Service Tax Relief To Home Buyers By The Delhi High Court
In a significant judgment recently, the Delhi High Court has held that service tax can not be levied on payments made towards the purchase of under construction property units in a complex from builders/developers. This service tax relief to home buyers includes builder flats, group housing flats and builder floors.
The court, however, clarified that service tax charged by the builder from buyers on the Preferential Location Charges (PLC) of a flat in a complex was valid since there is “value addition” in the process. So, service tax can still be levied on (PLC) that builders charge from the buyers.
The court also directed the concerned department of the government to refund the amount to the petitioners with 6 percent rate of interest from the date of deposit till the date of refund if the builder/developer has collected service tax from them.
The ruling came on a plea by the two petitioners – Suresh Kumar and Anuj Goyal. They had entered into an agreement with Sethi Buildwell Pvt. Ltd to buy flats in the Max Royal group housing project in Sector 76, Noida. The Builder collected Service Tax from them in addition to the consideration of flats against services in relation to Construction of Flats and (PLC). The petitioners challenged the demand of service tax charged by the builder in addition to the cost of the flat.
The petitioners argued that their agreement with the builder is a composite contract for purchase of immovable property. So, they contended that in the absence of any specific provisions for ascertaining the service component of the said agreement, Parliament does not have the legislative competence to levy service tax on such transaction.
The bench of Justice S Muralidhar and Justice Vibhu Bakhru in its judgment on June 3 has struck down the provision of Section 65(105)(zzzh) of the Finance Act, 1994. The court said “Neither the Act nor the Rules framed therein to provide for a machinery provision for excluding all components other than service components for ascertaining the measure of service tax.”
The court said “The measure of tax assumes significance in such contracts as a levy of the service tax taking the gross amount charged by a builder for a composite contract would amount to a levy of service tax not only on the service element but also on the immovable property and the property in goods transferred or intended to be transferred to the ultimate buyer.”
However, the bench clarified that a landowner hiring a builder to construct a house will still pay service tax.
The government charges service tax on buyers of apartments in under construction projects since the amendment introduced by the Finance Act of 2010. Service tax is charged only on 25 per cent of the total value of the apartment due to a 75 percent abatement that is allowed.
The court observed that Finance Act 2010 and the rules authorising the levy of service tax “ do not provide any machinery for computation of value of services, if any, involved in construction of a complex and, therefore, no such tax can be imposed”.
The court also added that “Clearly service tax can not be levied on the value of undivided share of land acquired by a buyer of a dwelling unit or on the value of goods which are incorporated in the project by a developer. This would clearly include the legislative field reserved for the State under list 2 of the Seventh Schedule of the Constitution of India.”
This judgment of the Court will benefit buyers who have booked flats in under construction flats in under construction projects. 15 percent service tax is applicable from June 1 this year. Therefore, the order if not challenged in Supreme Court by the government would benefit many homebuyers. This judgment can have ramifications for home buyers across the country and should also cheer millions of home buyers.
Ajay Verma is a founder and writer of The Housing World, a real estate and mortgage news website. He brings with him 20+ years of rich experience in the real estate and mortgage industries. He has worked in senior roles in Delhi and NCR in the above-mentioned sectors.