♣ Tax Research Unit from Ministry of Finance has issued report of the High Level Committee (HLC) dated 20th January, 2016 as there is a divergence of view between Para 6.2.1 of the Education Guide 2012 and the CBEC Circular No. 151/2/2012 dated 10-02-2012 on how flats handed over to the land owners in case of redevelopment are to be valued for the purpose of levy of service tax. The two views need to be reconciled. The HLC has opined that the guidelines communicated by the said Circular are more appropriate. The Education Guide 2012 was released purely as a measure of facilitation so that all the stakeholders could obtain some preliminary understanding of the new issues for smooth transition to the new regime. Hence the said circular will prevail over the education Guide, 2012.
My Comments: It is again affirmed that Circular issued by the CBEC is binding on the Service Tax assessing authorities.
♣ The issue has been examined. In a tri-partite construction business model, there are 3 parties involved: i) The land owner; ii) The Builder/developer & iii) The contractor (who undertakes the construction).
Typically, in such a model, the land owner enters into an agreement with the builder, whereby, the land owner gives either land/development rights (to construct/develop a residential complex and sell flats/houses of such complex to buyers) to the builder. The builder/developer, in turn, agrees to assign a portion of the constructed area, in the form of flats in favour of the land owner. The remaining flats are sold by the builder/developer to various buyers. The builder/developer receives consideration for the construction service provided by him, from two categories of service receivers:
i) From landowner, in the form of land/development rights; and
ii) From other buyers, normally in the form of money.
♣ According to the CBEC Education Guide on Taxation of Services, 2012 value of construction service provided to such land owner will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly. However, Circular No. 151/2/2012-ST dated 10-02-2012 states that the value of land/development rights in the land may not be ascertained ordinarily and therefore, value, in the case of flats given to the first category of service receiver, that is, the land owner, is determined in terms of section 67(1) (iii) read with rule 3(a) of Service Tax (Determination of Value) Rules, 2006. Accordingly, the value of these flats would be equal to the value of similar flats charged by the builder/developer from the second category of service receivers. In case the prices of flats/houses undergo a change over the period of sale (from the first sale of flat/house in the residential complex to the last sale of the flat/house), the value of similar flats are sold nearer to the date on which land is being made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid by the builder/developer on the ‘construction service’ involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (e.g. allotment letter).
a) In case of redevelopment, quality of construction and other amenities are different for rehabilitation tower given to the land owner and free sale tower sold to new buyers, hence how can service tax be paid on value charged by the builder/developer from the buyers in free sale tower which will be always higher i.e. both are not comparable.
b) Service tax is always payable on service i.e. it should be paid on construction services rendered by the developer, if service tax is payable on value charged by the builder/developer from the buyers in free sale tower which will also include value of land. Hence there should be provision to deduct value of land which is always higher in component i.e. value per square feet of carpet area in Matunga, Mumbai is approximately sold at 35,000 per square feet but construction cost per square feet will only be Rs 3,500 per square feet, which is approximately 1/10th of the total value of flat.
c) There should be provision to deduct value of land which can be either value determined by the stamp duty authority of respective states or corpus payable by the builder/developer to society/Members/Tenants and rent payable by the builder/developer to Members/tenants can be considered as value of development rights/land and appropriate deduction to be allowed in value to be determined for payment of service tax.
Unfortunately, Circular No. 151/2/2012-ST dated 10-02-2012 is silent on the said critical points.
1) Circular issued by the CBEC is binding on the service tax revenue authorities.
2) In congested city like Mumbai, many redevelopment projects are going on and complexity in redevelopment projects is also very high but till today many points raised above are not incorporated/not answered.
3) Subject of valuation of flats for levy of service tax given to land owners in redevelopment by the builder/developer/contractor is an evolving subject hence either department will issue further clarification by way of new circulars or new section/provision/explanation will be added in the coming budget or court will decide the same.