Service Tax on Construction and selling of residential flats
Recently, the Delhi High Court in a landmark judgement in the case of Suresh Kumar Bansal Vs UOT  70 taxmann.com 55 (Delhi) has held that service tax cannot be levied on construction of residential complex service. In an interesting decision, the Court has upheld the levy of the tax but has but quashed the tax as there was no statutory measure to ascertain the value of services involved in this composite contract which involved sale of undivided share of land.
The question before the High Court was whether the consideration paid by flat buyers to a builder/promoter/developer for acquiring a flat in a complex which is under construction/development, could be subjected to levy of service tax.
There has been widespread confusion on the question of whether construction of a residential complex attracts service tax or not. Many people believe that this was a contract for sale and not service and therefore, service tax cannot be levied on the same.
High Court’s judgement:
The High Court has, in principle, rejected the argument that service tax is not leviable on such contracts. But, the Count has noted that "In the present case, there is no machinery provision for ascertaining the service element involved in the composite contract. In order to sustain the levy of service tax on services, it is essential that the machinery provisions provide for a mechanism for ascertaining the measure of tax, that is, the value of services which are charged to service tax. Neither the Act nor the Rules framed therein provide for a machinery provision for excluding all components other than service components for ascertaining the measure of service tax. The abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract."
This issue will, in all likelihood, be contested in appeal before the Supreme Court and the possible consequences could be as under.
- The Supreme Court may reverse the Delhi High Court Judgement
- The Central Government may amend the Finance Act, 1994 either prospectively or retrospectively.
The High Court ruling would be welcomed by the real estate companies as there would be levy of service tax only on the construction service element and not on the value of the land. This will reduce the tax burden considerably. Further, the ruling would also help the investors intending to buy a property as cost of the property will reduce on account of reduction in the service tax figure.
However, till such time as the Supreme Court decides on this issue, assessees may continue to pay service tax under protest so that if the Supreme Court gives a favourable order the assessee can go for refund without time limit. On the other hand, if the Supreme Court holds against the tax payer and in favour of the Service tax department, then such tax payers will be saved from the penal consequences.