Good news for home buyers! HC says no service tax on under-construction properties

The Delhi High Court has ruled that no service tax shall be charged on buying of under constructed flats. If the developer has already collected service tax the court ordered that the same should be refunded with the interest at the rate of 6%.

The landmark ruling by bench of Justices S Muralidhar and Vibhu Bakhru, in a case of Suresh Kumar Bansal versus the Union Of India, said that the Section 65(105)(zzzh) of the Finance Act, 1994 is applicable for the purchase of units in a complex within the scope of taxable service.

The bench said, “If the builder has collected any amount as service tax from the buyers for taxable service as defined in Section 65(105)(zzzh) of the Act and has deposited the same with the government authorities. Any such amount deposited shall be refunded to the buyers with interest at the rate of 6% from the date of deposit till the date of refund.”

However, the service tax will still be applicable on preferential location charges (PLC) levied by a builder.

Till date, Service tax is levied by the Central Government on the construction services offered by the developers to buyers. Presently, Service tax is 15%. Service tax is applicable on almost all services that a consumer avails, including buying an under-construction property.

This is so because, in the case of an under-construction property, the developer is deemed to be the provider of construction services to the home buyer, and hence service tax was charged on the cost of construction.

The service tax was was charged only to the extent of the cost of construction and not the entire value of the property. This means that cost of land is excluded.

For the purpose of calculation, 25% of the gross value of an under-construction unit with the value less than Rs 1 crore is considered to be the cost of construction, and service tax is applied on this.

The controversy of service tax came about when the buyer, Bansal, put forward the question that how can service tax can be charged by the builder prior to the completion of the construction?

According to petitioner, the agreements entered into with the builder are for the purchase of immovable property and the Parliament does not have the legislative competence to levy service tax on such transaction.

The petitioners further claim that the Act and the rules made thereunder do not provide any machinery for computation of the value of services, if any, involved in the construction of a complex and, therefore, no such tax can be imposed.