Service Tax on Allotment of Houses and Flats in India

By Roopa Nayak , Pulak Saha ,Rajiv J. Luthia , Ashok Batra, Bimal Jain,  Sumantra Guha (All are CA) 

Meaning of Allotment of flats etc. to plot of land owner & its taxability In Real Estate Industry, the builders / developers / promoters normally agree to give few flats / houses / shops / commercial units to the concerned plot of land owner(s) in lieu of getting land / development rights.

Here, the first question which comes to the mind is whether such allotment of flats / houses etc. is subject to Service Tax.

It is pertinent to note that consideration in the form development rights are given to the builder / developer / promoter by the landowner before issuance of completion certificate by the competent authority in respect of such complex, building, civil structure or /  part thereof.

Resultantly, such services provided or / agreed to be provided by the builder / developer / promoter fall within the purview of Section 66 E (b) [which deals with Declared Services], of Finance Act, 1994 and will be subject to service tax.

Valuation of Construction Services..!

Further, as far as valuation of such construction services is concerned, it is worth highlighting that value of such flats / houses / shops / commercial units will be the value of the plot of land when the same is transferred & the point of taxation will also be determined accordingly.

On the other hand, Service Tax payable in respect of construction services in case of sale of flats /  houses / shops / commercial units to other customers [who normally make payments in agreed number of installments  will be determined in accordance with Notification No. 26 / 2012-S.T.dated 20.06.2012.

In simple words, service tax will be payable on 25 per cent of the amount charged by the Service Provider provided value of plot of land is also included in the amount charged from the service receiver.

Departmental Clarification..!

The relevant extracts of Departmental Clarification (free book on service tax changes with effect from 01.07.2012) given vide Para 6.2.1& Para 6.2.3 of Taxation of Services-An Education Guide dated 20.06.2012 are given below: 

6.2.1:

What would be the liability to pay service tax on flats / houses agreed to be given by builder / developer to the land owner towards the plot of land / development rights and to other buyers. If payable, how would the services be valued?

    Here two (2) important transactions are identifiable:

    (a) sale of plot of land by the landowner which is not a taxable service; and

   

b) construction service provided by the builder / developer / promoter.

    The builder / developer / or / promoter receives consideration for the construction service provided by him / her, from two (2) categories of service receivers:

    (a) from landowner: in the form of plot of land / development rights; and

    (b) from other buyers: normally in cash.

   

Construction Service..!

Construction service provided by the builder / developer / promoter is taxable in case any part of the payment / development rights of the plot of land was received by the builder / developer before the issuance of completion certificate & the service tax would be required to be paid by builder / developers / promoters even for the flats given to the land owner. 

It may be pointed out that in a recent judgement passed by the Mumbai High Court in the case of Maharashtra Chamber of Housing Industry (MCHI) and Others v. Union of India [012-TIOL-78- HC-Mum-ST] has upheld the Constitutional validity of levy of service tax, under clauses (zzzh) & (zzzzu) of section 65, on similar construction services provided by a builder.

A relevant portion of the judgement is reproduced below-

The charge of tax under Section 66 of the Finance Act is on the taxable services defined in clause (105) of Section 65. The charge of tax is on the rendering of a taxable service. The taxable event is the rendering of a service which falls within the description set out in subclauses (zzq), (zzzh) & (zzzzu).

The object of the tax is a levy on services which are made taxable. The fact that a taxable service is rendered in relation to an activity which occurs on land does not render the charging provision as imposing a tax on plot of land & buildings. The charge continues to be a charge on taxable services.

The charge is not  a charge  on plot of land or / buildings as a unit (House). The tax is not on the general ownership of plot of land. The tax is not a tax which is directly imposed on plot of land & buildings.

Legislative Competence of Parliament..!.

   

The fact that plot of land is subject to an activity involving construction of a building or a complex does not determine the legislative competence of Parliament.

The fact that the activity in question is an activity which is rendered on plot of land does not make the tax a tax on plot of land.

The charge is on rendering a taxable service & the fact that the service is rendered in relation to land does not alter the nature or character of the levy.

The legislature has expanded the notion of taxable service by incorporating within the ambit of clause (zzq) & clause (zzzh) services rendered by a builder to the buyer in the course of an intended sale whether before, during or after construction.

Imposition of the Tax..!

There is a legislative assessment underlying the imposition of the tax which is that during the course of a construction related activity, a service is rendered by the builder to the buyer.

Whether that assessment can be challenged in assailing constitutional validity is a separate issue which would be considered a little later. At this stage, what merits emphasis is that the charge which has been imposed by the legislature is on the activity involving the provision of a service by a builder to the buyer in the course of the execution of a contract involving the intended sale of immovable property. 

Parliament, in bringing about the amendment in question has made a legislative assessment to the effect that a service is rendered by builders to buyers during the course of construction activities.

In our view, that legislative assessment does not impinge upon the constitutional validity of the tax once, the true nature & character of the tax is held not to fall  within the scope of Entry 49 of List II. So long as the tax does not fall within any head of legislative power reserved to the States, the tax must of necessity fall within the legislative competence of Parliament.

 

This is a settled principle of law, since the residuary power to legislate on a field of legislation which does not fall within the exclusive domain of the States is vested in Parliament under Article 248 read with Entry 97 of List I."

Value, in the case of flats (apartments) given to first category of service receiver will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.

Collaborative Agreement to Construct..!

6.2.3 When a certain number of flats (apartments) are given by the builder / developer / promoter to a plot of land owner in a collaborative agreement to construct, in lieu of the plot of land or development rights transferred, will such transferee be required to pay service tax on further sale of flats (apartments) to customers?

   

Yes, the service tax will be required to be paid by such transferee if any consideration is received by him /her from any person before the receipt of completion certificate. 

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