Service tax on flats

Querist : Anonymous (Querist) 21 September 2011 This query is : Resolved
Sir, We,50 employees, had formed a group and purchased land and registered on individual names in March,2010. We had approached a builder for construction of flats and entered into an agreement for construction of flat @ Rs.961 per sq.ft. and construction agreement was registered in March,2010 and we paid 1st installment of 25% in the month of April,2010. Now, the builder is insisting to pay service tax @ 35.55 ps./sft and as per construction agreement ST is in our scope. please advise us what exactly the rule speaks and how much ST we have to pay.

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R.Ramachandran (Expert) 21 September 2011
1. Since the land belongs to you, the contractor is undertaking 'Works Contract Service' and accordingly entitled to charge service tax separately on you which you are liable to pay.

2. However, the demand of Rs. 33.55 per sq.ft. towards service tax is not at all correct.

3. At best the Contractor has two options: (i) to demand 4% Service tax (if he had opted for composition scheme) on the entire value of Rs. 961/- per sq.ft. or (ii) 10.3% on the value of service portion alone. For the second item he has to issue an invoice showing (i) value for material portion and (ii) value of service.

Raj Kumar Makkad (Expert) 21 September 2011
The service tax provisions relating to construction services cover two types of services - (a) Commercial or industrial construction which is taxable w.e.f. 10-9-2004 and (b) Construction of complex (residential complex of more than 12 residential units) which is taxable w.e.f. 16-6-2005.
If works contract tax is payable on these construction activities, these services would get covered under ‘works contract service’ w.e.f. 1-6-2007.
Initially, there were disputes regarding services provided by a builder or a developer for construction of residential complex or commercial premises.
However, on basis of Court decisions and CBE&C circulars, it was more or less settled that a builder entering into contract for sale of flat or industrial unit (gala) or shop or a developer entering into contract for construction of an individual flat for personal residential use of client are not liable to pay service tax.

Vineet (Expert) 26 September 2011
Agree with Mr Ramchandran.

Under Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007, the contractor has option to discharge Service Tax liability by paying 4% (plus applicable cess) on the gross amount charged for works contract. Hence in your case, this would amount to Rs 39.59 per sq ft. in such case, the contractor will not be able to claim cenvat credit on inputs.

The other option is to charge service tax on service component only under Rule 2A of Service Tax (Determination of Value) Rules, 2006. Here, the service tax at full rate (10.3%) is levied on gross amount of contract minus the value goods (material) for which a separate bill is to be raised and subject to levy of state VAT.

It appears that your contractor is exercising second option by determining value of service component at Rs 345 per sq ft and balance Rs 616 for goods. In this he will charge VAT on goods part while take credit for both goods and services.