Service Tax - Officers who authored Education guide have only broad understanding sans legal backing - CBEC reiterates Circular No 151 dated 10.02.2012
I asked a Service Tax expert for his quick views on the Board's Instruction. This is what he gave me:
"Service Tax on residential complex construction was introduced in the year 2005. We are now in the year 2016. For 11 years, nobody is clear on the elementary issue of how to arrive at the value of a flat and when a builder is liable to pay tax. Host of Circulars were issued during this 11-year period and with the officers changing at the helm, the interpretation changes and a new theory emerges. The new officer cleverly says the earlier Circular was issued based on the "BROAD" understanding of that officer and is not binding (as if the new Circular is issued after consultation with the Attorney General and is flawless!). If the officers who collect the taxes themselves are not clear and have only broad understanding, how about the poor taxpayer?
When a landowner gives development rights to a builder, and the builder hands over some of the flats to the landowner in exchange of the land given for development, how to pay Service Tax? Circular No 151 dated 10.02.2012 clarified that there is a "Service" rendered by the builder to the landowner in respect of the flats handed over to him and is liable to pay Service Tax. As far as value is considered, it was clarified that the value of similar flats sold by the builder to other buyers has to be adopted. However, as per para 6.2.1 of the Education Guide, the value of flats (given to the landowner) will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.
When Negative list was introduced, the Chairman of CBEC, in the introductory message claimed -
We, in the Central Board of Excise and Customs (CBEC) are highly conscious of our responsibility to explain the changes as lucidly and as comprehensively as possible. This educational Guide material has been prepared by a team of officers of our Tax Research Unit and goes far beyond the standard Q&A guides, budget circulars or similar tools that are commonly used for such purposes.
Now, the very same Board in a clarification issued yesterday says the clarification issued by the Team Negative List is not correct. They reaffirmed the Circular No 151 dated 10.02.2012. Presumably, the comparable flat value brings in more revenue and with the present position, the judiciary may take a view that the later clarification (Education Guide) would prevail over the earlier one dated 10.02.2012.
The present Circular dated 20.01.2016 tries to remove the conflict between para 6.2.1 of the Education Guide and Circular No 151 dated 10.02.2012. Apparently, they wanted to go with "more revenue" clarification of Circular dated 10.02.2012, i.e., comparable flat model.
Coming to the Circular dated 10.02.2012, it says, though the consideration received by the builder from land owner is value of land/development rights in land MAY not be ascertainable ordinarily. But, the question is WHY NOT? A builder may claim I have the land value recognized by a State Government for levy of stamp duty. Why cannot it be adopted? One has to go to Valuation Rules only if the value is not ascertainable. They cannot presume and jump to 67(1)(iii). The case falls under Section 67(1)(ii) and para 6.2.1 of the Education Guide drafted by TEAM NEGATIVE LIST cannot be termed as negative, for, they knew it would fall under 67(1)(ii).
Let us talk about another issue. If we adopt comparable value, there is a problem. Let us say, A Developer sells a flat (Developer share) to a buyer for 50 lakhs. This includes land cost (of undivided share of land). When he hands over an identical flat to land owner, he gets only a constructed flat (he continues to be the owner of undivided land share, developer only constructs a superstructure). How can the value of flat handed over to the land owner be also treated as Rs 50 lakhs for payment of Service Tax?
Leaving all this, there is another confusion in the field. Notification No 26/2012 ST dated 20.06.2012 provided abatement of 25% and 30% to certain specified categories of residential complexes. However, field formations are denying the benefit of this notification of the ground that a works contract has to be assessed only at 40% of the gross amount charged and demanding differential tax.
For ease of doing business, Board should immediately clarify that."