Service Tax on 'High-End Constructions' - 'Or' or 'And' Debate
MARCH 01, 2013
By Shailesh P Sheth, Advocate
NOTIFICATION No. 26/2012-ST dated 20.06.2012, inter alia, provides an abatement of 75% in respect of the construction of a complex, building, civil structure, etc. subject to the fulfillment of the prescribed conditions (Sr. No. 12 of the Notification refers).
However, the Finance Minister is probably lured by the full-page advertisements almost appearing daily in the leading newspapers displaying the upcoming skyscrapers with large and luxurious flats or the commercial units boasting of all modern amenities and technologies. The Finance Minister has, therefore, apparently decided to curtail the benefit of abatement available in respect of such ‘High-End Construction'.
While announcing his proposal in this regard, the Finance Minister said in his Budget Speech as under:
"182. Homes and flats with a carpet area of 2000 sq.ft. or more or of a value of Rs. 1 crore or more are high-end constructions where the component of ‘service' is greater. Hence, I propose to reduce the rate of abatement for this class of buildings from 75 percent to 70 percent. Existing exemptions from service tax for low cost housing and single residential units will continue."
The above proposal has been given effect to vide Notification No. 2/2013-ST dated 01.03.2013 vide which Sr. No.12 of the Notification No. 26/12-ST ibid has been substituted by the new entry which reads as under:
Sr. No. | Description of taxable service | Percentage | Conditions |
12. | Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority, - (i) for residential unit having carpet area upto 2000 square feet or where the amount charged is less than rupees one crore; (ii) for other than the (i) above | 25 30 | (i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004; (ii) The value of land is included in the amount charged from the service receiver". |
From the plain reading of the above substituted entry, the following position emerges:
(a) In the first place, a subtle distinction between the ‘residential constructions' and ‘commercial constructions' has been made for the first time for the purpose of abatement. No such distinction existed in the old entry at Sr. No.12 of the Notification No. 26/12-ST;
(b) The abatement of 75% will now be available only in respect of residential unit having a carpet area upto 2000 sq. ft. or having a value of less than Rs. 1 crore subject to the fulfillment of the prescribed conditions. However, in case of commercial constructions, the abatement of 70% only will be available henceforth irrespective of the size or value of the commercial unit. Till now, the abatement of 75% was available even in respect of commercial constructions.
(c) The abatement of 75% will be available in respect of residential properties if either of the following two conditions are fulfilled i.e.
(i) the residential unit is having a carpet area upto 2000 sq.ft.; or
(ii) the value of the residential unit is less than Rs. 1.00 crore.
This inference can be drawn in view of the use of the disjunctive word ‘or' used in clause (i) of the substituted entry at Sr. No. 12 and also finds support, not only from Budget Memorandum but also from the TRU Letter D.O.F. No. 334/3/2013-TRU dated 28.02.2013 vide para 5 thereof.
Therefore, a residential unit under construction having a carpet area, say of 1500 sq.ft., but costing Rs. 3 crores (not an unusual thing in a city like Mumbai) will still qualify for the abatement of 75%. Similarly, a residential unit under construction with carpet area of more than 2000 sq. ft. but having a value of less than Rs. 1 crore would also be eligible for the abatement of 75%.
The fallout of the above is that clause (ii) carrying the reduced abatement of 70% will cover only the following types of properties viz:
(a) commercial units under construction irrespective of its size or value; and
(b) residential units under construction having the carpet area of more than 2000 sq.ft. and value of more than Rs. 1 crore.
Otherwise, the so-called ‘high-end constructions' will continue to get the abatement of 75% if it satisfies either of the two conditions relating to size or value as explained above. Is this really what the Finance Minister intended?
The relevant clause therefore needs reconsideration and re-drafting if the real intention of the Finance Minister is to be carried out. Otherwise, the issue of interpretation of the clause is bound to arise leading to the age-old dispute whether ‘or' should be read as ‘and' i.e. in a conjunctive manner or as ‘or' i.e. in a disjunctive manner? Remember Union of India V/s Ind-Swift Laboratories Ltd. - (2011-TIOL-21-SC-CX) ?
The back-door distinction created between the ‘residential properties' and ‘commercial properties' is also rather unfortunate. There is not a whisper about this, either in the Budget Speech of the Finance Minister or in the TRU's Letter dated 28.02.2013. The Real Estate Industry is, therefore, going to have a rude shock when the reality dawns upon it!
"Let all the laws be clear, uniform and precise; to interpret laws is almost always to corrupt them." (Voltaire - Philosophical Dictionary, 1764)
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