Realtors set free of service tax burden on sale of apartments

Realtors set free of service tax burden on sale of apartments
The Economic Times, February 03, 2009, Page 7

CASH-STARVED DEVELOPERS GET A BREATHER AFTER CBEC CLARIFICATION
Deepshikha Sikarwar NEW DELHI

PROPERTY developers building residential complexes will not have to pay service tax on sale of apartments now, as the tax department has cleared the ambiguity on taxability of these companies.

The Central Board of Excise and Customs (CBEC) in a circular has said construction service provided by a builder to a person buying the apartment till the execution of sale deed would not attract service tax.

Usually, developers enter into an ‘agreement to sell’ with the buyer of the property. But the property remains under the ownership of the developer and it is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and ownership of the property transferred to the buyer.

“Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently will not attract service tax,” the circular said.

Also, if the ultimate owner enters into a contract for construction of a residential complex with a builder who himself provides service of design, planning and construction, and after such construction the owner receives such property for his personal use, then such activity would not be subjected to service tax. It is because this case would fall under the exclusion provided in the definition of ‘residential complex’.

However, if services of any person like contractor, designer or a similar service provider are received in both the cases, then these would attract service tax.

The circular comes in the backdrop of various builders’ organisations approaching the government seeking clarity over applicability of service tax in a case where a developer enters into an agreement to sell a dwelling unit in a residential complex at any stage of construction. A debate on this was split with a segment of service tax officers who operate on the field arguing that after an agreement of sale between a buyer and a developer, the buyer becomes the owner of the residential unit and subsequent activity of a builder for construction of residential unit was a service of ‘construction of residential complex’ and hence liable to service tax. However, the opinion was countered by another section of officials.

“The CBEC clarification unambiguously puts to rest all conflicting views emerging in case of sale of dwelling unit in a residential complex,” Ernst & Young associate director Bipin Sapra said.

HOME RUN

What was the confusion?
Realtors had asked govt for clarity over applicability of service tax
Builders argued service tax should not be levied when they enter into an agreement to sell a residential unit during construction

What prompted CBEC circular?
There was a difference of opinion within the tax department
One section said a buyer becomes owner of the unit after an agreement of sale with developer, and construction was a service provided by the builder
But this opinion was countered by another section of officials

What has CBEC clarified?
CBEC has now said that construction service provided by a builder to a person buying the apartment till the execution of sale deed would not attract service tax