MUMBAI: In a temporary relief to home buyers and developers, the Bombay high court has granted interim stay on service tax on under-construction buildings, which was challenged by the Maharashtra Chamber of Housing Industry (MCHI), an umbrella organisation of 500 developers. The matter is posted for hearing on August 3.

Admitting the petition last week, a division bench of Justices V C Daga and S J Kathawala granted interim stay until further hearing. The MCHI and others challenged the constitutional validity of the Finance Act 2010, which sought to introduce the concept of service tax on under-construction buildings. But the MCHI contended that the sale of a unit, as per the settled laws dealing with transfer of property, could not be deemed a service.

"Sale by the builder should not be treated as a service, as service tax is levied ultimately on the property," said the MCHI. Senior advocate Rafique Dada appeared on behalf of M/s Parimal K Shroff & Company for the MCHI in the court.

In its interim order, the HC stated, "No coercive steps shall be taken against the petitioner for the recovery of service tax in relation to the provisions in question... but assessment may proceed in accordance with the law." This allows the government to carry on service-tax assessment.

MCHI president Sunil Mantri expressed satisfaction over the court's ruling which he said was "in the interest of the common man". "Any such levy will increase the cost of the flat and ultimately the buyer will have to bear the brunt," Mantri said.

Flat buyers now have to pay approximately 2.5% as service tax on the total value of their flat. "If the value of a flat is shown Rs 1 crore in the agreement, the home buyer will have to shell out an additional Rs 2.5 lakh as service tax," he said.
Read more
Reply
21 Replies
Sort by :Filter by :
  • So then the question that begs to be answered is what about builders who have already charged customers the service tax in the last month? Do they get it back??
    CommentQuote
  • It is a stay order and no more than that. If the government loses on all available petitions then the question of refund arises. However builder cannot charge ST till the stay order is in place.
    CommentQuote
  • Originally Posted by jacobsassoon
    So then the question that begs to be answered is what about builders who have already charged customers the service tax in the last month? Do they get it back??


    The matter is at interim stage. This is an interim Order. A lot depends upon the final order. If the Court rules in favour of association, the government cannot charge service tax and consequently the builders will have to repay the amount that they have collected as service tax from the customers.

    But in all probability, this will be escalated to the Supreme Court, I guess.
    CommentQuote
  • Originally Posted by pankajlaws
    The matter is at interim stage. This is an interim Order. A lot depends upon the final order. If the Court rules in favour of association, the government cannot charge service tax and consequently the builders will have to repay the amount that they have collected as service tax from the customers.

    But in all probability, this will be escalated to the Supreme Court, I guess.

    Then after 5 years when the government loses in Hight court it will bring an amendment to the service tax bill so the case will have to be reconsidered.
    CommentQuote
  • Originally Posted by pankajlaws
    The matter is at interim stage. This is an interim Order. A lot depends upon the final order. If the Court rules in favour of association, the government cannot charge service tax and consequently the builders will have to repay the amount that they have collected as service tax from the customers.

    But in all probability, this will be escalated to the Supreme Court, I guess.

    Then after 5 years when the government loses in Supreme court it will bring an amendment to the service tax bill so the case will have to be reconsidered.
    CommentQuote
  • Originally Posted by jacobsassoon
    So then the question that begs to be answered is what about builders who have already charged customers the service tax in the last month? Do they get it back??



    How can builder charge service tax as till today rules regarding it are not clear?,nobody can explain how much the tax and what will be the criteria for it?Then which customers paid service tax it to the builder??

    Today Itself I talk to Dosti once again and they said Even they dont know exactly what are the terms for it.They again added we will not have to pay the tax on the construction completed till 30th june 2010,(though u might have paid the amount in July).

    But he told about stay order also and mention they are doing there best to dissolve this matter as it would definately benificial for us and them also.

    So lets hope for the best !
    CommentQuote
  • Indeed a relief for common man...
    CommentQuote
  • I think this is quite an irony. The builders association standing up for the common man. If MCHI is so concerned about the buyers and really think the Mumbai RE market is just about recovering from recession then why don't they stabilize the price levels. Wouldn't that help the common man even more? For every 100 rs rise in a 1000 sq ft home the cost appreciates by 1 lakh. MCHI cannot adopt a 'holier than thou' attitude and selective concern for common man by admonishing only the govt and the banks when they try to join the party. The message is clear MCHI- first get your own house in order. And finally for the common man (me included) why can we not form an association like the MCHI which will really represent the ground realities and resist arm twisting tactics by all stakeholders?
    CommentQuote
  • Service tax is good for end consumers!!!

