Service Tax on Redevelopment of Properties

vector-skyline-36By Sameer Sanghvi & Co

By Accommodation Times News Services

Since, in the redevelopment transaction the developer agrees to construct certain area for land owner on the land retained by the land owner, free of cost during the construction period, as per the Education Guide dated 20th June, 2012 issued by the Central Board of Excise and Customs (“CBEC”), post introduction of the new service tax regime effective from 1st July, 2012, the developer shall be liable to pay service tax on the value of the land transferred by land owner to the developer.
The aforesaid view is in contrast to the view expressed by CBEC in its earlier Circular No. 151/2/2012-ST dated 10th February, 2012, where in the CBEC has clarified that the value of the constructed area allotted by the developer to the land owner, free of cost would be equivalent to the value of the flats sold by the developer to the actual flat purchasers. The CBEC in the aforesaid Education Guide has further clarified that service tax shall also be payable by the land owner, who sells the flats forming part of his allocation, during the construction period.

I vehemently disagree with the aforesaid views of CBEC given in the above referred Education Guide and the Circular and with due respect wish to submit that CBEC has traversed beyond their jurisdiction to impose service tax on a value which is not chargeable to service tax.

In order to avoid such huge service tax liability, the Development Agreement needs to be carefully drafted in a manner, wherein the construction cost forming part of the rehab component is properly estimated and quantified. By quantifying the construction cost and by incorporating specific provisions in the Development Agreement, the service tax liability can be substantially reduced. Also by quantifying the construction cost, the developer will be entitled to claim full CENVAT credit of all the input services (including the input services availed from the contractors) for constructing the area allotted to the land owner.

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