Service Tax on Construction Service - Is cost of land includible in taxable value?

By Vijay Kumar

BUT the most controversial of all these is the Notification No. 29/2010-ST related to abatement scheme provided to ‘construction services'. In his speech in the Parliament on the discussions related to Finance Bill, 2010, the Finance Minister said, “………….The construction sector has requested for a review of the changes in the service tax law proposed in this year's Budget. Several suggestions have been made by the trade associations. Considering all the inputs, I propose to provide tax relief to this sector by enhancing their rate of abatement from 67% to 75% of the gross value where such value includes the value of the land constructed upon. Certain procedural bottlenecks relating to the completion certificate prescribed in the law would also be simplified.”

In Notification No. 29/2010-ST an abatement of 75% is allowed on the taxable value subject to the condition of that the cost of land is included therein. The condition in the said notification reads as follows:

“This exemption shall not apply in cases where the cost of land has been separately recovered from the buyer by the builder or his representative.”

The issue here is whether cost of land can be included at all in the taxable value. Section 67(1)(i) of the Finance Act, 1994 which deals with valuation of taxable services provides that ‘service tax is chargeable on any taxable service with reference to its value, then such value shall — in a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;'

So the intention of the legislature is to tax only the ‘service' and the ‘gross amount charged by the service provider would be for such service provided or to be provided by him.' It was in this backdrop, Board issued a clarification vide paragraph 13.6 of Circular F.No.B1/ 6 /2005-TRU, dated: July 27, 2005 wherein it was clarified by the Board that 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.

While this clarification (i.e. TRU letter dated July 27, 2005) was perfectly legal and constitutional (because only States have the power to levy any tax on ‘lands and buildings'), Board by virtue of this latest notification, armed with the amendments made by Finance Act, 2010, seems to have reversed this Constitutional scheme of things by affirming that the gross amount charged by the service provider should also include ‘cost of land and stamp duty paid thereon for registration of land' and thereby allowing an abatement of 75% of the gross amount charged provided the builder or his representative do not recover ‘cost of land' separately from the buyer.

Good amount of litigation lies ahead!

Now let us take a look at what is in store in this notification:

Separately recovered?

This exemption shall not apply in cases where the cost of land has been separately recovered from the buyer by the builder or his representative. Will he be denied the exemption even if he agrees to pay the tax on the cost of the land?

25% or 33%? Now builders will have to run to Consultants and accountants to decide whether they should pay tax on 25% value by including the cost of land or 33% by not including it? Here is a quick worksheet prepared by TEAM TIOL.

As per the above worksheet, at land cost 25%, there is a small difference. Above 25%, one should go for 33% and below 25%, they should go for land cost inclusion.

But maybe builders would like to go to the nearest High Court instead of going to accountants to settle the issue.

With GST just a few months away, is it fair and worth to create so much confusion and litigation in Service Tax?