FAQ on Service Tax on Construction of Residential & Commercial Premises

[CA. Pradip Shah]

CA. Pradip R. Shah

e-mail: pradip@pradiprshah.com

Introduction:

1.0 What changes have been effected by the Finance Bill, 2010 with respect to construction of commercial / industrial premises and residential complexes?

Following changes have been carried out by the Finance Bill, 2010.

1) Deletion of the word "service" from title of section 65(25b) i.e. definition of commercial or industrial construction

2) Deletion of the word "service" from clause 65(105)(zzq) i.e. commercial or industrial construction

3) Insertion of "Explanation" under sub-clause (zzq) in section 65(105) i.e. commercial or industrial construction

4) Insertion of "Explanation" under sub-clause (zzzh) in section 65(105) i.e. construction of a complex

5) Insertion of new clause zzzzu in section 65(105) i.e. levying of Service Tax (ST) on the amount collected towards preferential location or internal / external development.

1.1 What is the trigger point for invoking the Explanation? Is it construction of building which is intended for sale or payment received from the buyer for the same?

The wordings of Explanation inserted are not clear. It starts with the focus on activity of construction and, in between, gets shifted to payment by the buyer. Absence of the words viz. "receipt of any sum by the builder from the prospective buyer in respect of" creates confusion. Let us try to insert these words and see whether it can convey the proper meaning.

"Explanation.—For the purposes of this sub-clause, receipt of any sum by the builder from the prospective buyer in respect of the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer"

(emphasis supplied)

1.2 How will insertion of Explanation impact the buyer of flat / commercial premises?

It will be applicable to the cases wherein the construction activity has yet not commenced, going on or having been completed but completion certificate not received and the buyer makes payment to the builder. It will not affect the transactions wherein the payments have been made before 1-7-2010.

1.3 During the month of January, 2009, the CBEC had issued a circular bearing no. 108/02/2009 - ST wherein it was stated that under both the models i.e. builder and the developer, there will not be any ST liability. Whether there is any change in that respect?

It will be interesting to see what the said circular tried to convey. An attempt has been made to dissect para 3 of the said circular and what emerges is as follow:

Sr No.	Activity	Buyer Model	Developer Model
1	Nature of initial agreement entered into between the promoters / builders / developers and the ultimate owner	It is in the nature of 'Agreement to Sell'.	It is in the nature of contract for construction of a residential complex
2	Creation of title of the property	It does not create any title to the property under the Transfer of Property Act.	It does not create any title to the property under the Transfer of Property Act.
3	Creation of any charge or interest in the property	No	No
4	Ownership of the property	With the promoters / builders/developers	With the buyer
5	Transfer of ownership of property	On satisfaction of following three conditions viz. i) after completion of the construction ii)full payment of the agreed sum ; and iii) execution of sale deed	On the principle of accession
6	Nature of service viz. design, planning and construction by the promoters / builders/developers	Self-service as the builder / developer is doing it for himself	Services are for personal use of the buyer which is covered under the exclusion clause of the definition of "residential complex".
7	Applicability of ST	NO	NO

As can be seen from above, the view was clear that looking to the existing method of carrying out the transactions in this respect, and statutory provisions with respect to levying ST provision, the construction industry in the arena of residential and commercial premises cannot be brought within the tax-net. However, considering the fact that there being availability of huge untapped resources, it can not remain out of tax-net for a long time. By terming the payment by the buyer as deemed service, the Government has made clear that without going into the legality of both the models, perhaps, this is the only way in which ST can be levied.

1.4 Looking to above, is it not the case of marked change in views of the Government in this respect?

No. Look at the fact that the newly inserted clauses no where touches upon the controversial issues which have arisen in the recent past due to contradictory interpretations by various courts in this respect. Read the following para of letter no. D.O.F. No.334/1/2010-TRU dated 26th February 2010 explaining the justification for insertion of Explanation.

8.6 In order to achieve the legislative intent and bring in parity in tax treatment, an Explanation is being inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly. This would only expand the scope of the existing service, which otherwise remain unchanged.

Thus, in order to achieve the legislative intent of collecting more revenue, the changes have been carried out with a clear intention of expanding the scope of existing services. There do not appear to be any intention on the part of the Government to plug the loop-holes in the existing statutory provisions.

EXPLANATION

2.0 What is the significance of inserting "Explanation"?

As will be evident from various amendments carried out through the Finance Bill 2010, off late, in many cases, amendments made in the statutes in the recent past have misfired. The courts have interpreted these amendments in such a way that it does not achieve the desired objective of the Government. According to the Revenue, these rulings are not in tandem with the thinking of the policy-makers. Therefore, as a safeguard, the draftsmen have started making extensive use of Explanation under the main provision with the idea of clarifying the intention behind the statutory provisions. This is done with the idea that the substantial provision in the statute will be interpreted by the Court on the expected line.

2.1 What is the scope of "Explanation"?

Explanation is a part of the main section and hence, it cannot be read in isolation. The idea of inserting it is, if anything is not clear in the main section, it shall be made clear by Explanation. It should be remembered that for the purpose of taking any action or interpretation, the main section will be the foundation and the Explanation will be a subordinate part. It helps in harmonizing and clearing up any ambiguity in the main section. In view of this, Explanation cannot be termed as an amendment of the section. In view of this, the question of the same being prospective or retrospective does not arise. Unless the Explanation purports to be a definition or deeming clause, it does not enlarge or limit the provision to which it is added.

