SERVICE TAX ON REAL ESTATE AGENT

[Dr. Sanjiv Agarwal]

Service Tax had been imposed on real estate agents and real estate consultants with effect from 16th October, 1998 vide Notification No. 53/98-ST, dated 7th October, 1998. The gross amount charged or total consideration received by such real estate agency or consultant from the client for such services rendered shall be chargeable to service tax.

Meaning of Real Estate Agent

Section 65(88) defines ‘real estate agent’ as under —

“real estate agent” means a person who is engaged in rendering any service in relation to sale, purchase, leasing or renting, of real estate and includes a real estate consultant.

According to Section 65(88), real estate agent has been defined to mean a person who is engaged in rendering any service in relation to sale, purchase, leasing or renting of real estate. Thus, an agent should be a person, who deals in real estate and provide services relating to real estate and include—

(i) Sale,

(ii) Purchase,

(iii) Leasing, or

(iv) Renting or hiring of such estate.

It also includes real estate consultant meaning thereby that a consultant is also an agent and a service provider providing consultancy or advice in the above mentioned areas, which constitutes a taxable service.

Real estate agent should satisfy the following basic tests —

(i) He should be a person (i.e. natural or juristic).

(ii) He should be engaged in or render services to his clients.

(iii) Such services may relate to sale, purchase, lease or rentals.

(iv) Rendering of service should be of any real estate.

(v) Real estate consultant is also included.

Meaning of Real Estate Consultant

Section 65(89) defines ‘real estate consultant’ as under —

“real estate consultant” means a person who renders in any manner, either directly or indirectly, advice, consultancy or technical assistance, in relation to evaluation, conception, design, development, construction, implementation, supervision, maintenance, marketing, acquisition or management, of real estate.

As per Section 65(89), real estate consultant has been defined to mean a person who renders in any manner, directly or indirectly, advice, consultancy or technical assistance in relation to evaluation, conception, design, development, construction, implementation, supervision, maintenance, marketing, acquisition or management of real estate.

Thus, a real estate consultant—

(i) should be a person,

(ii) should render service in any manner,

(iii) rendering of service may be direct or indirect,

(iv) such service should include any—

(a) advice,

(b) consultancy, or

(c) technical assistance,

(v) service shall relate to following specific areas —

(a) evaluation

(b) conception

(c) designing

(d) development

(e) construction

(f) implementation

(g) supervision

(h) maintenance

(i) marketing

(j) acquisition

(k) disposal

(l) erection

(m) transfer

(n) leasing or hiring

(o) management, etc.

(vi) service shall be in connection with real estate.

The coverage of the definition is wide enough to cover all possible types of services rendered by real estate consultants in relation to real estate. It shall cover all persons giving advice, consultancy or technical assistance with regard to real estates, but shall not cover the persons actually carrying out the advises.

Persons engaged in advising on the mode of finance for the acquisition of real estate will be covered under ‘Real Estate Consultant’.

Firms engaged in evaluation of real estate projects will be covered under the definition of real estate consultants. Hence, they will be liable for payment of service tax. However, if the credit rating agency undertakes such work, they will be liable for payment of service tax under the category of Credit Rating Agency and not under this category.

Taxable Service

Section 65(105)(v) defines ‘taxable service’ as under —

“taxable service” means any service provided or to be provided to any person, by a real estate agent in relation to real estate.

In case of real estate agency/consultants, taxable service would mean and include services rendered by real estate agents and/or consultants in relation to real estate rendered in any manner, whether directly or indirectly such as providing advice, technical assistance or consultancy or any other service in relation to such real estate. It will cover evaluation, conception, design making, development construction, implementation, supervision, maintenance, marketing acquisition disposal or management.

It may be noted that some international reality concerns, such as, Richard Ellis, Colliers and Jardine etc. have opened shop in India and they are providing comprehensive reality services. Apart from the traditional services in respect of sale/purchase/leasing of real estate, such concern are inter alia, providing services to real estate developers and promoters in respect of evaluation of a proposed real estate scheme/project by conducting techno-economic studies, providing feasibility reports and by even helping in marketing real estate projects. Such services shall also attract service tax. It would include comprehensive really services provided by international realty concerns, who are providing such services in India. However, it is clarified that activity of actual construction of any building carried out by builders/developers does not attract service tax levy as it is not a service within the meaning of the term real estate agent or real estate consultant. (Source : Letter No. F. No. B. 11/1/98-TRU, dated 7-10-1998)

The Finance Act, 2004 had imposed service tax on construction services; i.e., services provided in relation to commercial or industrial construction and civil structures. Finance Act 2005 had levied service tax on construction of complex services. Real estate agency services will not include such services or activities.

