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  • Service tax relief for buyers of under-construction houses

    June 09, 2016

    The Delhi High Court has said that home buyers cannot be charged service tax on payments made towards purchase of under construction apartments from builders if the total value of the apartment includes the land value. 

    However, service tax can still be levied on preferential location charges (PLC) that builders charge from buyers. 

    The court also said that if the developer has already collected service tax, buyers would be refunded the amount with 6% rate of interest by the revenue department of the government of India. 

    Since the amendment introduced by the Finance Act of 2010, the government charges service tax on buyers of apartments in under construction projects. Service tax is levied only on 25% of the total value of the apartment due to a 75% abatement that is allowed. So at 15% service tax applicable from June 1 this year, the buyer pays service tax of 3.75% on the total value of the apartment. 
     
    This verdict was announced when there was a plea made by two petitioners who bought flats in 2011 in Max Royal that was developed by Sethi Group in Noida's Sector 76.

    This judgment will definitely help buyers who have booked flats in under construction projects where they enter into a complex contract with the developer that will involve transfer of land since service tax won't change on the builder or developer.

    The court clarified, “Clearly, service tax cannot be levied on the value of undivided share of land acquired by a buyer of a dwelling unit or on the value of goods which are incorporated in the project by a developer... (this) would clearly intrude into the legislative field reserved for the States under List II of the Seventh Schedule of the Constitution of India.“ 
     
    Accepting the petitioners' the court said in the June 3 order that "no service tax under Section 66 of the Act read with Section 65(105)(zzzh) of the Act could be charged in respect of composite contracts such as the ones entered into by the petitioners with the builder". 

    The petitioners said that agreements entered into by them with the builder are for purchase of immovable property and the Parliament does not have the legislative competence to levy service tax on such transaction. They also said that "the Act and the rules made thereunder do not provide any machinery for computation of value of services, if any, involved in construction of a complex and, therefore, no such tax can be imposed." 

    Their petition referred to previous circulars issued by the Central Board of Excise and Customs (CBEC) which, according to them, clarified that the taxable service under clause (zzzh) did not cover builders who were developing and selling immovable property. 
     

    OUR TAKE

    This judgment will definitely help buyers who have booked flats in under construction projects where they enter into a complex contract with the developer that will involve transfer of land since service tax won't change on the builder or developer. By ruling this, the HC has also saved many hopes of the future home buyers and also listened to the pleas of many who had already paid heavy service tax returns. Seems like a win-win situation for all.


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