Builders are liable to collect service tax

I have booked an under-construction flat in Mumbai. Recently, the builder sent me a notice asking me to pay service tax on the amount of installments paid by me from July 1, 2010? Can you guide me about the legal position as on date as I had heard that the courts have granted stay on the recovery of service tax? —Dinesh Mehta

The Mumbai High Court has dismissed a writ petition filed by the Maharashtra Chambers of Housing Industry on behalf of its 800 members challenging the levy of service tax on builders vide its judgment dated January 20, 2012. With the dismissal of the writ petition, builders, developers and promoters will now be liable to collect service tax on all payments received by them post July 1, 2010. 

The Finance Act, 2010 had amended the definition of taxable service under construction of complex service, the amended definition is as follows:

Taxable service with effect from July 1, 2010 means any service provided or to be provided to any person, by any other person, in relation to construction of complex.

Explanation—”For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer;” [Section 65(105)(zzzh)].

Now, as per the court order, the builder, developer has to collect service tax @ 2.575% on the amounts received by them from July 1, 2010. Therefore, the builder is rightly asking you to pay service tax on all installments paid by you from July 1, 2010.

The writer is with M Sheth & Co, a chartered accountancy firm in Mumbai, and can be reached at mshethco@yahoo.co.in