Tax component may be refunded

PUNE: Flat buyers may be spared the 12.2% service tax, with the government making it clear that a builder who does construction work on his own do not have to pay service tax.

Some builders, who have added the service tax component to the cost of the flat, have parked these proceeds in an escrow account. It’s possible the money may be refunded.

The finance ministry has, however, held that in a case where the builder, promoter or the developer builds a residential complex with more than 12 units by engaging a contractor, the contractor will be liable to pay service tax on the gross amount charged for construction services.

“Builders did not contest the levy of service tax on contractors. They have only opposed levy of service tax on the sale of a flat,” said an industry analyst.

Residential complexes were brought under the service tax net from June ’05. The government had said service tax will be charged only on the value of the contract for constructing the block.

Land value will be excluded while computing service tax. Further, the abatement of 67% on the value of the contract will be allowed if the construction contract is turnkey — the contractor supplies the material and labour.

Builders contended they are not liable to pay the levy because they have the rights to develop the property. They cited a CBEC notification which said estate builders who construct buildings — for their own use or rent it out or sell it out subsequently — were not taxable service providers.

However, the directorate of service tax went by a SC ruling which said that a works contract included in any agreement ‘for carrying out either for cash or for deferred payment or for any valuable consideration, the building and construction of any movable or immovable property’ would attract a turnover tax.