LEGAL CHAT
The reach of service tax
N.C.S. RAGHAVAN
ARAVIND RAGHAVAN
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Apartment builders and buyers need to know its ambit
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In the previous issue, while discussing post-launch costs involved in the construction of a residential apartment complex, we had indicated the levy of service tax on a complex which has more than 12 residential apartments. However, doubts had arisen regarding the applicability of service tax in a case where the owner/developer/ builder/promoter enters into an agreement with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction (or even prior to that) and who makes the construction- linked payment.
In this regard, the Union Ministry of Finance, Department of Revenue, has issued the following clarifications:
A ‘residential complex’ means any complex of a building or buildings, having more than 12 units.
A complex constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex intended for personal use as residence by such person has been excluded from the ambit of service tax.
The circular had further stated that generally, the initial agreement between the promoters/builders/developers and the ultimate owner is in the nature of ‘agreement to sell.’
Self-service
As per the provisions of the Transfer of Property Act, it does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax.
Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter/builder/ developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex.’ However, in both these situations, if the services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.
Clear stand
In view of the above circular, it is clear that service tax cannot be levied on a prospective purchaser of an apartment under an agreement to sell and can only be levied after the completion of construction and receipt of full payment from the prospective purchaser and that too, after the execution of the sale deed in favour of the purchaser.
(N.C.S. Raghavan is a chartered accountant and Arvind Raghavan, an advocate)
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