Value Added Services provided by Builders

[Dr. Sanjiv Agarwal]

Finance Act, 2010 has inserted a new clause (zzzzu) in section 65(105) to tax certain value added services provided by builders in relation to commercial complex or a residential complex w.e.f. 1.7.2010.

These relate to specified services of preferential location or facilities provided by builders.

The taxable service means any service provided or to be provided to a buyer, by a builder of a residential complex, or a commercial complex, or any other person authorised by such builder, for providing preferential location or development of such complex but does not include services covered under sub-clauses (zzg), (zzq), (zzzh) and in relation to parking place.

Explanation.— For the purposes of this sub-clause, ‘‘preferential location’’ means any location having extra advantage which attracts extra payment over and above the basic sale price;’.

The taxable service in relation to clause (zzzzu) would cover -

(a) providing preferential location (such as see facing, park facing, a ground floor, corner etc.)

(b) special development of complex such as superior finishing, lifts, modular kitchen, internal roads, health club, transformer etc.

(c) fire fighting installation charges

(d) power back up charges

(e) roads and other infrastructure fees etc.

The extra payment charged from the buyer for providing such extra privileges or facilities shall attract service tax. However, it would not cover services already covered under construction of complex service, commercial or industrial service or management, maintenance or repair services. The charges for parking lot or area would also be excluded from the scope of service tax.

The test for taxability of such service is that the builder provides any location having extra advantage which attract extra payment over and above the basis sale price.

The words ‘preferential location’ have been defined in the Explanation to section 65(105) (zzzzv). It means any location having extra advantage which attracts extra payment over and above the base sale price. Some of the examples of preferential location could be as under-

(a) Direction : sea-facing or park-facing flat/commercial space, corner flat;

(b) Floor: first floor, top floor;

(c) Vaastu : having the bed room in particular direction;

(d) Number : lucky number of flat/commercial space, say, a buyer wants the allotment of a flat whose number totals 1,5, 7 or 9; (e) Wooden/imported marble flooring;

(f) Modular kitchen/kitchen with all modern appliances

(g) Jaguar/modern bathroom;

(h) Helipad on the top of the building;

(i) Club house, gymnasium, swimming pool, badmintion or tennis court;

(j) Artificial lakes, private entrance and private swimming pool/spa

(k) Hospitals, schools, colleges, etc., in the complex;

(l) Electronic video alarm system and other security features;

(m) Landscaping,

(n) water harvesting, etc.

In a case where provision of locational advantage is made by the builder by charging extra amount from the buyer, the same shall be taxable service.

It may be noted that this category of services is different from the construction services. In case of ‘Commercial or industrial construction’ and ‘Construction of complex service’, Notification No. 1/2006-ST, dated March 1, 2006 provides abatement for the value of taxable service and the tax is payable only on the balance amount. In this category, the builder will have to pay service tax at the prevailing rate on the entire value recovered from the buyer for providing preferential location or development and no abetment would be available.

CBEC has clarified as follows vide Circular No 334/1/2010-TRU dated 26.2.2010 —

“8. Special services provided by builder etc. to the prospective buyers such as providing preferential location or external or internal development of complexes on extra charges.

8.1 Construction of commercial or industrial structures was brought under service tax net in 2004 while construction of residential complexes became a taxable service in 2005. The scope of the existing services includes construction, completion and finishing, repairs, alterations, renovation or restoration of complexes. It has been reported that in addition to these activities, the builders of residential or commercial complexes provide other facilities and charge separately for them and these charges do not form part of the taxable value for charging tax on construction. These facilities include,-

(a) prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastu- having the bed room in a particular direction; Number- lucky numbers);

(b) internal or external development charges which are collected for developing/maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc;

(c) fire-fighting installation charges; and

(d) power back up charges etc.

8.2 Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, such charges are being brought under the new service. Charges for providing parking space have been specifically excluded from the scope of this service. Development charges, to the extent they are paid to State Government or local bodies, will be would be excluded from the taxable value levy. Further, any service provided by Resident Welfare Associations or Cooperative Group Housing Societies consisting of residents/owners as their members would not be taxable under this service.”

CBEC had clarified the 2010 Budget amendments by way of TRU Letter No 334/03/2010-TRU dated 1.7.2010 as follows –

“In the Finance Act, changes have been made in the construction services, both commercial construction and construction of residential complex, using ‘completion certificate’ issued by ‘competent authority’. Before the issuance of completion certificate if agreement is entered into or any payment is made for sale of complex or apartment in residential complex, service tax will be leviable on such transaction since the builder provides the construction service. Completion certificate issued by a Government authority was prescribed as demarcation by introducing an Explanation in the Finance Act. During the post budget discussions, it was pointed that practice regarding issuance of completion certificates varies from state to state. Considering the practical difficulties, the scope of the phrase ‘authority competent’ to issue completion certificate has been widened by issuing an order for removal of difficulty (Refer M.F.(D.R) Order No.1/2010 dated 22nd June 2010). Completion certificate issued by an architect or chartered engineer or licensed surveyor can be now taken to determine the service tax liability.

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