JANUARY 31, 2011

Budget 2011 - Realty Sector crying for clarity in service tax provisions

By S Sivakumar, CA

NO other sector would have gone through the suffering and pain that the Real Estate sector has, over the past few years, arising mainly on account of the highly confusing statutory provisions related to the levy of service tax, further compounded by the ‘so called' clarifications issued by the Board and the perverse interpretations by the Field Force. In fact, the situation has come to such a pass that nobody, including the Government, has a clear idea of the applicability of the service tax provisions on this highly promising sector, leaving the field open to the Field Force to interpret and implement the law. Further, this is perhaps the only sector where the Commissionerates located in different regions, have been taken different stands. Thus, while the players in the South, by and large, have been paying service tax over the years, their counterparts in the North and the West have not been paying service tax.

As we know, service tax was first charged on commercial or industrial construction services with effect from 10-9-2004 and on construction of complex services with effect from 16-6-2005. The Board has come out with periodical circulars and clarifications, including notably, the Master Circular No. 96/7/2007 dated 23-8-2007 and the famous or for that matter, the infamous Circular No. 108/2/2009-ST dated 29-1-2009. Also, there have been instances where the Jurisdictional Commissioners have issued communications taking open stands against the views of the Board.

As if there was not enough confusion prevailing already, the Government has added more confusion by inserting the Explanation Sections 65(105)(zizz) and (sq.) according to which, the scope of the construction services stands expanded, with effect from 1-7-2010 to provide that, unless the entire payment for the property is received post the completion of the construction of the flat/commercial property, as evidenced by the Occupancy Certificate, all contracts, irrespective of whether they are agreements of sale or agreements of construction, would be ‘deemed' to be taxable services. This amendment, it seems, is clearly aimed at bringing the players in the North and West, into the service tax net, as contrasted to their Southern counterparts. Further, the Government also seems to believe that the Realty players are compulsorily required to go under the provisions of Notification No. 1/2006-ST dated March 1 2006, if the post Budget 2010 amendment (vide Circular No. 29/2010-ST dated 22-6-2010) involving the reduction of the abatement of 25% when the cost of land is not separately recovered, is any indication.

Here are some questions concerning the levy of service tax on the construction services, for which I have not been able to find answers, despite that the tax has been levied over the past 5 to 6 years:

++ Are pure developers, who have contracted out the entire construction activity to contractors, liable for service tax with effect from 1-7-2010, under the ‘deemed services'? Is the view of the Board as expressed in the Master Circular No. 96/7/2007-ST dated 23-8-2007, which was subsequently re-affirmed in Circular No. 108/02/2009-ST dated 29-1-2009which had stated, interalia, that, it is the contractor who is liable to service tax, still valid?

++ If the intention is to bring the Realty players in the North into the service tax net, is the amendment carried out through the insertion of the Explanation to the construction services, applicable retrospectively, as the Department seems to strongly believe?

++ Why is it that the Circular No. 108/02/2009 and the insertion of the Explanation introducing the concept of ‘deemed service provider' been carried out only in respect of construction services and not to works contract services? Given the fact that the same activity can be either classified under construction services or under works contract services, even by the own circulars issued by the Board, is it not fair and reasonable to expect that the statutory provisions governing the levy of service tax should be the same, between the construction services and the works contract services?

++ Post Budget 2010, in respect of the Abatement Scheme, as amended by Circular No. 29/2010, does the gross value on which service tax is payable, includes the cost/value of the land, as is currently interpreted by the Department? If this is indeed the view of the Department, is it legal to levy service tax on the value of land?

++ By issuing Notification No. 29/2010-ST dated 22-6-2010 effective from July 1, 2010, by which, service tax is to be paid on 25% of the gross amount charged when the cost of land is not separately recovered, does the Government believe that the cost/value of the land can only be 8%, as contrasted to the fact that the cost/value of land could be anywhere between 40% and 80% in the urban areas?

++ Does the Government think that the Realty players who have classified their services under construction services have no choice but to compulsorily go under Notification No. 1/2006, under which, interalia, no cenvat credit is allowed? Despite Tribunal decisions, why is the Department bent on not accepting that the players can also go under Notification No. 12/2003-CE dated 20-6-2003, under which, cenvat credit in respect of input services and capital goods can be claimed? Why can't the Board express its views, through the Budget or through an appropriate notification, so that, the realty players can accordingly plan their transaction?

++ Why is the Government which has been gracious and kind enough to let the Realty Players who have classified their services under ‘Works Contract services' avail of cenvat credit, hell bent on refusing the cenvat credit benefit to those players who have classified their services under the Construction services?

++ What is the view of the Government with regard of the applicability of service tax in respect of the joint development agreements entered into between the developers/builders and landowners? It seems that, while some Commissionerates are taking the view that, the developer is liable for service tax in respect of the construction of the built up area meant for the landlord, some other Commissionerates are taking the view that, cenvat credit is to be denied to the extent of the value of the ‘exempted services' rendered by the developers/builders to the landlords? How can the Government allow contrasting views to be taken on this subject, by the different Commissionerates? Why can't the Board come out with a circular, clarifying its views on this subject?

++ Lastly, is the Government not aware that, due to the chaotic and utterly insensible statutory provisions and the mutually contradictoryviews taken by the Board as expressed in its circulars issued from time to time, there has been no uniformity in the levy of service tax on the Realty Players located across the country and that, this is the most unfortunate fallout that can happen to a central levy?

One would expect the FM to use the Budget as a tool, for simplifying and harmonizing the statutory provisions related to the levy of service tax on the construction activities and ensure that the provisions governing the levy as well as the availability of cenvat credit are comparable across the various service heads.

Now, let's take a look at the confusion that prevails in respect of the renting services.

Irrespective of whether the activity of renting, per se , can at all be considered a ‘service', I for one, would not find fault with the affirmative exercising of the legislative power in holding that renting, is a service, and even for the fact that the Government has thought it fit to retrospectively amend the statutory provisions to take effect from June 1, 2007. But, having taken the legislative view that renting is a service, where is the justification in denying cenvat credit to the lessors/realty players, under the very obnoxious Circular No. 98/1/2008-ST dated 4-1-2008?

How can the Government take a self-contradicting view that, for purposes of collection of service tax, renting is a service but, for purposes of cenvat credit, it is not. The said Board Circular is devoid of any logic whatsoever and it's high time the FM withdrew this Circular and reaffirmed the fairness in Government action, which is a pre-requisite for compliance.

So, it's up to you, FM, Sir.

(The Author is Director, S3 Solutions Pvt Ltd, Bangalore)