Those buying under- construction property have got a surprise benefit from the Delhi High Court ( HC) recently. The court has ruled that that since there is no provision to calculate the value of service in a deal between builder and buyer, there should be no service tax on it. While the judgment will definitely apply to buyers within Delhi’s jurisdiction, it could also have an impact on property deals in other states. The judgment also says service tax should be refunded in case of buyers, who have purchased property after 2012.
However, there is a catch: experts believe the tax department is likely to appeal against the order, as otherwise it would mean a huge tax outflow for the government for refunds. But until that happens this order holds and flat buyers can technically refuse to pay service tax on under- construction property or existing buyers can even seek refunds. In other cities, buyers could also cite this order.
Today, the service tax on under- construction property is 15 per cent. It is not charged on the entire property value. It can be calculated in two ways. One, is to deduct the value of the land, and of goods and services from the total value of the property. The service tax is then charged on the remaining amount. Two, is to assume the value of land is 75 per cent of the property value and construction costs account for the remaining 25 per cent. Service tax is calculated on the 25 per cent.
For example, if the property value is ? 1 crore, the value of construction is deemed to be ? 25 lakh and service tax of 15 per cent is levied on ? 25 lakh. This works out to ? 3.75 lakh.
The rationale behind charging service tax on property is that as the builder is providing the service of ‘ construction’, the buyer has to pay tax on that service. A petition filed by Suresh Kumar Bansal, Anuj Goyal and others in the Delhi HC argued apartment buyers are not liable to pay service tax, as it is difficult to determine the value of service in construction.
The HC judgment said there was no rule or mechanism in law to bifurcate the value of land. Hence, service tax cannot be charged. Since construction of property is technically creation of immovable property, the transaction is similar to transfer of land. And, since land is a state subject, the central government cannot levy service tax on it.
The HC said, “… the arrangement between buyer and builder is a composite one, which involves not only the element of services but also goods and immovable property. Thus, while the legislative competence of Parliament to tax the element of service involved cannot be disputed, the levy itself would fail, if it does not provide for a mechanism to ascertain the value of the services component, which is the subject of the levy. Clearly, service tax cannot be levied on the value of undivided share of land acquired by a buyer of a dwelling unit or on the value of goods, which are incorporated in the project by a developer. In the present case, we find no machinery provision for ascertaining the service element involved in the composite contract.
To sustain the levy of service tax on services, it is essential that the machinery provisions provide for a mechanism for ascertaining the measure of tax, that is, the value of services which are charged to service tax.”
Business Standard New Delhi,10th June 2016
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