phiyoni@adv (Legal Executive ) 31 January 2009

Service tax no longer applicable to construction of residential complex by builders

Circular No.108/02/2009- ST

F. No. 137/12/2006-CX.4
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs

New Delhi, Dated, 29th January 2009

Subject: Imposition of service tax on Builders-regarding

Construction of residential complex was brought under service tax w.e.f. 01.06.2005. Doubts have arisen regarding the applicability of service tax in a. case where developer /builder/promoter enters into an agreement, with the ultimate owner for selling a dwelling' unit in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment. The 'Construction of Complex' service has been defined under Section 65 (105)(zzzh) of the Finance Act as "any service provided or to be provided to any person, by any other person, in relation to construction of a complex". The 'Construction of Complex' includes construction of a 'new residential complex'. For this purpose 'residential complex' means any complex of a building or buildings, having more than twelve residential units. A complex constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex intended for personal use as residence by such person has been excluded from the ambit of service tax.

2. A view has been expressed that once an agreement of sale is entered into with the buyer for a unit in. a residential complex, he becomes the owner of the residential unit and subsequent activity of a builder for construction of residential unit is a service of 'construction of residential complex' to the customer and hence service tax would be applicable to it. A contrary view has been expressed arguing that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit, the transaction of sale is completed only after complete construction of the residential unit. Till, the completion of the construction activity the property belongs to the builder or promoter and any service provided by him towards construction is in the nature of self service. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of 'residential complex' as defined for the purposes of levy of service tax and hence construction of it would not attract service tax.

3. The matter has been examined by the Board. Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of 'agreement to sell. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of 'self-service' and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a. residential complex with a. promoter / builder / developer, who himself provides service of design, planning and construction; and. after such constitution the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of 'residential complex'. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.

4. All pending cases may be disposed of accordingly. Any decision by the Advance Ruling Authority in a specific case, which is contrary to the foregoing views, would have limited application to that case only. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.

(Gautam Bhattacharya)
Commissioner (Service Tax)
CBEC, New Delhi

Reply Follow

8 Replies

Brindha (Legal - Manager) 12 March 2009

How a purchaser of flat claim a refund ? The builder says that he has already paid the taxes to the department and he cannot claim as it becomes unjust enrichment. Can a individual purchaser claim refund from the department for his flat ? Please explain.

Regards,

S.Brindha

A V Vishal (Advocate) 12 March 2009

No, there is no provision for claiming refund of the tax already collected and paid into government fund unless an amendment is made in the principal act by the parliament

Mangesh law_student (Service) 13 March 2009

Dear A V Vishal,

What if we have paid service tax to builder, but builder have not paid it to tax dept. How can we claim refund from builder? I have already requested my service tax refund from builder as he is not ready to repay. Builder have done many cheating to us and we have moved to consumer court. We also claim our service tax refund in our case. Will I get it back. As a proof of payment builder have not given me receipt separately but he had given me discriptions on his comapny letter head with his signature details of my last payment and it include service tax amount too. And my bank had disburse my last payment as per the letter from builder. Can I also seek for interest for amount paid as service tax.

Thanks in advance,

Mangesh Nalawade

A V Vishal (Advocate) 14 March 2009

Dear Nalawade:

Even for arguement sake let us assume that the builder has not remitted the service tax to the government, but how are you going to prove it. Since the matter is now before the consumer forum, you need to wait and watch. The court must ask the builder to produce some kind of documentary evidence to check if the builder has really paid the same or not. In case, the builder has not done so, the court may direct him to refund the money with interest upto the date of payment. The decisive factor would be the terms of the agreement with the builder and the receipts the builder has issued you towards acknowledgement of money paid to him.

Meenakshi (retd banker) 26 March 2009

But the last line in Para 3 is again misleading. What if the services of the designer etc is taken by the builder. Then the sub service provider will tax the builder for services and the same will be passed on to the final buyer of the property.

Builders/ developers claim that they are passing on the tax paid by them or charged to them by the sub service providers.

Is it legal for the builder to pass on the burden of the service tax to the ultimate purchaser of an individual flat?

Meenakshi (retd banker) 26 March 2009

Builders/ developers claim that they are passing on the tax paid by them or charged to them by the sub service providers.

Is it legal for the builder to pass on the burden of the service tax to the ultimate purchaser of an individual flat?

sharath (service) 16 April 2009

Every Builder would invariably have some input services on which the Service Tax is paid. But this forms cost of the Builder . This amount of service tax cannot be collected from the final customer - But will form part of cost. The buyer of the apartment can make an application to the jurisdictional office for the refund amount. Let me know in case you need more information.

CA Sk Hasan Ali (Chartered Accountant) 16 April 2009

Dear Meenakshi:

As per Rule -3 of CENVAT Credit Rules, 2004, a service provider can take credit of Service Tax which is paid to Input Service provider provided he has not availed abatement as per various notifications. In this case Notification No. 18/2005 ST dated 07/06/2005 can be taken into account for abatement.

Here, two situations are possible for the above mentioned case:

If abatement is not availed –

For example –

a. Input Service Rs. 100

(Total amount paid to input service provider

is Rs. 112 i.e. Service Tax @ 12%)

b. Value Addition Rs. 200

c. Total (a + b) Rs. 300

d. Service Tax @ 12 % Rs. 36

e. Cost to service receiver Rs. 336

But Service provider will pay Rs. 24 to Govt. as service tax i.e.

i. Total Service tax received from service receiver Rs. 36

ii. Less: Input tax paid (as in a. above) Rs. 12

iii. Service Tax payable (i – ii) Rs. 24

If abatement is availed –

For example –

a. Input service Rs. 112

(Includes Service Tax @ 12%)

b. Value Addition Rs. 200

c. Total (a + b) Rs. 312

d. Service Tax @ 12% only on 33% of ( c ) above Rs. 12.40

(As per Notification No. 18/2005)

e. Cost to service receiver Rs. 324.40

Here Service provider will pay Rs. 12.40 to Govt. as Service Tax.

From the above examples it is clear that a service provider can not pass the Input Service Tax to the ultimate service receiver, even if in second case service tax is added to the cost the service receiver is benefited by the way of abatement.