It cannot be denied that the 100% tax exemption for new housing projects
under Section 80-IB has worked magic for the residential housing sector and
hence the decision of the former FM not to extend this exemption for projects
commenced beyond March 31, 2008 came as a major disappointment. With the
residential realty sector showing some signs of recovery, it is necessary
that the tax exemption is extended for another period of about four to five
years, so that, the recovery process can be accelerated and sustained. It
would be good to see the FM reintroducing the tax exemption under Section
80-IB.
One has to mention here, despite the 100% tax exemption provisions, most
Developers and Builders have not actually been able to use this benefit.. As
is known, thro’ an introduction of sub-section (10) in Section 80-IB, housing
projects approved by the local authority on or before the 31st day of March,
2008 and completed within 4 years from the end of the financial year in which
these projects are approved are, interalia, allowed 100% tax exemption. One
important pre-requisite for claiming this exemption is that, the residential
units should not have a built-up area more than 1000 sft when built
in Delhi or Mumbai and 1500 sft when built in any other place. Notwithstanding
the noble objective of this exemption which was crucial for the rapid development
of the sector, the developers have been suffering due to an over jealous
Income tax Department, which would seem to seek to deny this benefit, on
one pretext or another. For instance, many Developers have been denied this
exemption even when a few units have exceeded the sft limit for the entire
residential projects, when, as per law, the exemption should be available
for the vast majority of the units which have met the conditions.
Another major issue concerning the Realty Sector is the total lack of clarity
on the levy of service tax on the residential sector. As we know, service
tax on ‘construction of complex’ services was introduced thro’ the
introduction of Section 65(105)(zzzh) with effect from June 16, 2005. It
has never been clear as to who is liable to pay service tax, viz. the Developer/Builder
or the Contractor, who actually undertakes the construction activity. We
have seen enough confusion even in the minds of the Department if the Circulars
and Clarifications are any indication. In February 2006, when the DGST, Mumbai
issued a letter F. No. V/DGST/22/Audit/Misc./1/2004/Mumbai, dated 16-2-2006,
based on the decision of the Hon’ble Supreme Court in K. Raheja
Development Corpn. v. State of Karnataka 2005-TIOL-77-SC-CT stating
that service tax was payable by the builders and estate developers, only
to be overruled by the Board which stated in F.No. 332/35/2006 - TRU dated
August 1, 2006 in Para 13 that it is the contractor/contractors who would
be liable for service tax and not the Developers. Each Commissionerate took
its own decision on this highly confusing ‘clarification’ from
the Board. Of course, the confusion has always remained on the levy of service
tax on ‘agreements to sell’, especially after the decision of
the Guwahati HC decision in the Magus Construction case 2008-TIOL-321-HC-GUW-ST. If
one thought that this was not enough, the Board opened up the pandora’s
box on January 29, 2009, when it issued a famous (or infamous) Circular No.
108/02/2009-ST stating that ‘agreements to sell’ are not
subject to service tax and in the process of issuing this clarification,
the Board also ended up ‘clarifying’ perhaps unintendedly, that
even agreements to construct are not subject to service tax. One can
clearly see the total lack of clarity that has persisted with the Government
over the last four years in terms of the levy of service tax on the residential
sector and the result has been total chaos.
If this is the case vis-a-vis service tax for the residential realty sector,
in so far as it concerns the commercial realty sector, the lesser said about
it, the better it is. The Government is already involved is a lengthy litigation
with a section of the tax payers from the retail sector and the writs have
already been transferred to the Hon’ble Supreme Court challenging the
levy of service tax on commercial rents. To add to the confusion prevailing,
the Delhi High Court has delivered a controversial (with due regards to the
Court) judgement holding, interalia, that service tax cannot be charged on
commercial rentals, without quashing the constitutionality of the levy of
service tax on rentals. The Government’s SLP against this decision
of the Delhi High Court has been admitted by the Supreme Court, which has,
however, refused to stay the Delhi HC decision. While the matter is
sub-judice, the Government could still bring out some clarity in the matter
thro’ a clarification.
While one can debate the wisdom of the Government in seeking to levy service
tax on rents, which by no stretch of imagination can be considered as a ‘service’,
one has to feel disappointed at the Government’s attempts in refusing
to allow the Developers and Builders to avail of the benefit of cenvat credit
which could be significant, in terms of Board Circular No. 98/1/2008-ST dated
January 4, 2008. As per the Government then, while ‘ renting’ is
a service on which service tax can be levied, in so far as the statutory benefit
of cenvat credit is concerned, ‘renting’ is not a service. This
double standard, which is unlikely to stand judicial scrutiny, has created
enough problems for the commercial realty sector and as such, reflects the
confusion that prevails in the minds of the Delhi Babus.
There are a plethora of Notifications and Circulars concerning the Realty
Sector, which have added to the confusion already prevailing. Some of these
include Notification No. 1/2006-ST dated March 1, 2006 which is interpreted
by the Department in a rather ominous manner. The Department has been asking
Contractors to include the value of materials supplied free of cost by the
Developers, as part of the value of services rendered, despite stay orders
given by the Madras and the Delhi High Courts. The Department has also
been seeking to deny the benefit of Notification No. 12/2003-ST dated June
20, 2003, for players in the construction sector. There is an urgent need
for the FM to re-visit all the existing Notifications, Circulars and Clarifications
concerning the Realty Sector and look at the possibility of issuing one single
consolidated circular addressing the needs of the sector.
And, lastly, of course, it’s about the total confusion that prevails
in respect of the service tax levy vis-a-vis the SEZ scheme. The Government
doesn’t seem to have understood the difference between ‘exemption’ and ‘refund’,
if its Notification No. 9/2009-ST dated March 3, 2009 is any indication.
Before the dust created by this Notification could settle, the Government
came with yet another Notification No. 15/2009-ST dated May 20, 2009 clarifying
that input services ‘wholly consumed’ within the SEZ would be
exempted from the levy of service tax. It is, of course, anybody’s
guess as to the list of services which can be treated as ‘wholly consumed’ within
the SEZ. Some clarity is very badly needed on the SEZ front.
REALTY Sector
is one of the largest contributors to the national exchequer, in terms of
payment of taxes to the Central and State Governments. The construction sector
also employs an astonishing 31 million people, both in the organized sector
as well as, in the unorganized sector. With specific reference to service
tax, this sector is one of the largest contributor, after, of course, the
telecom sector. No wonder then, that this sector has been a milking
cow for the Government over the years. The credit for subjecting this sector
to service tax goes to Mr P Chidambaram, when he introduced service tax
on ‘Construction
of Complex’ services in his 2005 Budget. Whether he literally meant
it or not, the service tax levy on this sector has remained ‘complex’ over
the last four years. It has come to such a pass now that, nobody including
the Government has a clue as to how to solve the critical issues concerning
this vital sector, which plays such an important role for the country’s
economic development. An attempt has been made to discuss the critical
direct and indirect tax issues bothering this industry.