of various appellate authorities. The Explanation is not merely explaining or clarifying the scope but also expanding the scope of taxable service. Thus, by virtue of this ?deeming provision‘, an activity earlier which was not termed as ?service‘ as per various appellate authorities judgments and CBEC‘s own circulars, will be a ?deemed service‘ for purpose of levy of service tax.

The effect of this amendment would be that the service tax applies on all transactions in which the builder / developer had not obtained building completion / construction completion certificate from the competent authorities. In other words service tax will not apply only when the builder / developer execute the sale deed or sale agreement of ready made or fully completed flats, raw houses, shop, offices or industrial shed.

The government has also defined / clarified the competent authorities whose certificate would be considered for completion level of the building. By Circular No. F. No. 334 / 3 / 2010 – TRU Dt. 22.06.2010, CBEC has clarified that the ?Competent Authorities? includes, besides any government authorities, registered architect, registered chartered engineer and licensed surveyor of the respective local body of the city or town or village.

In all other cases, the builder will be liable to pay the service tax if he accepts or receives the advance amount / booking amount either in cash or otherwise directly or indirectly through his agents prior to completion of the construction of the building. It is very common in most of the cases that builder accepts the booking amount from the prospective buyers and from that money only completes the majority of the construction of the building. Now such amount collected by them would be taxable w.e.f 01.07.2010.

However, the CBEC has given relaxation to the builder / developer by way of exempting the amount collected prior to 01.07.2010 by issuance of notification. So, the builder / developer who have already collected the amount prior to 01.07.2010 even on existing projects will not be required to pay service tax on the same.

Further this explanation cannot have retrospective effect prior to 01.07.2010 as evident form the above notification Dt. 01.07.2010.

Further, for the purpose of determining the taxable event, the date of booking or date of receipt of booking amount is irrelevant. In other words, the date of provision of the taxable service is only relevant. Hence, if construction service is provided after 01.07.2010, service tax will be payable. Thus, if the existing construction is going on and any amount is received after 01.07.2010 towards booking amount or otherwise the service tax would be applicable. The Explanation has been inserted to the definition is merely a ?deemed service provision‘. Principally, provision of service is the ?taxable event‘, i.e. services provided after taxable date is taxable. Thus, service tax will apply in respect of services provided or to be provided on or after 01.07.2010.

There may be some instances where the construction of complex may be fully completed before insertion of the explanation to the definition but Completion Certificate from competent authority has not been given by 01.07.2010 even though applied for, then in such circumstances, no service tax is payable as service tax is on provision of service which is the taxable event and the said taxable event is already completed prior to introduction of new services i.e. 01.07.2010 and the fact that the certificate is obtained on later stage is irrelevant.

Further, the amendments have been made in two categories of the services i.e. Commercial and Industrial Construction Services and Construction of Residential Complex Services.

However, corresponding amendment is not proposed or made under the category of ?Work Contract? Services. Hence, the said amendment will not apply if the contract is covered under works contract service i.e. where VAT / Sales tax is payable on the contract. Thus, the builder / developer who had entered in to an agreement with the intended buyer / prospective buyer which can be classified as works contract, the service tax would not be leviable. Further, the contract can be called as work contract or not, that is the subject matter of detailed study in each case.

Prepared & Compiled by CA. Hardik P. Shah – hpshah_1999@yahoo.com