Service Tax Imposed by builder on the purchase of new flat

Circular No. 108/02/2009 – ST

F. No. 137/12/2006-CX.4

Government of India

Ministry of Finance

Department of Revenue

Central Board of Excise and Customs

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New Delhi, dated 29^th January 2009 

Subject: Imposition of service tax on Builders - regarding

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        Construction of residential complex was brought under service tax w.e.f.01.06.2005. Doubts have arisen regarding the applicability of service tax in a case where developer / builder/promoter enters into an agreement, with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment. The ‘Construction of Complex’ service has been defined under Section 65 (105)(zzzh) of the Finance Act as “any service provided or to be provided to any person, by any other person, in relation to construction of a complex”. The ‘Construction of Complex’ includes construction of a ‘new residential complex’. For this purpose, ‘residential complex’ means any complex of a building or buildings, having more than twelve residential units. A complex constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex intended for personal use as residence by such person has been excluded from the ambit of service tax.

2.       A view has been expressed that once an agreement of sale is entered into with the buyer for a unit in a residential complex, he becomes the owner of the residential unit and subsequent activity of a builder for construction of residential unit is a service of ‘construction of residential complex’ to the customer and hence service tax would be applicable to it. A contrary view has been expressed arguing that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit, the transaction of sale is completed only after complete construction of the residential unit. Till the completion of the construction activity, the property belongs to the builder or promoter and any service provided by him towards construction is in the nature of self service. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of ‘residential complex’ as defined for the purposes of levy of service tax and hence construction of it would not attract service tax.

3.       The matter has been examined by the Board. Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of ‘agreement to sell’. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.

4.       All pending cases may be disposed of accordingly. Any decision by the Advance Ruling Authority in a specific case, which is contrary to the foregoing views, would have limited application to that case only. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.

(Gautam Bhattacharya)

Commissioner (Service Tax)

Dear Rahim,

If your friend has entered into to agreement to sell for residential property and builder is constructing the property which is subject to sale only after completion of property and full payment of agreeem amount by registring the Sale Deed.

The builder can not charge Service tax. this is illegal collection. there can be two  things either the builder is not aware of Circluar issued by CBEC on 29Jan'2009 (as Above) or he is aware still colecting amount but not depositing the same to the credit of CBEC. With reference to his Service Tax registratin number you can enquire whether the Builder is really depositing the ST or not.

VK Dwivedi. 

Dear Sir,

I booked an appartment in August 2011. As per the agreement plan I had paid them 95% of the total cost within one month. There was no demand of service tax at that time. I received a demand letter regarding service tax in april 2011. There were some discrepancies in the payment made by me. So I wrote them back and around last week of may 2011, I got the corrected demand letter. I paid accordingly. Now the builder is giving possession of the appartment and has sent a demend letter. They have charged the penal interest on the servcie tax from the date of booking till the actual payment date. How can they charge this suddenly? When the demand letter came, I paid accordingly.

Please suggest what to do now. One more query - how can we enquire whether the Builder is really depositing the ST.

Shall i pay to buider or not still confused ... plz plz advice