Service Tax Demands of Rs 30,000 Crores to be issued to Builders

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Service Tax Demands of Rs 30,000 Crores to be issued to Builders

AIT News Network

NEW DELHI. Builders and Real Estate Developers who have not been paying service tax under notified taxable service of “construction of residential complex” are in for big trouble and are shortly going to be slapped service tax demands in the range of Rs 30000 Crore after the issue has been settled by High Power Authority for Advance Rulings. Top Builders have already been issued notices by service tax department calling for the figures so that the service tax liability may be worked out based on such figures. Since the service tax on construction of residential complex was levied with effect from June 2005; the liability of Builders to pay service tax is also from the date of levy.

The landmark ruling AIT-2008-127-AAR has been given Justice PV Reddy Chairman of the Authority for Advance Rulings. Justice Reddy is ex-Justice of Supreme Court of India and ex-Chief Justice of High Court.

According to the ruling an Agreement for sale of a constructed residential unit is liable to service tax when booking of the unit is done before or during the construction activity. The applicant had submitted a draft agreement before the Authority wherein the payment terms were as under:

“AGREEMENT OF BOOKING/SALE OF RESIDENTIAL UNIT IN THE SELF-DEVELOPED HOUSING PROJECT-----

3. The BOOKER has agreed to pay/deposit to the BUILDER/PROMOTER OR DEVELOPER the sum of Rs. __________ (Rupees __________ only) against the said constructed residential unit . (hereinafter referred to as "THE CONTRACT AMOUNT"). Such amount shall be paid/deposited by the BOOKER to the BUILDER/PROMOTER OR DEVELOPER as follows: -

Rs. __________ (Rupees __________ only) paid as commitment to purchase the said residential unit.

(ii) Rs. ________________ on--- (iii) Rs. ________________ on---

(iv) Rs. ________________ (v) Rs. ________________

(vi) Rs. ________________ (vii) Rs. ________________

(viii) Rs. ________________ (ix) Rs. ________________

(x) Rs. ________________ (xi) Rs. ________________

(xii) Rs. ________________ (xiii) Rs. ________________

(Against Possession)”

Thus in above situation the payment is not at all linked to stages of construction but even then there is liability to pay service tax.

Though the Ruling has no revenue impact on the applicant as he can recover service tax from his customers as it is his proposed activity; the Developers who have already sold the flats cannot recover service tax from their customers and will be required to pay service tax from their own pocket. Several Consultants who advised their clients against payment of service tax have already reversed their opinion and have now asked them to pay service tax to avoid liability.

Some Consultants who have no exposure and experience of litigation before Supreme Court and Authority for Advance Ruling are criticizing the Applicant. They are more worried about their opinion going wrong and if the logic of the ruling is applied by the Department; the demands will also be confirmed. Such Consultants, whose job is confined to only giving opinion and burying the issues below the carpet, are much more worried about their clients going in the hands of Advocates who will handle the matters up to Supreme Court as the litigation in such matter will obviously go up to Supreme Court.

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