    I think the govt has done a good thing by imposing a service tax on under-construction buildings. The point here is that builders will find it difficult to get funds from investors. (an investor will be vary of doling out service tax as he wants the max out of his investment).
    MCHI is fighting the case only 'coz they are finding it difficult to get fund. It's not at all out of their concern for the end consumers.
    I think, service tax will help me and you... by taking the investors away... and by reducing the prices in the long run.
    CommentQuote
  • Valid point..

    Though any update on the hearing from court. it was supposed to be 3 Aug.

    Regards
    Inder.

    Originally Posted by lmfrz
    I think the govt has done a good thing by imposing a service tax on under-construction buildings. The point here is that builders will find it difficult to get funds from investors. (an investor will be vary of doling out service tax as he wants the max out of his investment).
    MCHI is fighting the case only 'coz they are finding it difficult to get fund. It's not at all out of their concern for the end consumers.
    I think, service tax will help me and you... by taking the investors away... and by reducing the prices in the long run.
    CommentQuote
  • I respect your view but frankly I think the logic does not hold water. Investors who make upto 100% return on the properties that buy will not really worry too much about the 2.5% levy. They will anyway recover it from the next user. Even as a end use I will always calculate the cost of my property including the service levy which means that if and when I put it on the market I will factor in for that amount. It's just like saying people who pay a premium for floor rise will consider tht point and pass on the premium they paid (and much more) to the next buyer. Same is the case with service tax.

    I however agree that MCHI is anyway in the mix for its own good though its desperately trying to play guardian angel. In a way its good that atleast some one is protesting this order because you and me are too busy buried in our office work and other issues anyways..This the unfortunate and true picture in my opinion

    Originally Posted by lmfrz
    I think the govt has done a good thing by imposing a service tax on under-construction buildings. The point here is that builders will find it difficult to get funds from investors. (an investor will be vary of doling out service tax as he wants the max out of his investment).
    MCHI is fighting the case only 'coz they are finding it difficult to get fund. It's not at all out of their concern for the end consumers.
    I think, service tax will help me and you... by taking the investors away... and by reducing the prices in the long run.
    CommentQuote
  • Originally Posted by lmfrz
    I think the govt has done a good thing by imposing a service tax on under-construction buildings. The point here is that builders will find it difficult to get funds from investors. (an investor will be vary of doling out service tax as he wants the max out of his investment).
    MCHI is fighting the case only 'coz they are finding it difficult to get fund. It's not at all out of their concern for the end consumers.
    I think, service tax will help me and you... by taking the investors away... and by reducing the prices in the long run.



    Somehow don't agree with this concept. However, this gave me another thought about Capital Gains taxation. Now if we are selling flat, say after 5 years, what would be my cost of acquisition? it can't be total purchase cost of flat, since 25% is constituting "services received", which should not be capitalized.

    Any thoughts?
    CommentQuote
  • --
    Ravi Ahuja, Executive Director, Development Services, Cushman & Wakefield, India also says, ''It will be detrimental for the low and mid-segment residential sector which is already facing the heat of high home loan interest rates.''


    He points out, "As per this law, purchase in a new building is exempted from service tax once it has received completion certificate. This may result in a drop in pre-commitments from investors and affordable housing buyers resulting in project finance concerns for developers."


    Ahuja points out that as most developers finance their projects through pre-commitments which are done in the early stage of construction, the new tax levy will force many endusers as well as investors to relook at their budgets as well as cash flows.
    --


    I think 2.5% is too less a price to pay to squeeze these builders out of fund.
    In the long term it will help by making real estate not so attractive for investment.

    MCHI is doing the litigation for its own good. In retrospect, I feel the 30 - 40% price hike from Feb '10 to June '10 can be attributed to the imposition of this tax. And many builders made a killijng out of fear of service tax of the end consumers. I have seen a few builders asking to book before June '10 to avoid the service tax.
    CommentQuote
  • The latest I heard on the service tax from one of the developers is that the court has adjourned the matter until 23rd Sep hence no service tax is payable at the moment. However some developers are taking an undertaking from buyers to cover themselves incase the judgement goes against them.. Just an update..
    CommentQuote
  • Friends,
    Any update on this.... Who is the winner?
    One of my relative booked an under construction flat in Ghazaiabd, in Sep 2009. He is in CLP plan. Now builder is asking service tax on the remaining amount after Jul 2010.

    Is it a valid demand from the builders.
    CommentQuote