Service tax for buyers
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15 Sep, 2007, 1623 hrs IST,Padma Ramakrishnan, TNN Economic times
The Union finance ministry has in a recent circular exempted
developers or builders from collecting service tax from property
buyers, provided they had built the residential complex by employing
direct labour. In cases where the developers had employed a
contractor, it is the contractor who will have to pay the service tax
and not the builder.
According to real estate players, the confusion prevailing in the last
two years had at last been cleared as the service tax on residential
properties would have meant an additional burden for the buyer.
According to advocate Anil Harish, a decision by the Supreme Court in
the K Raheja Corp case which related to works contract tax had made
the service tax authorities believe that what is being sold is not
just goods and that there is an element of service involved.
The department said while constructing a building, and entering into
an agreement for sale, the price that the builder gets is for the
input costs and partly for the services he is rendering and therefore
the service tax is chargeable.
Many builders in their sale agreements were thus putting in a clause
whereby if there is any service tax payable, it has to be paid by the
purchaser . The service tax is very heavy at 12.36 per cent.
Builders had challenged the service tax as it termed the builders as
service providers and not as those who sell products. They also said
it amounted to double taxation, as the buyer was already paying stamp
duty.This would result in further pushing up property prices, they
said.
The Promoters and Builders Association of Pune [PBAP] and the Marathi
Bandhkam Vyavasayik Sanghatana had made a representation to the
Ministry, besides filing a case in Bombay High Court.The move was also
challenged in states like Rajasthan, AP and Karnataka.
Reacting to the clarification, Niranjan Hiranandani, Director,
Hiranandani Constructions said the Allahabad High Court had already
come out with a judgement in February this year, exempting builders
from paying service tax. The government had the option of appealing
against it within six months, but had not done so, hence the judgement
holds.
Now with the further clarification from the Union government it had
become even more clear. Had the Union government not clarified, it
would have created unnecessary litigation. According to Chartered
Accountant Vimal Punmiya, even earlier as per the act, service tax was
applicable only to the contractor and not to the builder. It was a
misinterpretation on the part of the commissioner of service tax,
which had created the confusion.
The circular has put an end to the debate on the subject. The builder
buys the plot, constructs and sell flats as per the market prices
prevailing, whereas the contractor has to do work at a predetermined
value. The clarification has brought forth the fact that builders
while selling flats cannot charge service tax, Punmiya states.
This has always been the contention of the PBAP, points out Rohit
Gera, vicepresident, PBAP and executive director, Gera Developments
Ltd. "Land is a state subject and here we had the Central government
charging on it. How does selling a home constitute a service? We are
happy that we have been able to communicate this to the government.
This clarification gets rid of the big worry and ambiguity for the
buyer that he would have to make provision for an extra one or two
lakhs," says Gera.
Apart from transferring the building, land and an interest in it is
being transferred, for which the customer is paying the stamp duty.
Transferring of asset is not service. Many developers in Maharashtra
were served notice to pay service tax on sale of properties, whereby
sale of property was treated as service , emphasises Mayur Shah,
Director, Marathon Realty.
The majority of builders are already paying service tax on bills
issued by contractors for their services. They are paying taxes on the
material bought and on the architect's fees. However, where the
builder gives a contract to the contractor for construction work, the
contractor will charge the builder who will, in turn, load that
component on to the buyer.
According to Chetan D Narain , CEO - Narains Corp and President -
India Institute of Real Estate, the service tax removal has come as a
surprise. One of the biggest goof-ups the government makes while
imposing service tax is not directing or clarifying who should pay. It
does become the responsibility of the service provider to pay to the
government , but it is a constant battle between the service recipient
and provider.
Quick BYTES
The Central government's recent clarification excluding builders from
the service tax net has been welcomed by real estate players This
clarification gets rid of a big worry and ambiguity for the buyer The
tax would have meant an additional burden on flat buyers.