Ser­vice tax on free area given to mem­bers of so­ci­ety in re­de­vel­op­ment project

Accommodation Times - - Front Page - By CA Pathik Shah To read full ar­ti­cle visit - http:// ac­com­mo­da­tion­times.com

Back­ground of re­de­vel­op­ment: In Mumbai, many build­ing are be­com­ing build­ing older than 35 to 40 years and such build­ing re­quire re­de­vel­op­ment. Also due to short­age of land, ris­ing pop­u­la­tion in­no­va­tive con­cept of re­de­vel­op­ment of old prop­er­ties has brought. In such re­de­vel­op­ment, so­ci­ety ap­points de­vel­oper and de­vel­oper con­struct new flats with mod­ern ameni­ties and fa­cil­i­ties. Mem­bers of so­ci­ety gets newly con­structed flat free of cost and also get rent al­lowances, cor­pus and other al­lowances. Hence, in such trans­ac­tion whether ser­vice tax would be ap­pli­ca­ble or not needs to be anaylzed. Crux of re­de­vel­op­ment trans­ac­tion Ser­vice tax im­pli­ca­tion for de­vel­oper on con­struc­tion of new flats to ex­ist­ing mem­bers up to 30th June, 2012 Charge­abil­ity of ser­vice tax As per sec­tion 65 (105) (zzzh) of Fi­nance Act, 1994 (here­inafter re­ferred “Act”), any ser­vice pro­vided or to be pro­vided to any per­son, by any other per­son, in relation to con­struc­tion of com­plex would be li­able for ser­vice tax. Def­i­ni­tion of con­struc­tion com­plex In con­nec­tion of above, mean­ing of con­struc­tion of com­plex needs to an­a­lyze. As per sec­tion 65(30a) of Act, con­struc­tion of com­plex means con­struc­tion of a new res­i­den­tial com­plex or part thereof; or re­pair, al­ter­ation, ren­o­va­tion or restora­tion of, or sim­i­lar ser­vices in relation to, res­i­den­tial com­plex. Def­i­ni­tion of res­i­den­tial com­plex In con­nec­tion of above, mean­ing of res­i­den­tial com­plex needs to be an­a­lyzed. As per sec­tion 65(91a) of Act, res­i­den­tial com­plex means any com­plex com­pris­ing of— i.a build­ing or build­ings, hav­ing more than twelve res­i­den­tial units; ii. a common area; and iii.any one or more of fa­cil­i­ties or ser­vices such as park, lift, park­ing space, com­mu­nity hall, common wa­ter sup­ply or ef­flu­ent treat­ment sys­tem, lo­cated within a premises and the lay­out of such premises is ap­proved by an au­thor­ity un­der any law for the time be­ing in force, but does not in­clude a com­plex which is con­structed by a per­son di­rectly en­gag­ing any other per­son for de­sign­ing or plan­ning of the lay­out, and the con­struc­tion of such com­plex is in­tended for per­sonal use as res­i­dence by such per­son. In above, so­ci­ety and mem­bers would be con­struct­ing flat for per­sonal use. Hence, con­struc­tion of any res­i­den­tial com­plex with in­tent to per­sonal use would not be li­able for ser­vice tax. Clar­i­fi­ca­tion from CBEC Fur­ther, The Cen­tral Board of Ex­cise and Cus­toms (CBEC), vide their cir­cu­lar 151/2/2012- ST dated 10th Fe­bru­ary, 2012, clar­i­fied as follow: “Re – con­struc­tion un­der­taken by a build­ing so­ci­ety by di­rectly en­gag­ing a builder/ de­vel­oper will not be charge­able to ser­vice tax as it is meant for the per­sonal use of the so­ci­ety/its mem­bers.” Con­clu­sion:

Hence, re-con­struc­tion un­der­taken by a so­ci­ety by di­rectly en­gag­ing a builder/ de­vel­oper up to 30th June, 2012 will not be charge­able to Ser­vice tax as it is meant for the per­sonal use of the so­ci­ety/its mem­bers. Ac­cord­ingly, de­vel­oper would not be li­able for ser­vice tax on ser­vices pro­vided for con­struc­tion of new flats to ex­ist­ing mem­bers. Ser­vice tax im­pli­ca­tion for de­vel­oper on con­struc­tion of new flats to ex­ist­ing mem­bers after 1st July, 2014 New ser­vice tax leg­is­la­tion from 1st July, 2014

“Re – con­struc­tion un­der­taken by a build­ing so­ci­ety by di­rectly en­gag­ing a builder/de­vel­oper will not be charge­able to ser­vice tax as it is meant for the per­sonal use of the so­ci­ety/its mem­bers.”

