FEBRUARY 27, 2010
By S Sivakumar, CA
THE 2010-11 Budget's fine print has several master strokes for the Realty Sector, confirming the adage that the Devil is in the details. Here is an attempt to comprehend some of the very major implications of the Budget, as it concerns the Realty Sector.
1. Service tax on Renting
Putting an end to the controversies related to the levy of service tax on ‘Renting of Immovable Property' services, the Government is bringing a retrospective amendment holding that ‘Renting' by itself is a service. This amendment is effective from June 1, 2007. This retrospective amendment will nullify the impact arising out of the decision of the Delhi High Court in the Home Solutions case and the appeal which is pending before the Supreme Court. In my view, this would probably end all controversies surrounding the levy of service tax on renting services. As TIOL rightly called it, the Board has had the final laugh, after all.
As we know, the Delhi High Court, in Home Solution Retail India Ltd. v. Union of India 2009-TIOL-196-HC-DEL-ST had struck down Notification No. 24/2007, dated 22-5-2007 and Circular No. 98/1/2008 - ST, dated 4-1-2008. The Government's appeal against this decision is already pending before the Apex Court. In the meanwhile, the CBEC had issued a Circular dated July 15, 2009, taking the view that since the Department has filed an SLP in the Supreme Court against this decision, the Field Force can go ahead and collect service tax from the Lessors/Landlords, as the issue hat not attained finality. In a very recent development, the Delhi High Court, on a petition filed before it, had asked the Government to withdraw the Circular dated July 15, 2009 and the ASG appearing for the Government had assured that corrective steps shall be taken by issuing further instructions, in supersession of earlier instructions, to the officers not to write such letters demanding the payment of service tax. Now, even before the ink on which this latest decision of the Delhi High Court could have dried, the Government has come out with this master stroke.
Not content with this retrospective amendment, the Government has also proposed to introduce a clause to protect all actions taken by its officers in recovering the service tax on renting services right from June 1, 2007. No court can now entertain any suit or proceeding in respect of the levy of service tax on commercial rentals or can entertain any proceeding against any action initiated by the Department. Very rarely does the Government comes out with a statutory provision, justifying the means it had adopted to collect tax, especially when the case is pending before the Supreme Court and this could be that one in a thousand cases, perhaps.
The only saving grace for Landlords/Developers is that, the Government has mercifully not touched the cenvat credit rules. With the statutory reiteration that renting is a service, cenvat credit would be available on the input services and inputs which have gone into the construction of the commercial or industrial building, despite that Circular No. 98/1/2008 seeks to deny cenvat credit to such Developers/Landlords.
2. Service tax on construction of residential complexes and Commercial & Industrial Construction Services
In a move which would have far reaching implications on the realty sector, the Government is proposing to introduce an Explanation due to which, the scope of ‘Construction of Complex' services and Commercial or Industrial Construction Services are now expanded to provide that, unless the entire payment for the property is received post the completion of the construction of the flat/commercial property, as evidenced by the Occupation Certificate, all contracts, irrespective of whether they are agreements of sale or agreements of construction, would be treated as taxable services. This is sought to be achieved by inserting the following Explanation to sub clause (zzq) and (zzzh) of Section 65(105) of the Finance Act, 1994.
“Explanation .—For the purposes of this sub-clause, the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorised 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 the person authorised by the builder before 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;”
This amendment, which is prospectively applicable from the date of the passing of the Finance Act, 2010, would effectively nullify the impact of Circular No. 108/02/2009-ST dated January 29, 2009. Irrespective of whether agreements of construction or agreements of sale are entered into, Builders and Developers would now be liable for service tax, so long as, the entire amount from their customers are not received after the date of the Occupation Certificate(“OC”). All agreements, whether single or double, whether for construction or for sale of flats, etc. would now be covered under service tax levy, so long as monies are received before the date of the OC. In fact, on the face of it, even agreements for sale of readymade flats, entered into prior to the OC date, would be covered under service tax. Though this is a prospective amendment, we would need to bear in mind that, the Circular No. 108/2/2009 never had any legal binding, in any case as the Department was never ready to accept this Circular, which has now been given a decent burial. Developers/Builders, who are not collecting service tax would be well advised to immediately collect service tax, based on this new amendment.
This Explanation could result in certain unforeseen hardship for Builders also. In a typical case, let's assume that, in an agreement to sell a flat for a total value of Rs 1 crore, Rs 40 lakhs is taken prior to the date of the OC and Rs 30 lakhs is taken, after the date of the OC, excluding the value of the land of Rs 30 lakhs. As per the Explanation, the entire amount of Rs 70 lakhs representing the value of the flat, excluding the value of the land, would be subjected to service tax levy, as the entire amount is NOT paid after the completion of the construction. Further, in my view, the liability to service tax would be attracted even in the case of sale of a readymade flat, if the sale is effected before the date of OC. As we know, the OC is given for the housing project as a whole, after completion of the construction of all the flats. In many cases, even when the construction of flats are completed, the OC is given much later. Moreover, as we know, OC is given for the project and not for the individual flats and the tracking of the OC date vis-a-vis the individual flats would be a very difficult task. In many cases, sale agreements for ready made flats, which are actually nothing but immovable property, could attract service tax, because of this Notification, on the basis that OC has been obtained at a later date.
