Construction In The Service Tax Net

Construction in the service tax net

by

zameenkuldeep

The proposed imposition of service tax on real estate comes as a surprise, say Pratik Jain and Siddharth Mehta

Real-estate

was one of the biggest victims of the economic slowdown, which crept in about one-and-half years back.

Despite the falling realty prices, there were few takers, as potential customers were either out of money, or preferred to adopt a wait-and-watch approach.

Now, with the economy showing signs of recovery, real-estate prices have also started rising; rather steeply in some parts of the country.

Therefore, the Budget 2010 proposals extending service tax on

real estate

came as a surprise to most of us.

The government intends to levy service tax on sale of property (both

residential and commercial)

, if any part of the consideration is received by the builder prior to issuance of `completion certificate’ in respect of the property by the concerned authorities.

In such a situation, the activity of construction would be `deemed’ to be a service. This means that if the entire payment is made after the completion of construction, service tax would not be applicable.

The proposed amendment would come into effect after the enactment of the Finance Bill, which could happen in next couple of months.

The issue of

service tax on real estate

transactions has been subject to dispute in the past. After extensive debate and litigation, the service tax authorities had clarified around a year back that any service provided by the builder in connection with the construction of residential complex till the execution of sale deed in favour of customer, would be in the nature of `self-service’ and consequently would not attract service tax. In other words, the authorities also acknowledged that sale of an under-construction apartment by builder to the customer do not entail any provision of service from builder to customer. This also seems logical, as the transaction is typically treated as sale of

immovable property

and stamp duty is paid on the entire value.

The veracity of this latest proposal is being debated extensively and several tax experts believe that an activity, which is actually not a service, can not be `deemed’ to be so.

Also, this would lead to double taxation, as stamp duty will continue to be paid on the entire

property price

. The state governments can also seek to levy VAT on material used for construction (such as cement, steel etc.), if the activity is treated as a service for the purposes of service tax laws.

Further, when GST is likely to be implemented from April 1, 2011, any structural change in the tax system should be done after analysing the possible implications in detail. If real estate transactions are to be brought within the ambit of GST, then ideally stamp duties should also be subsumed within its fold, an issue on which a consensus is still to emerge.

Therefore, over the next few days, the builder community is likely to meet the senior finance ministry officials and make a representation for withdrawal of the proposal.

However, assuming the proposal is implemented, the silver lining is that service tax would only apply on 33 per cent of the

value of property

and therefore the impact is likely to be around 3.4 per cent of the sale price of the property. However, any PLC (Preferential Location Charge) or other development charges recovered by the builder would also attract service tax at 10.3 per cent.

Those of who have already booked

apartments/ commercial properties

would be wondering as to whether the builder would seek to recover any additional amount on account of service tax.

Unfortunately, the proposal is not clear on this aspect.

One would hope that the government would come up with suitable clarifications in this regard and at least provide exemption where the entire consideration for the property has already been paid and the property is already under construction.

The authors are executive director, KPMG and senior manager, KPMG, respectively

Courtesy:HT Estates dt:06-March-2010

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Courtesy:HT Estates dt:06-March-2010

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