Issue of allotment of flats/ houses/ shops/ commercial units to the land owner towards the land/ Development Rights
(A) Meaning of Allotment of flats etc. to land owner and its taxability In Real Estate Sector, the builders/developers normally agree to give some flats/houses/shops/commercial units to the concerned land owner(s) in lieu of getting land/development rights. Here, the first question which comes to the mind is whether such allotment of flats/houses etc. is subject to Service Tax. It is pertinent to note that
consideration in the form development rights are given to the builder/developer by the landowner before issuance of completion certificate by the competent authority in respect of such complex, building, civil structure or part thereof. Resultantly, such services provided or agreed to be provided by the builder/developer fall within the purview of Section 66E (b) [which deals with Declared Services], of Finance Act, 1994 and will be subject to service tax.
(B) Valuation of these construction services
Further, as far as valuation of such construction services is concerned, it is worth highlighting that value of such flats/houses/shops/commercial units will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly. On the other hand, Service Tax payable in respect of construction services in case of sale of flats/ houses/shops/commercial units to other customers [who normally make payments in agreed number of installments will be determined in accordance with Notification No 26/2012-S.T.dated 20.06.2012.
In simple words, service tax will be payable on 25% of the amount charged by the Service Provider provided value of land is also included in the amount charged from the service receiver.
The relevant extracts of Departmental Clarification(free book on service tax changes wef 01.07.2012) given vide Para 6.2.1& Para 6.2.3 of Taxation of Services-An Education Guide dated 20.06.2012 are given below:
6.2.1 What would be the liability to pay service tax on flats/houses agreed to be given by builder/developer to the land owner towards the land /development rights and to other buyers. If payable, how would the services be valued?
Here two important transactions are identifiable:(a) sale of land by the landowner which is not a taxable service; and(b) construction service provided by the builder/developer.The builder/developer receives consideration for the construction service provided by him, from two categories of service receivers:(a) from landowner: in the form of land/development rights; and(b) from other buyers: normally in cash.Construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/ developers even for the flats given to the land owner.
It may be pointed out that in a recent judgement passed by the Mumbai High Court in the case of Maharashtra Chamber of Housing Industry and Others v. Union of India [012-TIOL-78- HC-Mum-ST] has upheld the Constitutional validity of levy of service tax, under clauses (zzzh) and (zzzzu) of section 65, on similar construction services provided by a builder. A relevant portion of the judgement is reproduced below-
"29. The charge of tax under Section 66 of the Finance Act is on the taxable services defined in clause (105) of Section 65. The charge of tax is on the rendering of a taxable service. The taxable event is the rendering of a service which falls within the description set out in subclauses (zzq), (zzzh) and (zzzzu).
The object of the tax is a levy on services which are made taxable. The fact that a taxable service is rendered in relation to an activity which occurs on land does not render the charging provision as imposing a tax on land and buildings. The charge continues to be a charge on taxable services.
The charge is not a charge on land or buildings as a unit. The tax is not on the general ownership of land. The tax is not a tax which is directly imposed on land and buildings.The fact that land is subject to an activity involving construction of a building or a complex does not determine the legislative competence of Parliament.
The fact that the activity in question is an activity which is rendered on land does not make the tax a tax on land.The charge is on rendering a taxable service and the fact that the service is rendered in relation to land does not alter the nature or character of the levy.The legislature has expanded the notion of taxable service by incorporating within the ambit of clause (zzq) and clause (zzzh) services rendered by a builder to the buyer in the course of an intended sale whether before, during or after construction.There is a legislative assessment underlying the imposition of the tax which is that during the course of a construction related activity, a service is rendered by the builder to the buyer. Whether that assessment can be challenged in assailing constitutional validity is a separate issue which would be considered a little later. At this stage, what merits emphasis is that the charge which has been imposed by the legislature is on the activity involving the provision of a service by a builder to the buyer in the course of the execution of a contract involving the intended sale of immovable property.
30. Parliament, in bringing about the amendment in question has made a legislative assessment to the effect that a service is rendered by builders to buyers during the course of construction activities. In our view, that legislative assessment does not impinge upon the constitutional validity of the tax once, the true nature and character of the tax is held not to fall within the scope of Entry 49 of List II. So long as the tax does not fall within any head of legislative power reserved to the States, the tax must of necessity fall within the legislative competence of Parliament. This is a settled principle of law, since the residuary power to legislate on a field of legislation which does not fall within the exclusive domain of the States is vested in Parliament under Article 248 read with Entry 97 of List I."
Value, in the case of flats given to first category of service receiver will be the value of the land when the same is transferred and the point of taxation will also be determined accordingly.
6.2.3 When a certain number of flats are given by the builder/developer to a land owner in a collaborative agreement to construct, in lieu of the land or development rights transferred, will such transferee be required to pay service tax on further sale of flats to customers?Yes, the service tax will be required to be paid by such transferee if any consideration is received by him from any person before the receipt of completion certificate.
By :CA. Roopa Nayak ,CA Pulak Saha ,CA. Rajiv J. Luthia , CA. Ashok Batra, CA. Bimal Jain, CA. Sumantra Guha