Effect of Service Tax onto Flats purchased in Paras Tierea before July 01, 2010

[manish mittal]

The budget 2010-11 has proposed to levy service tax on all sales of
under-construction properties from July 1, 2010. The property buyers
have to shell out an extra for payment made for purchase of property.
Finance Bill 2010 has introduced eight new services to charge service
tax. This includes Special services provided by a builder etc. to the
prospective buyers such as providing preferential location or external
or internal development of complexes on extra charges. There have been
further amendments to the Finance Bill, 2010, which have been passed
when the Bill became law. The following major changes have been made
by the Finance Act 2010 for under construction property.

An Explanation is added to section 65(105)(zzq) and (zzzh) which deems
construction of a new building and complex intended for sale, wholly
or partly, by a builder to a person before, during or after grant of
completion certificate by the competent authority to be services
provided by the builder to the buyer/prospective buyer except in
situations where entire amount is paid by the buyer only after the
receipt of completion Certificate.

Insertion of Explanation will be applicable to the cases wherein the
construction activity has yet not commenced, going on or having been
completed but completion certificate not received and the buyer makes
payment to the builder. It will not affect the transactions wherein
the payments have been made before 1-7-2010.

Service Tax exemption is provided to construction done under the
Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana
by notification no. 28/2010 dated 22nd June 2010.

Insertion of new clause zzzzu in section 65(105) i.e. levying of
Service Tax (ST) on the amount collected towards preferential location
or internal / external development. Such as services provided by a
builder to a buyer in providing preferential location or external or
internal development of complexes on extra charges.

Deletion of the word “service” from title of section 65(25b) and
deletion of the word “service” from clause 65(105)(zzq) i.e.
definition of commercial or industrial construction.

Contractor is entitled to claim abatement
There was some relief for the real estate sector with the finance
minister offering for partial roll back of service tax that was
imposed on the sector during the budget. Finance minister has rolled
back Service Tax to 25% from 33% in the April session when house
discussed and passed the finance bill. Abatement scheme, under
notification number 1/2006 dated March 1, 2006, says that the
contractor is entitled to claim abatement to the extent of 67 per cent
of the value of services rendered by him. The finance minister has
increased abatement from 67 per cent to 75 per cent. The abatement is
subject to the following conditions:

No exemption would be applicable for mere completion and finishing
services
The increased abatement of 75% would not be applicable in cases where
the cost of land has been separately recovered from the buyer by the
builder or his representative. This means that the abatement would
have to be calculated on the entire value of sale of flat/unit.
Effectively the rate of service tax shall be 2.575 (25% * 10.3%). Also
by presumption the notification has indirectly considered value of
land at 8% (75%-67%). This in my view is not correct.
The abatement is subject to non-admissibility of Cenvat Credit on
inputs, capital goods or input services.

Authorities for issuing completion certificates
It should be noted that the service tax would be levied only on under
construction property. A property is considered “under construction”
till the builder receives a “completion certificate” from the relevant
authorities. However the ministry has sought legal opinion as local
authorities in some states do not issue completion certificates. The
government is thinking of allowing some independent authorities, such
as architects or builders’ associations, as a sufficient proof of
completion.

For the purpose of issuing “completion certificate” by “competent
authority” it has been clarified by notification no.1/2010 that for
the purposes of sub-clauses (zzq) and (zzzh) of clause (105) of
section 65 of the Finance Act, the expression ‘authority competent’
includes, besides any Government authority,-

Architect registered with the Council of Architecture constituted
under the Architects Act, 1972(20 of 1972); or
Chartered engineer registered with the Institution of Engineers
(India); or
Licensed surveyor of the respective local body of the city or town or
village or development or planning authority
who is authorized under any law for the time being in force, to issue
a completion certificate in respect of residential or commercial or
industrial complex, as a precondition for its occupation.

No Service tax

From July 1, all sales of under-construction property will attract
service tax. However, resale properties would not levied service tax
as resale properties would essentially have obtained a completion
certificate.

No service tax if entire payment for the property is paid by the buyer
after completion of the construction including certification by the
local authorities.

The low-cost housing segment (property worth less than Rs. 20 lakh)
will be exempt from service tax.

The property buyers have to shell out an extra for payment made for
purchase of property from July 1. It should be noted that the service
tax would be levied only on under construction property. The ministry
has sought legal opinion as local authorities in some states do not
issue completion certificates. The low-cost housing segment (property
worth less than Rs. 20 lakh) will be exempt from service tax. Service
Tax would not be levied on parking lot and resale property. All sales
of under-construction houses from July 1 will attract service tax with
the finance ministry notifying tax on new services. Service tax has
also been levied on any payment made by buyer to the builder for
getting a preferential location.