2.2 The Government could have amended the existing definition as provided in clause 65(25b) and 65(30a). However, as against that an "Explanation" has been inserted. What can be the reason for the same?

At a first glance, clause (25b) and (30a) appears to cover the construction activity under the ST. However, due to certain court rulings and, more particularly, different models used for the purpose of carrying out construction activities, it was not possible to collect the ST. Therefore, the Government made clear its intention in the form of an Explanation which expanded the scope of these services.

2.3 What implications it can have?

Any payment received by the builder on and from 1st July, 2010 onwards will be subject to ST.

2.4 Whether the proposed insertion of "Explanation" can take care of all the aspects of the related industry?

No. Take a closer look at it. It is silent about various aspects of the services involved. For example, in the case of taxation of services, existence of SP and SR is essential. However, the tax is proposed to be levied even if there is no Service Receiver (SR). Secondly, it is not possible to make out at what point of time rendering of service will begin and come to an end. Thirdly, there is no clarity about valuation of the services. Fourthly, what will happen if the prospective buyer cancels the booking and the builder refunds the amount received? This is for the reason that the builder must have paid the ST in the past on the amount already received. Whether the same will be refunded? If so, how? If not, will it not amount to paying tax on the same service twice as the builder will sell the said flat to some other person in future?

The Concept of "Deemed Service"

3.0 As per the Explanation inserted, the act of payment by the prospective buyer has been termed as "deemed service". Why?

The act of payment by the prospective buyer to the builder, as referred to in the Explanation, is such that, under the existing provisions, it does not get covered. In order to make sure that the tax proposal does not get embroiled in legal controversy, the same has been termed as "deemed service". It conveys a clear message that though this is not a service, still the Government wants it to be treated as service and levy tax thereon.

3.1 What is "deeming" provision?

At times, for various reasons, it is not possible to cover certain transactions within the tax-net. In such cases, the draftsman resort to "deeming" provision. Under this scheme of taxation, a particular transaction when applied the touchstone of the charging section will not appear to be taxable. However, it is brought within the tax-net through "deeming" provisions. Insertion of "Explanation" in clause 105(zzzh) and (zzq) extend the scope of the services relating to commercial and industrial construction and complexes by treating the amount received by the builder as services rendered.

It is a legislative device. Under the same, what in fact has not been done is treated as having been done under fiction. Deeming section creates a legal assumption that a thing is true which is either not true or may be false or untrue. In construing the deeming provision, statutory fiction is required to be carried to its logical conclusion but the fiction cannot be extended beyond the language of the section by which it is created or by importing another fiction.

Applicability of the new clauses

4.0 How will the new clause apply in the following cases?

Case	Date of Execution of Contract between the builder and prospective buyer		Payments made by the buyer to the builder		Issue of CC by the competent authority
	Before 1-7-2010	After 1-7-2010	Before 1-7-2010	After 1-7-2010	Before 1-7-2010	After 1-7-2010
1	Yes	--	Yes	--	Yes	--
2	Yes	--	Yes	--	--	Yes
3	Yes	--	Yes	Yes	Yes	--
4	Yes	--	Yes	Yes	--	Yes
5	Yes	--	--	Yes	Yes	--
6	--	Yes	--	Yes	Yes	--
7	--	Yes	Yes	--	--	Yes

Case 1: The question does not arise as there is no payment involved and Completion Certificate (CC) has already been issued before 1-7-2010.

Case 2: In this case, no payments are taking place after 30-6-2010 and, hence, the question of tax liability should not arise. However, since the CC has not been received, it is a case of hanging sword. Any amount received by the builder will make it subject to tax.

Case 3: This is a unique case. However, CC having been issued, rendering of service has already come to an end. Hence, the question of charging the tax on payments made after 1-7-2010 should not arise.

Case 4: Since CC has been issued after 1-7-2010, question of payment of tax on the payments made to the buyer on and after 1-7-2010 till the date of issue of CC will be subject to tax.

Case 5: Payments has been received after issue of CC, the question of ST does not arise.

Case 6: As in case no. 5

Case 7: As there is no payment after 1-7-2010, the question of levy of tax does not arise.

As can be seen, entering into the contract between the buyer and the builder is of no consequence. Only two things are important for determining tax liability viz. date of payment by the buyer and issue of CC.

Scope of Changes

5.0 The way in which changes are proposed, it appears that there are minor changes in the structure of levying ST in this respect. What is the extent of change as proposed?

In order to appreciate the extent of changes, it will be better to read the amended provisions. For example in the case of commercial construction S. 65(105) (zzq) with the relevant definition will read as follow:

(105) (zzq) "Taxable service" means any service provided or to be provided to any person, by any other person, in relation to commercial or industrial construction

"Explanation.—For the purposes of this sub-clause, the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorised by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer;";

65(25b)

 "commercial or industrial construction" means—

(a) construction of a new building or a civil structure or a part thereof; or

(b) construction of pipeline or conduit; or

(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit, which is—

(i) used, or to be used, primarily for; or

(ii) occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in,

commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;

As can be seen from above, there is no change in the definition of Commercial or Industrial Construction (CIC). By inserting Explanation, certain transactions which, according to the Government, were remaining out of tax-net, have been brought within. It should be noted that the transactions which were taxable under this head will continue to be so.

5.1 Whether the changes with respect to construction of complex are also on the same line?

Yes. Let us see how the relevant provisions in this respect henceforth will look like.