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