We are a real estate development firm which engages a contractor to construct
residential societies. Prospective buyers pay us a booking advance on these
residential units. Are we liable to pay service tax even though our contractor
is paying service tax on construction activities?
In a recent controversial decision by the Authority for Advance Ruling, Central
Excise, Customs and Service Tax, New Delhi in the case of M/s Harekrishna
Developers, Ahmadabad vides Ruling No. AAR/03(ST)/2008, in Application No. AAR/05(ST)/2007
dated 7.4.2008, it was held that Service Tax is liable to be paid by the Real
Estate Developer where there is a sale of residential units after booking. They
are liable to pay service tax under section 65 (105) (zzzh) of the Finance Act,
1994 under the notified taxable service of construction of a complex. This
ruling has lead to a chaotic situation placing a tax axe in the hands of the
service tax department.
However, as per section 96E of The Finance Act 1994, the advance ruling
pronounced by the Authority under section 96D shall be binding only on the
applicant who had sought it or in respect of any matter referred to in
sub-section (2) of section 96C, on the Commissioner of Central Excise, and the
Central Excise authorities subordinate to him, in respect of the applicant.
Further, the advance ruling referred to in the sub-section shall be binding as
aforesaid unless there is a change in law or facts on the basis of which the
advance ruling has been pronounced. Thus, in light of the said provision of the
Finance Act, the said ruling has no bearing on any other real estate developer
and thus the said ruling cannot be made the base for demanding any service tax.
Moreover, this issue relating to applicability of service tax on construction
activities was examined in detail by the ministry of finance. The Central Board
of Excise & Customs, New Delhi issued a Master Circular clarifying technical
issues relating to taxation of services Vide this Circular No. 96/7/2007-S.T.,
dated 23-8-2007 F.No. 354/28/2007-TRU in this regards. The fundamental question
as to whether service tax is liable under construction of complex service
[section 65(105)(zzzh)] on the builder, promoter, developer or any such person
was discussed threadbare. Two situations were examined, those who get the
complex built by engaging the services of a separate contractor, and others who
build the residential complex on his own by employing direct labour. It was
clarified vide the said Master Circular dated 23.8.2007 that, in a case where
the builder, promoter, developer or any such person builds a residential
complex, having more than 12 residential units, by engaging a contractor for
construction of the said residential complex, the contractor in his capacity as
a taxable service provider (to the builder/promoter/developer/any such person)
shall be liable to pay service tax on the gross amount charged for the
construction services under 'construction of complex' service [section 65(105)(zzzh)].
However, in the second situation, as no other person is engaged for construction
work and the builder/promoter/developer/any such person undertakes construction
work on his own without engaging the services of any other person then, in such
cases, firstly service provider and service recipient relationship does not
exist and secondly, services provided are in the nature of self-supply of
services. Hence, in the absence of service provider and service recipient
relationship and the services provided are in the nature of self-supply of
services, the question of providing taxable service to any person by any other
person does not arise. The said Ruling is in contradiction to the said Master
Circular. Thus in absence of any further clarification and in light of current
situation, the Real Estate Developer is not liable to pay any service tax as the
contractor is already paying service tax on construction activities.