The news relating to imposition of service tax on sale and construction of residential property has come as a shock for all the prospective buyers of real estates and the construction industry. The issue has become an area of major discussion and has gained great eminence after the Budget 2010 due to noteworthy modifications made therein in direction of taxability on the basis of service tax on the sale of flats. With effect from 1st July 2010 a new provision namely, ‘Deemed Service’, has been further established in regard to construction service. Any sale made in respect of any commercial or industrial construction or edifice of residential complex will attract tax, if ‘completion certificate’ has not been acquired. Added to the misery, purchase of immovable property in installments will also come under the purview of taxability by means of service tax.
Scenario of construction service before Budget 2010
Earlier there were three categories of services that were covered under the provisions of service tax, namely:
- Construction of a complex where the complex was of residential nature and consisted of more than twelve units, which was taxable from 16th June 2005.
- Industrial or Commercial construction, which was taxable from 10th September 2004.
- With effect from 1st July 2007, if sales tax/VAT/works contract tax is payable on the construction activities then the associated services would be sheltered under ‘works contract service’.
Builders were relatively free from the purview of service tax as earlier sale of under construction houses were not liable for service tax, the builders or constructors had relative freedom with regard to this matter as it was considered that no service is being rendered.
Amendments and the effects:
The Finance Act, 2010 has made some alterations to the definition of industrial or commercial construction and construction of residential complex with effect from 1st July 2010.
Explanation- For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorized by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer.
With regard to the above amendments, it has been observed that two participants of the real estate business will get seriously affected, namely:
- A Contractor cum Builder who carries out the construction himself and accordingly doubles as a Contractor, and
- A Builder who subcontracts construction actions to other contractors, in occurrence of civil works contract.
However, it should be remembered that the dispute is only in context to liability of a builder to pay service tax on the sales made by him in form of under-construction flats. The liability of a contractor engaged by the builder remains the same under the pertinent taxable category of service tax.
Related posts:
- Sale of Under Construction Houses to Attract Service Tax from July 1:
- Service Tax on Builders
- Union Budget 2010: Construction Services Tax to Raise Cost of Apartments
- Service Tax Latest Notifications
- Penalty Provisions Under Service Tax
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