Service Tax on Immovable Property: Current Status

Service Tax on Immovable Property

Current Status: The Service Tax has to be levied and may be collected by the Government.

Updates: The following are the specific updates regarding the retrospective imposition of service tax.

List of events:-

I. DELHI HIGH COURT

1. The Finance Act, 1994 imposes Service Tax on renting of immovable property.

2. The Hon'ble Delhi High Court holds this renting to be unconstitutional.(Home Retail Solutions v. UOI)

3. The Central Govt. appeals to the Hon'ble Supreme Court.

4. The Legislature amends Finance Act, 1994 to override the decision of the Hon'ble Delhi High Court and imposes Service Tax on renting of immovable property retrospectively.

5. The Hon'ble Delhi High Court stays the imposition of service tax and holds that the Union Govt. cannot impose the tax. (in Writ Petition No. 3398/2010 on May 18, 2010)

6. The Union Govt. approaches the Hon'ble Supreme Court. The Hon'ble Supreme Court vide an order dated January 10, 2011 stays the order of the Hon'ble Delhi High Court and holds that the Union Govt. may impose the Service Tax. On 4th February, while continuing the stay order on the Delhi High Courts orders, it further holds that the Hon'ble Delhi High Court should hear the matter expeditiously.

7. The final arguments in the Hon'ble Delhi High Court concluded in the last week of May, 2011 . Order expected in the first week of June by the Hon'ble Delhi High Court. The stay by the Honn'ble Supreme Court on the Hon'ble Delhi High Court's orders continues.

II. PUNJAB AND HARYANA HC

1. Meanwhile, a similar matter came up before the Punjab and Haryana High Court. The P&H HC has upheld the constitutional validity of the service tax on immovable property. (vide Shubh Timb Steels Ltd. v. Union of India, CWP 11597 of 2010)
Further read:
1. Economic Times report
2. Opinion of Mr. Vivek Tankha, Additional Solicitor General, Govt. of India
3. Report by CNN-IBN
4. Report on the Internet

Service Tax and Construction of Property

In the Finance Act of 2010, the government has decided to impose service tax on the purchase of under-construction properties. However, this tax is applicable only if the consideration (either in full or in part) has been paid by the buyer to the developer prior to the issuance of a completion certificate by an ‘appropriate authority’. The activity of construction has been deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax is charged accordingly. The ‘authority competent’ to issue completion certificate has been widened to include authorities other that the government authorities[1]. Completion certificate issued by an architect or chartered engineer or licensed surveyor can be now taken to determine the service tax liability.

After these were brought forward in the Finance Bill, 2010, views were expressed that the tax liability on construction sector has been tightened at a time when the sector was recovering after recession. Keeping this in mind the government provided that the abatement which could be claimed by the builders in respect of these services was increased from 67%[2] to 75%[3]. Therefore, the service tax is leviable on only 25% of the amount paid before the issuance of the completion certificate. At 10.3%, this turns out to be roughly 2.575%(10.3% of 25%) of the total value. Therefore, a flat worth Rs. 40 Lakhs becomes dearer by around Rs. Lakh. Importantly seventy five percent abatement will be applicable only if the gross value of commercial or residential complex or unit includes cost of land. Otherwise the existing rate of abatement of 67% would continue to apply.[4] Service Tax exemption is provided to construction done under the Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana.[5]

---

[1] Notification No.28/2010- Service Tax, dated 22nd June, 2010

[2] Notification No. 1/2006-Service Tax, dated the 1st March, 2006

[3] Notification 29/2010-Service Tax, dated 22nd June, 2010

[4] D.O.F.No.334/03/2010-TRU

[5] Notification No.28/2010- Service Tax, dated 22nd June, 2010