CREDAI continues to highlight the implications of the service tax issue on real estate: Meets Shri. Y G Parande, Member (Budget), Ministry of Finance, GoI, with recommendations on provisions of Finance Bill 2010
~ With Goods & Services Tax (GST) expected to be rolled out soon, applicability of service tax may lead to confusion and uncertainty ~
The CREDAI delegation explained that the proposal of the Government to levy Service Tax on construction of complex was an impractical proposal as this would lead to Government giving preference to the secondary market of Completed Projects against Under Construction Projects thus reducing drastically the capacity of the Developers. Also that on one hand, the Government wants to stimulate development and on the other hand it is laying hurdles for such development. CREDAI further questioned the issue of Service Tax being brought out at a time when GST is expected to be introduced in another ten to twelve months. Another matter of concern is that there has been variability in terms of charging Service Tax in different parts of the country.
Mr. Kumar Gera, Chairman, CREDAI, shared, “We have put forth our concerns and recommendations and also discussed the probable impact of the provisions with the Ministry. We are hopeful that the Government will understand the implications and not burden the consumer as we feel that in its present form, while some small amount may be collected through this tax, the overall negative sentiment may result in a net loss of revenue to the Government.”
Mr. Santosh Rungta, President, CREDAI commented, “CREDAI is concerned about the development of the sector and has thus suggested amendments to the proposals in its present form for the government’s consideration. With ‘housing for all’ being the common objective for both the government as well as CREDAI, we are expecting a positive response from the government in reconsidering the issues present in the Finance Bill 2010.”
A detailed summary of the key issues discussed and the points and suggestions put forth by CREDAI:
The concern area:
Firstly, the construction of property and transaction of the same as deemed to be a service in the Finance Bill is going beyond the law as well as the Constitution as it is a state subject according to Article 265 and elaborated in Article 246(3) and Article 246(1) of the Constitution of India. Also that CBEC (Central Board of Excise and Customs) in a recent circular, while providing clarification on scope of the service category of ‘Construction of Complex Services’ stated that in cases where a developer/builder/promoter enters into ‘Agreements to Sell’ units with customers, then the activity of constructing such units would not attract Service Tax.
The recommendation:
Hence, CREDAI has recommended that Service Tax should not be levied on construction of commercial/residential complexes. CREDAI believes, the proposed amendment, if implemented, goes against the spirit of the Constitution and is likely to lead to disputes and unwarranted litigation.
The concern area:
Secondly, the sale of a complex by a builder in favour of a buyer is subject to Stamp Duty which varies from 5-12% on the value of the property in different states. Hence, if the buyer has to pay service tax in addition to the Stamp Duty, it would lead to double taxation, which certainly is not intended by the government. It also leads to the same transaction being viewed as sale/transfer of immovable property as well as a deemed service.
The recommendation:
CREDAI has recommended that the buyers should not be burdened additionally with Service Tax in view of the fact that Stamp Duty is already levied on purchase consideration paid by buyer.
The Service Tax, if implemented, would also adversely affect the real estate industry as it would result in an upsurge in property prices and reduce demand of the final products. It needs to be acknowledged that the real estate industry is the second largest employer in the country and contributes about 5% to the country’s GDP.
The concern area:
Another matter of concern being that with the Goods & Services Tax (GST) expected to be implemented soon, change in law of such magnitude, may lead to confusion and uncertainty.
The recommendation:
Hence CREDAI has recommended that it is advisable that implementation of the levy of service tax, if activated, is deferred till the introduction of GST.
In case the Service tax is implemented, various scenarios would emerge on date of enactment of provision (‘cut-off date’) due to difference of timing between construction activity, date of payment and date of agreement. Therefore, CREDAI has recommended that for ease of implementation of the proposed levy, simplified and well-defined assessment and collection provisions should be enacted. And in any case it is recommended that Service Tax should not be levied on properties under construction on the cut-off date or alternatively, all bookings prior to cut-off date should be outside the scope of the proposed levy.
The concern area:
Currently, an abatement of 67% is available for computing the taxable value under ‘Commercial & Industrial Construction Service’ and ‘Construction of Complex Service’. However, according to CREDAI, the price components as present in a construction projects are as follows: cost of land comprising 30% - 40%; building material comprising 30% - 40% and labour cost being 10% - 15%. Hence, Service Tax, being a tax on ‘service’, should be applicable only on the labour component, i.e. 10% - 15% of the total construction value; thus bringing down the rate of effective Service Tax from 3.3& to 1% of the construction price.
The recommendation:
CREDAI recommended that abatement should be adequately amended to bring the effective rate of service tax down to 1%.
The concern area:
The provisions and methodology for issuance of completion certificates vary across states and different practices are prevalent in terms of norms to be followed, compliances to be undertaken, legal formalities, timing of issuance, etc. Linking Service Tax liability with issuance of completion certificate would thus pose practical difficulties.
The recommendation:
CREDAI has recommended that Service Tax on construction services should not be linked with issuance of completion certificate. A suitable alternative, providing uniformity across states may be considered by the Government.
CREDAI also recommended that as Preferential Location Charges (PLC), internal/external development charges are not in the nature of any service, same should not be subject to Service Tax. And in case it is levied, it should be covered under the existing construction service categories so as to extend the benefit of abatement on such charges. Also that the deduction for amounts paid to State Government or local bodies forming part of PLC or other charges should be included in the new taxable category.
The concern area:
The real estate industry has significant inter linkages with several other sectors of the economy and over 250 associated industries. Service Tax on renting of immovable property would result in an increase in overall tax burden on all businesses. Furthermore, from an economic perspective, taxation of rentals would be discriminatory as it would create a bias in favour of owning property, as opposed to taking on rent. This would result in an undesirable distortion in the real estate market.
Also, Delhi High Court in an order passed on 9th April 2009, in the case of Home Solution Retail India Ltd and others Vs Union of India held that Service Tax is not applicable on renting of immovable property. The matter is still pending before the Supreme Court.
The recommendation:
CREDAI recommends that Service Tax should not be levied on renting of immovable property. And in case it is decided to be levied, it should be deferred till the matter is decided by the Supreme Court.
CREDAI further recommended that no tax, interest or penalty should be applicable on past payments of service tax under ‘Renting of Immovable Property Service’. Also, credit of Service Tax on construction activity should be available against output Service Tax liability under Renting of Immovable Property Service.
About CREDAI
It is the apex body of the organized real estate developers/builders across
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