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Service Tax on builders

Posted by  in March 29th   

Applicability of Service Tax on Builders

In budget 2005, Finance Minister P. Chidabaram bought the Construction Services under ambit of service tax.

This meant that builder taking the services from contractors for construction or other allied services will have to pay Service Tax to such contractors. However, what will be the treatment for Service Tax in a situation where Builder undertakes such development on its own without using any outsider contractor.

As the prospective buyers will be buying the property and paying for the same, Service Tax cannot be charged. Further, as there is no Service Consumer in this case, who will be paying such tax? What will be the value of such service rendered?

But, the Service Tax Dept and DGST (Directorate General of Service Tax) have initiated raids on several Builders in UP and particularly in Agra. They are of the view that as Service has been rendered, service tax would be levied on prospective customers.

I solicit Member’s view on the issue.

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7 Comments

Pooja Mathur Said,
March 30th, 2006 @10:55 am  

If we refer to advertisements published today in Several Newspapers by Commissioner of Service Tax, they have mentioned this

” Services rendered by Builders/Developers to purchaser of flats is also liable to Service Tax. If the construction is under taken by by the builder for prospective customer under an agreement for sale and after construction the rights in property have been transfrred to the said prospective customer. This activity is a taxable service under construction of complex service and is liable to Service Tax. This ais apart from the liability of the contractors providing the services of construction of complex.”

I am not aware of the statutory validity of the above, but i dont think that such service should be taxable. Service provided by Contractor to Builder can be taxable, but if builder undertakes the construction on its own, the same should not be taxable for prospective customers.

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rahul Said,
March 30th, 2006 @11:06 am  

Dear Ladies,

Moot point here is that service has been rendered and has been consumed for some value. Thus tax should be levied.

To quote Section 66 of Finance Act, 1994 (which is the charging section of Service Tax):
“There shall be levied a tax (hereinafter referred to as the service tax) at the rate of ten per cent of the value of the taxable services with in sub-clauses (a) to (z) and (za) to (zz) and clause (zza) to (zzzh)of clause (105) of section 65 and collected in such manner as may be prescribed”

Thus Tax has to be levied once the taxable services are provided on the value charged for such services. As the construction services are taxable, the service tax has to be levied.

It doesn’t matter who is rendering the services or who is consuming the srvices. Once the services are rendred and some value is charged for the same, tax liability is attracted same time.

I also agree that present case is slightly tricky, but what has to be seen is that a taxable service has been provided and has been consumed. Thus Service Tax should be levied.

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Madhur Said,
March 30th, 2006 @11:49 am  

Dear Fellow members,

The fact is that Government has found out Alibaba’s treasure in the form of service tax and our own Finance Ministers office was burning midnight oils during the time of the budget to try and bring whatever service possible under the ambit of Service Tax.

In previous budgets, they brought Construction under the ambit of Service Tax. Now, if you get something constructed there are number of taxes that apply to it for eg firstly you pay Excise duty (or Customs duty in case the material is imported) on manufacturing of material, then VAT on sale of material, then Works Contract Tax on the contract and then Service Tax too. The taxes are soo voluminous that it doubles the cost of construction. What is the government upto ??

I work for a Real Estate Development company as we are pained by such actions of the Government. Now they say that Service Tax should be payable on the Final product too i.e the flats being sold to the customers. Its all unjustified. If the service tax is being charged from the customers who buy the flats from us, we should get the credit on it from the service tax paid on the construction. This would further lead to huge amount of documentation which would not prove to be cost-effective.

Further, we are not providing any service to the customers. We are just constructing the flats and selling them so why should this be taxable???

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Rakhi Khanna Said,
March 30th, 2006 @6:02 pm  

i agree to your view on this but with a distinction. Even in case where the builder is developing the project with the third party contractor he is still not covered. in such a case the contractor will be covered under the service head ‘construction service’ and not the builder.
however i would like to have your views in case of a builders agreement. if service tax is attracted then what would be the value of taxable service.

regards

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Pravesh Agarwal Said,
March 30th, 2006 @6:04 pm  

I am Pravesh Agarwal,agra based Chartered Accountant.

Last week here in Agra There are raid on builders.i am of the view that the builder is developing the project with the help of third party contractor in that case the service tax will be applicable on the contractor not on the builder.the reason behind is that,he is making only fineshed goods not providing services.it is only contractor who is providing services to builder.therefore contractor will be liable not the builder.

regards

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Madhur Said,
March 30th, 2006 @6:06 pm  

Yes, you are right the service tax shall be leviable on the contractor and not on the builder.

However, the department is contending that the builder is rendering services to the prospective customers who have given the advance to the builders.

In my view this contention is totally baseless. In order to justify the action, the department is placing its reliance on Raheja Builders case which was delivered in the context of Karnataka Sales Tax law. The definition of sale has wide import under the said law which is not the case in respect of service tax law.

If any member can provide with me with additional information and the stand taken by them, especially in Agra where the raids were conducted, it would be of great help. In my view this action is totally bad in law and contrary to the provisions of the Finance Act, 1994 and therefore without jurisdiction. It is nothing but a gamut to increase tax collection and undue hardship to the assessee. Further, it may be pointed out that the tax once deposited may be refused to be refunded to the assessee on the application of doctrine of unjust enrichment.

Therefore, immediate action in the matter is required. Most of these projects are short term, i.e. not longer than 1-2 years and as we all law the procedure in appeal and decision under the excise law shall definately take much longer.

In view of the above, collective action, may be in the form of writ before the Hon’ble High Court to stay the proceeding which are bad in law and without jurisdiction may be initiated.

Looking forward to members comment in the matter.

Till then happy blogging!!!

CA Madhur Khandelia

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V S Datey Said,
April 2nd, 2006 @11:17 am  

Really, the judgment in case of K Raheja is quite clear regrding service tax on construction services. If a builder/contractor enters into contract with buyer before construction of buliding and buyer is required to pay towards the price in stages at various stages of completion, it can be held as ‘works contract’. If a builder/developer sales a ready flat, it is not ‘works contract’.
I believe the same principle should apply in service tax also.
Of course, there are constitutional issues invoved. In recent judgment in case of Vharat Sanchar Nigam Ltd. SC has clearly held that service tax cannot be imposed on value of goods.
Another constitutionsl issue is whether an indivisible contract can be treated as ‘service contract’

V S Datey

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