From 1st July, 2014, Ser­vice tax leg­is­la­tion has been en­tirely changed. From pos­i­tive list of tax­a­tion to neg­a­tive list of tax­a­tion ap­proach has been adopted. In such new leg­is­la­tion, 1st time def­i­ni­tion of “ser­vice” has been in­tro­duced. Def­i­ni­tion of “Ser­vice” As per sec­tion 65B(44) of Act, (44) "Ser­vice" means i.any ac­tiv­ity car­ried out by a per­son for another for con­sid­er­a­tion, and ii. in­cludes a de­clared ser­vice, iii.but shall not fall­ing in “Neg­a­tive List of Ser­vices” as listed u/s. 66D of the Act; and un­der No­ti­fi­ca­tion no. 25/2012 dated 20-06-2012 How­ever, mean­ing of “ac­tiv­ity” has not been de­fined in Act. In terms of the common un­der­stand­ing of the word ac­tiv­ity would in­clude an act done, a work done, a deed done, an op­er­a­tion car­ried out, ex­e­cu­tion of an act, pro­vi­sion of a fa­cil­ity etc. It is a term with very wide con­no­ta­tion. In con­nec­tion of re­de­vel­op­ment, ap­pli­ca­bil­ity of def­i­ni­tion can be an­a­lyzed as follow: i. De­vel­oper does ac­tiv­ity of con­struc­tion of flat for ex­ist­ing mem­bers. ii. De­vel­oper re­ceives de­vel­op­ment rights for con­struc­tion of ad­di­tional saleable flats. iii. De­vel­oper pro­vides con­struc­tion ser­vice which is de­clared in sec­tion 66E Hence, re­de­vel­op­ment of flats for ex­ist­ing mem­ber would be “ser­vice” un­der def­i­ni­tion of sec­tion 65B(44) of Act. Such ser­vice is pro­vided within tax­able ter­ri­tory. Hence, such ser­vice would be “tax­able ser­vice” as per sec­tion 66B of Act. Clar­i­fi­ca­tion from Mumbai Com­mis­sioner Fur­ther, The Ma­ha­rash­tra Cham­ber of Hous­ing In­dus­try (MCHI) has sought clar­i­fi­ca­tion from the Ser­vice Tax Com­mis­sioner, Mumbai-I on the is­sue whether Builders/De­vel­op­ers are li­able to Ser­vice tax in re­spect of re­hab flats/units al­lot­ted to so­ci­ety mem­bers in re­de­vel­op­ment project. The Com­mis­sioner, vide his let­ter F.No.V/ST-I/Tech-II/463/11 dated 31-082012, clar­i­fied that Ser­vice tax is levi­able on con­struc­tion of such re­hab flats/units/ free of cost area re­ceived by mem­bers. De­vel­op­ment ser­vice would be “work con­tract” or “con­struc­tion of build­ing” The is­sue will arise whether the de­vel­op­ment ser­vice would be “works con­tract” or “Con­struc­tion of build­ing”. The ef­fec­tive tax rate, date of ser­vice tax ap­pli­ca­bil­ity, val­u­a­tion and rel­e­vant Rules and no­ti­fi­ca­tions etc., are dif­fer­ent for con­struc­tion of build­ing and for works con­tract. In the re­de­vel­op­ment, the de­vel­oper usu­ally does not get ti­tle to or rights in land per­tain­ing to re­hab por­tion. De­vel­oper con­structs on the land be­long­ing to the so­ci­ety. Hence, ser­vice pro­vided by the de­vel­oper would be a “works con­tract” for con­struc­tion of re­hab flats in a re­de­vel­op­ment. Ac­cord­ingly, de­vel­oper would be works con­trac­tor for ser­vice pro­vided to so­ci­ety. Con­clu­sion on ap­pli­ca­bil­ity of ser­vice tax from 1st July, 2012 Based on above anal­y­sis of def­i­ni­tion of ser­vice tax in re­spect of re­de­vel­op­ment ac­tiv­ity and clar­i­fi­ca­tion from Mumbai com­mis­sioner, ser­vice tax would be ap­pli­ca­ble on con­struc­tion of flat to ex­ist­ing mem­bers which are given free of cost to ex­ist­ing so­ci­ety mem­bers. Such ser­vices would be works con­tract ser­vice. Val­u­a­tion on free cost/re­hab con­struc­tion ser­vice De­ter­mi­na­tion of