Service tax :
By the Finance Act, 2010 the Government has amended the
definition of Commercial or Industrial Construction Service [S. 65 (25b) read
with S. 65 (105) (zzq)] and construction of Residential Complex [S. 65 (30a)
read with S. 65 (zzzh)].
The scope of these categories is expanded to cover sale of
flats/units under construction. Builders/developers are now liable to
service tax if any payment towards sale consideration is received before the
grant of completion certificate by the competent authorities for such
flats/units. This amendment overrides the Gauhati High Court’s decision in the
case of Magus Construction Private Limited v. UOI, (2008 11 STR 225).
Therefore, if a builder/developer receives the entire sale
consideration for flats/units after the issue of completion certificate, the
same is not liable to service tax.
There is an abetement of 75% of the sale value. Thus, tax
will be levied on 25% of the sale value of flat at the rate of 10.3%. For
example, if the agreement value of a flat sold under construction is
Rs.50,00,000, then service tax @ 10.3% is payable on Rs.12,50,000, which works
out to 1,28,750. Thus, there will be an additional burden of 2.6% on the
agreement value of the flat. The amendment will be effective from the date to be
notified by the Central Government.
Vat :
The Maharashtra Government in the State budget has also
introduced a new composition scheme on sale of under construction property along
with land or interest in land @ 1% of the agreement value. The scheme is
effective from 1st April, 2010 but the Notification in respect of the same about
the manner in which the tax is to collected by the builder/developer has not yet
come. There is no set-off for inputs.
It may be noted that already a composition scheme @ 5% is in
operation, which is effective from 20th June, 2006 i.e., the date on
which the transfer of property under construction was brought within the ambit
of VAT.
It may further be noted that the levy of tax on property
under construction itself is challenged by the Maharashtra Chamber of Housing
Industry (MCHI), an association of builders by a writ petition in the Bombay
High Court (being Tax writ petition No. 2022 of 2007). The main issue
involved in the writ petition is the competency of the State Legislature to
enact the definition of Works Contract in the manner which suggests its
applicability to the builders/developers, in addition to the contractors.
The definition talks about transfer of property in goods in the execution of
works contract including the building, construction, . . . . . The Government is
competent to levy tax on construction (sale of goods involved in construction).
Article 366 read with Article 246 (2) of the Constitution has authorised it to
do so. But power to levy tax on building; i.e., sale of flats is
unimaginable. It appears that prima facie the High Court is convinced
about this position and ordered interim relief for the members of the
Association. The High Court has directed that the members of the MCHI should not
be treated as ‘dealers’ liable to tax under the MVAT Act, 2002 in respect of
sale of flats on ownership basis under the Maharashtra Ownership Flats Act, 1963
(MOFA Act), provided such members of MCHI submit the data and documents as
mentioned in the Court order. Thus, such members of MCHI have been absolved from
registration and also from assessments till the disposal of the petition.
However, the developers who are not members of the Association are not protected
by the Court order.
It seems that to divert the attention of the public from the
Court matter, the Government has introduced a new composition scheme @ 1% on the
agreement value of the transfer of flat/unit under construction without
providing any deduction for land, etc.
There is an impression in the mind of people that this is a
new amendment and only under construction flats/units sold after 1st April, 2010
are chargeable to VAT @ 1%. This is not so, the amendment regarding tax on
flat/unit under construction is effective from 20th June, 2006. In this
budget the Government has come out with a new composition scheme of 1% of
agreement value without any deduction for land against earlier composition
scheme of 5%.
Though the new composition scheme is effective for the
flat/units registered on or after 1st April, 2010, the Notification in respect
of the same has not been issued. In the absence of the Notification the builders
are in a dilemma as to how and in what manner the tax is to be collected as the
full sale price is not collected at the time of executing agreement for
flat/unit which is under construction.
Thus in the hands of purchaser the overall cost of the
flat/unit may increase by about 3.6% of the agreement value by way of service
tax and VAT. In the given example of Rs.50,00,000 value of flat, the additional
cost by way of service tax will be Rs.1,28,750 and by way of VAT will be Rs.
50,000 making it a total of Rs.1,78,750.
It is pertinent to note that the above cost can be avoided if a ready flat
is purchased after the builder obtains completion certificate.
