It may be recalled that earlier the Director of Service Tax vide its letter F.No.V/DGST/22/Audit/Misc./1/2004/Mumbai dated 16 02 2006 had directed departmental officers to initiate steps to recover service tax from the builders and developers engaged in construction of complexes in respect of flats sold under construction.

The said direction reflected the department’s changed interpretation in view of the Hon’ble Supreme Court’s judgement in the case of K. Raheja Development Corporation v. State of Karnataka at [2005] 2 STT 178 (SC).

However, recently vide its letter no. F. No. 332/35/2006 – TRU dated 01 08 2006 the Government of India, Ministry of Finance,
Department of Revenue, Tax Research Unit has issued a clarification in respect of applicability of service tax on real estate developers and builders.

This clarification should provide a sigh of relief to the builders and developers and in turn to flat purchasers at large as it clarifies that service tax is not payable in respect of sale of under construction residential flats by the builders and developers and the same is payable by contractors on construction services in respect of specified residential complexes comprising more than 12 units. This confirms the position of law which was accepted by the construction industry and the service tax department before the controversial stand earlier taken by the department by its aforesaid direction dated 16 02 2006.

Pertinent to note here that flats in residential complexes comprising 12 or less units were never liable to service tax. Similarly sale of fully constructed flats were also not considered taxable. The controversy was only in relation to sale of flats under construction in residential complexes comprising more than 12 units and that now gets resolved. Exemption when aggregate value of taxable services rendered in financial year does not exceed Rs. 4 lakh provided in any financial year also applies to contractors. Benefit of levy of service tax only on 33% of the gross amount of construction contract, subject to conditions, continues to be applicable to composite civil construction contractors.

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