Applicability of Service Tax to Builders
– By K P BANEY
Service Tax is made applicable to construction sector, including residential and commercial construction being taken by the Promoters/Builders. Builders do not agree, and have filed number of Writ Petitions (WP). Promoters and Builders Association of Pune (PBAP) was the first to file WP, which is coming for admission on 26th April 2006 at Mumbai HC.
Let one understand as to what is real stand of Builders. Builders agree that Service Tax is applicable to them. And accordingly most of the Builders have started paying service tax (ST) on whatever services they take. They are paying / ready to pay ST on Architectural services, services from Structural Engineers, on Contractor (who actually carries out construction, on Labour contractor’s bills, if they are doing construction work themselves. They are also paying ST on transport bills, telephone bills, and other services that they normally take.
And Since Builders are not registered, they are not entitled to get set-back on ST that they themselves have paid.
Builders say that ST is not applicable to sale of Flats. Selling Flats, or any constructed property on ownership basis could not be considered as a service. It is pure SALE.
Builders are not service providers. They purchase or tie up Land from/with the Owner of land. The document is registered. The Owner, as per rules, pays taxes at this stage. Direct sale of Property, and Development agreements, both are considered as transfer of property under I/Tax rules.
Builders then develop the land by constructing Fencing / compound, level the land, plan / provide infrastructure like approach road, water supply, drainage, communication etc etc. They plan construction and get the plans approved from the local authority with help of their Architect. Get the structure designed. And commence construction work. They print Brochures and advertise for their projects. Till this stage, they even do not know as to who will be their buyer.
And Builders go on constructing irrespective of whether they get buyer or not. For Service Tax, there has to be service provider, and service seeker. In this case where is the service-seeker? And, even at latter stage, the buyer has no say in construction. He can not add column or remove column. He can not for that matter change specifications or amenities of the building. He can at the most add accessory or two. That also at extra cost, like one may add seat covers while purchasing a car. If buyer is considered as supreme, and Builder as a contractor, then Buyer will definitely have the final say, But the flat-buyer, does not have that final say.
After completion of the project, builder conveys (sales) the flat with land to the individual buyer under “Deed of Apartments”, or conveys total property in the name of the “Society”. Stamp Duty is paid on total amount of sale which includes cost of land and cost of construction. Stamp Duty is paid on instruments under “Transfer of Property” Act.
Department is quoting ruling of SC on the case of “Raheja Builders” at Karnataka. In Raheja’s case, they were selling land by one agreement, and constructing as a contractor under another agreement. It was probably planning due to high stamp duty in Karnataka. They, working as a contractor, naturally are liable for works contract / service tax on the contract value.
In Maharashtra, Builders do not do jugglery of (two or) multiple agreements. Sale of flat therefore is a sale, and not a service. Otherwise also, when two departments I/Tax and registration department consider it as transfer of property, then how can it be called service tax?
PBAP is not fighting for its own taxes, but is fighting for the Flat- purchaser’s right. If Builders register themselves with the Excise Department, and they collect ST from the flat-purchasers, then they will be able to offset (get set-back) ST paid by them. They will be gainers and not losers. But poor flat-purchaser will suffer, and be burdened more by about 4.5% of the cost of flat.
Keeping the Sentiments apart, Builders sale their commodity, and definitely is not a service provider, by any simple common sense logic.