Is Land Value includible by Construction Service Provider?
IN Budget 2010, there is a proposal to insert explanations in sub-clauses (zzq) and (zzzh) of Section 65(105) of Finance Act, 1994 which provides that unless the entire consideration for the property is paid after the completion of construction (i.e. after issuance of completion certificate by the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly.
Explaining the legislative intent of this insertion of explanations under the respective clauses, the D.O. Letter from JS (TRU) dated February 26, 2010 observes that the different practices followed by the builders/promoters/developers with regard to execution of contracts with prospective buyers, payment terms and legal formalities followed by the respective parties gave rise to confusion, disputes and discrimination in terms of service tax payment.
So, to bring about parity in tax treatments of different transactions resulting from various modes of execution of contracts, it was clarified by TRU that these explanations are being inserted to provide that the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities). It was further clarified by TRU that this would only result in expanding the scope of the existing taxable services.
It appears that the entire construction sector is up in arms against the proposed budget proposals and is toying with the idea of challenging the legality of these proposals in various Courts of law. In fact the budget proposals have come as a rude shock to the industry which cozied up to the clarifications issued in Circular No. 108 dated January 29, 2009 which negatived the view taken by the Advance Ruling Authority in M/s Harekrishna Developers - 2008-TIOL-03-ARA-ST.
One of the primary grouses of the Construction sector is that the Government is proposing to levy service tax on the entire value of consideration received in instalments by the builders including the element of cost of land value. This view is gaining currency with several leading consultants pitching in with their views that the proposed changes could tax the cost of land value included in the consideration paid by the prospective buyers.
Is this view adopted by the Construction sector and consultants appropriate? What is the exact legal position in this regard? It appears that there is a Board clarification precisely on this very issue. When the ‘Construction of Complex service' was brought into the service tax net for the first time in the year 2005, TRU in its letter dated July 27, 2005 clarified as follows:
13.6 The taxable service is the service provided in relation to construction of a residential complex. Service tax would be payable only on the gross amount charged by the service provider for the construction service provided and it would not include the cost of land and stamp duty paid for registration of land.
The Board way back in 2005 already clarified that for the purpose of levy of service tax, the gross amount charged by the service provider would not include the cost of land and stamp duty paid for registration of such land. In the light of this clarification, at least to this extent, the controversy should abate. Anyway, it is hoped that the Board would come out with a fresh clarification to resolve all controversies surrounding these proposals.