Real estate and property management services shall cover comprehensive or integrated solutions in real estate segment which includes multiple areas of real estate related services irrespective of the location or size of the property or the size of the transactions.

Such services covers —

— Advisory and consultancy — advice on new investments (type, location, value etc.), on disposition or best use option.

— Transaction management — execution of purchase, sale, lease of property.

— Project management — management of construction and interior fitout (however, construction and interior decoration are covered under separate categories).

— Facility management — Operation & maintenance or facilities in the buildings/offices/business parks.

Following points are relevant for a taxable service in relation to real estate —

(a) services should be provided by real estate agent/consultant.

(b) services should be provided to a client (upto 15-5-2008) and to any person (w.e.f. 16-5-2008).

(c) services should be in relation to real estate.

(d) consultancy services in relation to real estate shall also be covered.

Replacement of ‘client with any person’ (w.e.f. 16.5.2008)

Finance Act, 2008 has substituted the words ‘to any person’ for the word ‘to a client’ (w.e.f. 16.5.2008) as the service tax is levied on service and status of recipient of taxable service should not determine the tax treatment of a given service.

Some Issues Relating to Taxability

Person engaged in leasing or renting of agricultural land is providing services in relation to leasing or renting of real estate. There is no exemption given for services provided in relation to agricultural land. Hence, he is liable for service tax.

Persons providing services for valuation of property are doing the valuation of property as per the prescribed methods used by them. They are providing the information about value of the property, which is factual information. Hence, they are not liable for service tax.

The civil contractors are engaged in the execution of job. They do not provide any services in relation to advice, consultancy or technical assistance. Hence, they are not liable for service tax. However, if the civil contractors also provide advice or consultancy then they will be liable for service tax to the extent of remuneration received for such advice or consultancy.

Persons providing any advice or consultancy for the marketing of real estate property are services in connection with selling of property, hence covered under the category of ‘Real Estate Agents’, and will be liable for payment of service tax.

In Indus Tubes Ltd. v. CCE, Ghaziabad 2007 -TMI - 1453 - CESTAT, NEW DELHI, it was held that real estate agent services includes real estate consultant. Commission received for order procurement for construction of houses and payment were covered in the scope of real estate services.

In CST v. Poonam Grover Associates 2008 -TMI - 30573 - CESTAT, AHMEDABAD, where assessee was engaged in job making furniture as per customer’s specifications, it was held that demand was not sustainable under real estate agent’s services and revenue’s stand at second stage appeal for interior decorator’s service was held to be non sustainable.

In Prem Steels Pvt Ltd v. CCE, Meerut 2009 -TMI - 32717 - CESTAT, NEW DELHI, where assessee introduced prospective buyer of plot and arranged the sale thereof and received commission for the same, it was held that arranging sale of plot would be covered in real estate agent’s services.

In Orissa Industrial Infrastructure Development Corporation v. CCE, C & ST (BBSR-I 2010 -TMI - 78157 - CESTAT, KOLKATA where assessee corporation was acquiring land for its own use, since ownership of land was with assessee, it was held that assessee had not provided any service directly or indirectly of consultancy or technical assistance for acquisition of real estate.

Value of Taxable Service

Value of taxable service shall include the gross amount by way of fees, brokerage, commission, remuneration, etc and would not mean the value of capitalised billings. Expenses relating to a particular job or client may relate to advertisements, conveyance, travelling costs, hotel expenses, communication expenses etc and shall not be subject to service tax if billed separately subject to verification by the tax authority. It will be necessary for the agents to maintain proper documentary evidences for expenses claimed and billed to clients.

In case, the real estate agent receives the brokerage from another real estate agent, he becomes sub-real estate agent of other agent. However, the sub-agent should ensure that the main agent has paid the service tax on the commission received by him. W.e.f. 16-8-2002, input credit provisions shall apply.

In Prem Steels Pvt Ltd v. CCE, Meerut 2009 -TMI - 32717 - CESTAT, NEW DELHI, it was held that commission received by assessee for introducing prospective buyers of plot and arranging sale thereof would be covered for service tax.

Person Liable

Every real estate agent or consultant who raises a bill for services rendered to a client or customer shall be liable to pay service tax and shall be treated as an assessee for service tax purposes.

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