Saturday, February 4, 2012

No service tax on outright home purchase: Revenue Dept - CNBC-TV18 -

No service tax on outright home purchase: Revenue Dept - CNBC-TV18 -:

The Revenue Department says service tax is liable on the gross value of service, and not on the sale price with respect to housing, reports CNBC-TV18's Siddharth Zarabi. This means that tax will be levied only on 33% of the amount of the invoice that a consumer shows as having acquired their house for, since developers are allowed about 67% abatement on the tax to be levied.

At 33% and a service tax rate of 10.33%, finance ministry officials say that the actual impact on the billed amount would be 3.3%. They say that this is only an extension of the service tax that had originally been imposed on the housing sector.

Service tax will be levied on the balance amount in the case the structure is yet to be completed. No tax is applicable on outright purchase. The clarification in the Budget was aimed to end avoidance. The move was aimed at developers with restructured contracts.

The department says fears of impact on users are exaggerated as this is not a new levy. It was actually envisaged way back in 2005 but the government has decided to implement this now. Till now, there was no concept of a service tax between the developer and the end user.

The government however has now said that any exchange of money from the consumers to the developers will be charged as service tax, which means all properties that are really under construction where the title has not transferred yet from the developer to the consumer will also be charged service tax i.e. 10.3% as outlined in Budget 2010. The tax will be calculated on 33% of the agreement value.

Sobha Developers in an exclusive interview to CNBC TV18 has said that the prices will move up by about 4%. However all other brokerage analysts are estimating that the price increase would be in the range of 5-6%. Also the impact will be maximum on residential where there is pre-sale.

The Revenue Department will meet executives from the real estate industry to clarify concerns. The real estate industry is likely to meet Finance Minister Pranab Mukherjee soon to discuss issues.

In an interview with CNBC-TV18, Rajeev Talwar, Group ED, DLF and E&Y's Vivek Mishra spoke on the levy of service tax on new construction.

Here is a verbatim transcript of the interview. Also watch the accompanying video.

Q: When we tried to question the CBEC chairman on what the rationale was behind this imposition, there really wasn't a convincing answer; this really amounts to double taxation doesn't it?

Talwar: I couldn't agree wit you more; I really hope that there is a greater rationale and justification for this. It's been a little disturbing if I can say very mildly like it has been as disturbing and a disappointing imposition, which amounts to double taxation because the states who have the stamp duty under the Transaction of Property Act ranging anything from 5-9% would be hard pressed on such a levy.

And it really does make a difference to have taxation all over again for something which is as it is what the government says something which is already a bit little expensive.

Q: Within the developer community there seems to be a little bit of confusion on whether the tax will actually be levied on the total sale value or on the cost of construction. What do you make of it?

Talwar: We all at the moment from what all the papers have come out there is little or no clarity and we would all be seeking clarification on this that yes it should be a fair and equitable levy if at all it is levied.

As it is the land belongs to the owner and there is a construction cost being added to it on which most of the commodities are payable, and are levied VAT now. If on top of that one is to levy a service tax then it would really make the inputs more expensive and therefore the end products more expensive.

Q: Do you have any clarity on how this is going to be levied on the sale value or the cost of construction?

Mishra: There is an origin to this levy which is about 2-3 years back the Supreme Court passed down a decision in the case of K Raheja which was in the context of sales tax or VAT and in that decision they said that the transaction between the developer and the purchaser of the flat is also a works contract and also till then and even now the practice is that only the earlier transaction between the construction contractor and the developer is the works contract. But they said that the next leg of the transaction is also a works contract.

Now if that reasoning is followed and if it is to be treated as a works contract then it is subject to VAT on one hand and it is also subject to service tax on the other hand. And this explanation in the Budget just takes forward that reasoning and levies it to service tax.

And so there is not a double taxation but triple taxation because the second leg of the transaction between the purchaser of the flat or it gets subject to VAT as well as service tax and stamp duty.

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