gross value as per Valu- ation method un­der sec­tion 67 Sec­tion 67 of Act spec­i­fies man­ner of val­u­a­tion of tax­able ser­vice. As per sec­tion 67, in fol­low­ing man­ner val­u­a­tion needs to be done: Sec­tion Na­ture of trans­ac­tion Value of ser­vice 67(1)(i) the pro­vi­sion of ser­vice is for a con­sid­er­a­tion in money the gross amount charged by the ser­vice provider for such ser­vice 67(1)(ii) pro­vi­sion of ser­vice is for a con­sid­er­a­tion not wholly or partly con­sist­ing of money but value is as­cer­tain­able value of tax­able ser­vice shall be the equiv­a­lent money value of such con­sid­er­a­tion 67(1)(iii) the pro­vi­sion of ser­vice is for a con­sid­er­a­tion which is not as­cer­tain­able Val­u­a­tion needs to be done as per Rule 3 of Ser­vice Tax (De­ter­mi­na­tion of Value) Rules 2006 Val­u­a­tion method ap­pli­ca­ble on re­hab/ new con­struc­tion of flat to mem­bers de­vel­oped by de­vel­oper De­vel­oper re­ceives de­vel­op­ment rights for con­struc­tion of ad­di­tional saleable flats. In con­nec­tion of such con­sid­er­a­tion, in fol­low­ing man­ner val­u­a­tion would be done: Sale value of re­hab / new flats con­structed for ex­ist­ing flat owner: In re­de­vel­op­ment, de­vel­oper pro­vides ser­vice of con­struc­tion of re­hab / new flats for ex­ist­ing own­ers. Hence, de­vel­oper is “work con­tract” ser­vice provider. In such case sale value of new flats avail­able in mar­ket which would be sim­i­lar to flats con­structed by de­vel­oper could not be ap­ply. Since, sale value of new flat usu­ally in­cludes value at­trib­ut­able to land; whereas in re­de­vel­op­ment, land is never trans­ferred to de­vel­oper by so­ci­ety. Hence, mar­ket value of such con­struc­tion ser­vice can­not be ar­rived at by ap­ply­ing sale rate of new flats. Value of De­vel­op­ment agree­ment as per stamp duty val­u­a­tion De­vel­op­ment rights agree­ment en­tered be­tween de­vel­oper and so­ci­ety for re­de­vel­op­ment build­ing. Such de­vel­op­ment agree­ments are li­able for stamp duty. For levy of stamp duty on such de­vel­op­ment agree­ment, con­struc­tion cost of re­hab por­tion, cor­pus al­lowance, rent al­lowance are con­sid­ered and on such to­tal cost, value of stamp duty would be payable. In such case, as per sec­tion 67(1)(ii) where value of con­sid­er­a­tion is as­cer­tain­able then such value needs to be con­sid­ered for val­u­a­tion pur­pose. Hence, value of de­vel­op­ment agree­ment would be gross value of ser­vice pro­vided by de­vel­oper to so­ci­ety mem­ber for con­struc­tion of new flats to mem­bers. De­ter­mi­na­tion of net value as per ser­vice tax (De­ter­mi­na­tion of value) Rule, 2006 As per above para, gross value of con­struc­tion ser­vice pro­vided by de­vel­oper has been de­ter­mined. Such gross value in­cludes goods por­tion and ser­vice por­tion. As per Rule 2A of ser­vice tax (de­ter­mi­na­tion of value) rules, 2006, the value of ser­vice por­tion in the ex­e­cu­tion of a works con­tract shall be de­ter­mined in the fol­low­ing two man­ners: (i) Spe­cific Val­u­a­tion Method [Rule 2A (i) of Val­u­a­tion Rules] Un­der spe­cific val­u­a­tion method, value of ser­vice por­tion needs to be de­ter­mined by de­duct­ing value of ma­te­rial used for ex­e­cut­ing works con­tract. How­ever, gross value of con­sid­er­a­tion of con­struc­tion has been de­ter­mined based on de­vel­op­ment agree­ment.

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