Do you need to Pay Service Tax for under Construction Flats?
Dec 24, 2016 Legal Guidance
In the case of Suresh Kumar Bansal versus the Indian Union and others 2016-VIL-284-DEL-ST the Delhi High Court has declared: the under-construction flats that include the cost of land will be exempted from Service Tax. This news is indeed a breath of relief for many home buyers.
Decisions of Courts on Service Tax of under-construction property:
High Court has clearly stated that Service Tax will be charged only on the value of services and not on the value of the land. This decision has been taken on the basis of the rules mentioned in Finance Act 1994. Due to the absence of any mechanism within the Act, service tax cannot be imposed on under-construction flats where the value of land is included. Unfortunately, this judgement is pertaining to the period before 2012.
But a radical change was introduced in service tax from July 2012. Here all services were included except certain services specified in the Negative List. Although Act and Rules related to service tax do not have any provision for exclusion of the value of land, yet abatement is provided along with a notification. Therefore, since July 2012 the rule remains the same as that mentioned above.
However, it is expected that the Central Government will file an appeal before the Supreme Court. If the Supreme Court withholds the order of the High Court, then the ruling would not have any operation and the settlement for this issue will happen only after the Supreme Court takes a decision.
Refund of already paid Service Tax:
High Court has allowed a refund of the tax with 6 percent interest per annum. Other home buyers may also apply for the refund from the concerned tax authorities if they have paid service tax for purchasing under-construction flats with the ownership of land. But remember such home buyers will not get a refund from the builder because they have already handed over the Service Tax to the income tax authority.
The expected scenario in the future:
The builders are expecting an appeal by the Central Government to the Supreme Court. That is why; many builders are still charging service tax from the buyers. If the Supreme Court passes its judgement in the favour of revenue then these builders will have to pay service tax along with interest.
By opening an escrow account both the builders and buyers can find a temporary solution. In case the Supreme Court overrules High Court’s decision, then the builders can use the amount from this escrow account in order to pay off the service tax. But how the interest would be paid is still a matter of concern. But if the contrary happens, that is, the High Court’s judgement is accepted by the Supreme Court, the amount could be easily refunded to the customer from the escrow account.
Keeping in mind the Delhi High Court’s decision, the Central Government may as well make some suitable amendments in this matter. Whatever the final hearing may be, the ambiguity has to be cleared. After all, it is high time some proper mechanism is inserted.
Decisions of Courts on Service Tax of under-construction property:
High Court has clearly stated that Service Tax will be charged only on the value of services and not on the value of the land. This decision has been taken on the basis of the rules mentioned in Finance Act 1994. Due to the absence of any mechanism within the Act, service tax cannot be imposed on under-construction flats where the value of land is included. Unfortunately, this judgement is pertaining to the period before 2012.
But a radical change was introduced in service tax from July 2012. Here all services were included except certain services specified in the Negative List. Although Act and Rules related to service tax do not have any provision for exclusion of the value of land, yet abatement is provided along with a notification. Therefore, since July 2012 the rule remains the same as that mentioned above.
However, it is expected that the Central Government will file an appeal before the Supreme Court. If the Supreme Court withholds the order of the High Court, then the ruling would not have any operation and the settlement for this issue will happen only after the Supreme Court takes a decision.
Refund of already paid Service Tax:
High Court has allowed a refund of the tax with 6 percent interest per annum. Other home buyers may also apply for the refund from the concerned tax authorities if they have paid service tax for purchasing under-construction flats with the ownership of land. But remember such home buyers will not get a refund from the builder because they have already handed over the Service Tax to the income tax authority.
The expected scenario in the future:
The builders are expecting an appeal by the Central Government to the Supreme Court. That is why; many builders are still charging service tax from the buyers. If the Supreme Court passes its judgement in the favour of revenue then these builders will have to pay service tax along with interest.
By opening an escrow account both the builders and buyers can find a temporary solution. In case the Supreme Court overrules High Court’s decision, then the builders can use the amount from this escrow account in order to pay off the service tax. But how the interest would be paid is still a matter of concern. But if the contrary happens, that is, the High Court’s judgement is accepted by the Supreme Court, the amount could be easily refunded to the customer from the escrow account.
Keeping in mind the Delhi High Court’s decision, the Central Government may as well make some suitable amendments in this matter. Whatever the final hearing may be, the ambiguity has to be cleared. After all, it is high time some proper mechanism is inserted.
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