The new Notification could play havoc in the case of large housing projects as the OC is issued only after the completion of the entire project, leading to a situation wherein, practically all of the agreements with customers could attract service tax, not withstanding that some of these agreements are for completed flats.
Many of us were under the impression that the Supreme Court's decision in the L & T case, wherein, it has been submitted that an agreement to sell a flat should be differentiated from a works contract and that, the law laid down by the Supreme Court in the K Raheja Development Corporation case should be distinguished, in the case of an agreement to sell, would also apply to service tax levy, though what is before the Supreme Court is a case related to the levy of VAT on agreements of sale of flats. The Government, by inserting the Explanation, has effectively ensured that the Supreme Court's decision in the L & T case can have no impact on the service tax levy on construction of residential complexes. Of course, the new amendment could lead to further litigation, in the event that the Supreme Court holds that an agreement to sell a flat, is not a works contract, for purposes of VAT under the Karnataka Value Added Tax Act. As the definition of a works contract under the service tax law states that all contracts which are treated as works contracts under the VAT law would also be treated as works contracts under the service tax law, one could see that, a conflict could arise between the main definition of a works contract and the new Explanation which is now sought to be added, in as much as, while under the main definition, an agreement for sale of a flat would not be a works contract for VAT purposes and consequently so, even for service tax purposes, the same could still get taxed under the Explanation now proposed to be added.
The only consolation, perhaps, is the fact that some clarity has emerged finally and Developers and Builders should be thankful for this.
Though this Explanation has been inserted prospectively, given the fact that the Department has never accepted the Circular No. 108/2/2009-ST dated January 29, 2009, it is reiterated that Developers and Builders should collect service tax from their customers, even for the back period, so as to avoid trouble.
3. Transmission of Electricity exempted
Notification 11/2010-ST dated February 27, 2010 exempts transmission of electricity, from the service tax levy. This highly welcome amendment will help Developers and Builders who have build industrial and commercial complexes and are required to provide back up power/electricity to their tenants. The Service Tax Department has been issuing show cause notices to Developers asking them to pay service tax on the value of the electricity distributed by Developers including the electricity received from the State Electricity Boards and this Notification comes as a major relief. Though this Notification is prospective, in my view, it would nullify all existing SCNs, as well.
4. A new taxable service is proposed to be introduced under Section 65(105) (zzzzu) under which, a builder of a commercial or residential complex or any other person authorized by such builder shall be liable for the amounts received for providing preferential location, for external or internal development charges, excluding parking space for vehicles from a buyer. This amendment is probably aimed at plugging a loophole involving builders collecting premium amounts for allotting flats, etc. at premium/preferential locations and not paying service tax on these charges collected.
5. One welcome move is the proposed amendment to Section 73 (3) of the Finance Act, 1994, thro' the insertion of the Explanation as per which, when service tax is paid prior the issuance of SCN, no penalty can be imposed under Section 76 and 78. Though there have been Circulars from the Board on this subject, the Department has always been interpreting that, the beneficial provisions relating to the non-levying of the penalties cannot be extended to cases, when suppression of facts is alleged.
6. In a welcome measure, the time limit for completion of housing projects, eligible for deduction under Section 80-IB has been extended to five years, instead of the currently applicable four years. This could help Developers and Builders who are experiencing delays in the completion of the housing projects. There are also some changes providing for an increase in the area that the housing projects can have for commercial purposes.
7. The cost of construction for the Sector might go up due to the increase in the central excise duty on cement, clinker and other materials to 10% apart from the increase in the fuel prices. Of course, the announcement that the 1% interest subsidy on housing loans of up to Rs 20 lakhs would continue till March 31, 2011, is a decently good one.
Before parting :
I cannot think of a recent Budget, affecting the Realty Sector, as much as this Budget does.
This Budget indicates the mind of the Government, in so far as it concerns the levy of indirect taxes on the Realty Sector. That the Government would go in for retrospective amendments to protect its revenue from the Realty Sector, should come as a not-so-welcome news for the Realty Sector.
That the Realty Sector would get comprehensively taxed under the GST becomes clear from this Budget.
Though the Explanations have been added only to Construction of Complex Services and Commrecial or Industrial Construction services, I presume that this has been due to a slip and we will soon find the Explanation finding its way into the definition for Works Contract services also.
(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)
