Service tax on under construction property or construction services
Meaning of construction services – construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where entire consideration received after issuance of completion certificate by the competent authority.
The expression “ competent authority” means the government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non requirement of such certificate from such authority , from any of the following :
- Architect registered with the council of architecture constituted under the architect act, 1972
- Chartered engineer registered with the institution of engineers
- Licensed surveyor of the respective local body of the city or town or village or development or planning authority
Nature of services provided in construction
Additions, alterations, replacement or remodeling of a complex, building, civil structure or a part thereof intended for sale to a buyer except where entire consideration is received after issuance of completion certificate by the competent authority.
Liability under reverse charge
Wherever the service provider is located outside the taxable territory but the service is being provided in taxable territory, in terms of place of provision of services rules, 2012, the tax shall be payable by the service receiver.
Place of provision of services rules, 2012
As per rule 5 of place of provision of service rules,2012, place of provision of ‘ construction services’ provided in relation to immovable property shall be the place where the immovable property is located or intended to be located, irrespective of where the provider or receiver is located.
Redevelopment including slum rehabilitation projects: Generally in this model, land is owned by a society, comprising members of the society with each member entitled to his share by way of an apartment. When it becomes necessary after the lapse of a certain period, society or its flat owners may engage a builder/developer for undertaking re-construction. Society /individual flat owners give ‘No Objection Certificate’ (NOC) or permission to the builder/developer, for re-construction. The builder/developer makes new flats with same or different carpet area for original owners of flats and additionally may also be involved in one or more of the following:
(i) Construct some additional flats for sale to others;
(ii) Arrange for rental accommodation or rent payments for society members/original owners for stay during the period of re-construction;
(iii) Pay an additional amount to the original owners of flats in the society.
Clarification: Under this model, the builder/developer receives consideration for the construction service provided by him, from two categories of service receivers.
First category is the society/members of the society, who transfer development rights over the land (including the permission for additional number of flats), to the builder/developer.
The second category of service receivers consist of buyers of flats other than the society/members. Generally, they pay by cash.
(i) Re-construction undertaken by a building society by directly engaging a builder/developer will not be chargeable to service tax as it is meant for the personal use of the society/its members.
(ii) For the period after 01/07/2010, construction service provided by the builder/developer to second category of service receivers is taxable in case any payment is made to the builder/ developer before the issuance of completion certificate.
Investment model: In this model, before the commencement of the project, the same is on offer to investors. Either a specified area of construction is earmarked or a flat of a specified area is allotted to the investors and as it happens in some places, additionally the investor may also be promised a fixed rate of interest. After a certain specified period an investor has the option either to exit from the project on receipt of the amount invested along with interest or he can re-sell the said allotment to another buyer or retain the flat for his own use.
Clarification: In this model, after 01/07/2010, investment amount shall be treated as consideration paid in advance for the construction service to be provided by the builder/developer to the investor and the said amount would be subject to service tax. If the investor decides to exit from the project at a later date, either before or after the issuance of completion certificate, the builder/developer would be entitled to take credit under rule 6(3) of the Service Tax Rules, 1994( to the extent he has refunded the original amount). If the builder/developer resells the flat before the issuance of completion certificate, again tax liability would arise.
Conversion Model: Conversion of any hitherto untaxed construction /complex or part thereof into a building or civil structure to be used for commerce or industry, after lapse of a period of time.
Clarification: Mere change in use of the building does not involve any taxable service, unless conversion falls within the meaning of commercial or industrial construction service.
Non requirement of completion certificate / where completion certificate is waived or not prescribed: Where completion certificate is waived or is not prescribed for a specified type of building, the equivalent of completion certificate by whatever name called should be used as the dividing line between service and sale and authority competent to issue completion certificate includes an architect or chartered engineer or licensed surveyor.
Applicable service tax rate
With effect from March 1, 2013, the effective rate of service tax on under-construction commercial properties (irrespective of carpet area or consideration being charged) has been increased from 3.09% to 3.7%. i.e. abetment rate has become down from 75% to 70%
Separately, with respect to residential properties, please note that with effect from May 9, 2013, the applicable service tax on under-construction residential properties, having carpet area of less than 2,000 square feet and the consideration charged by the builder for the same is less than R1 crore, continues to remain 3.09%. i.e. abatement % is 75%
In case of residential properties, the increased service tax rate of 3.7% is applicable in cases where either the carpet area is greater than 2,000 square feet or the consideration charged by the builder is greater than R 1 crore (or both).
Also, the service tax is required to be paid as and when the builder raises the invoice on you for such services.