Realty check for new service tax regime

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The Hindu Business Line


Vivek Pachisia
Tax Partner

The service tax regime has been overhauled vide Budget 2012 — the 18-year-old classification-based service tax law has been replaced with ‘negative list’ based levy. This has widened the scope of services manifold.

The shift to a negative list-based taxation is aimed at aligning the service tax system to the proposed Goods and Services Tax regime. It is hoped that the GST will help unify the levies of the Centre and the States into one composite system.

Under the new regime, effective from July 1, apart from a handful of services specifically excluded from service tax, every activity for monetary or non-monetary consideration is taxable — the change has an impact on every sector, and real estate is no exception.

The service tax legislation, which has been widening its scope of coverage of the real estate sector over the years, has used the transition to the new regime to cover the spectrum of real-estate related services with a few exclusions, and set to rest some of the levies disputed in the past.

Residential apartments

An interesting concept of “declared services” has been introduced under the new regime to settlethe question of whether a particular activity can be considered a service or not. For instance, the real estate sector disputed the levy of service tax on residential apartments sold to customers. The issue has been addressed by including the activity within declared services to the extent provided before a building completion certificate is issued.

Similarly, service in relation to renting of immovable property, which was disputed in the case of Home Solutions Ltd, has been specifically included as a declared service.

One major change under the new tax regime is the enhanced scope of levy in the case of residential complexes. Now, even a complex with two or more residential units will be subject to service tax, as opposed to 12 or more earlier.

Renovation cost

The concept of taxing contract service related to construction continues under the new regime.

However, the composition scheme, which adopted a concessional tax rate of 4.8 per cent under the erstwhile scheme, has been replaced with a concept of abatement to levy composition tax. Accordingly, though there may not be any significant incremental tax cost for new constructions, which are eligible for 60 per cent abatement, renovation of existing buildings may be impacted with a lower abatement of 40 per cent of the contract value.

While the negative list will enhance and clarify the scope of taxability under service tax — many aspects of which were hitherto mired in litigation — questions over conflicting jurisdiction between service tax, stamp duty and VAT shall remain.

Furthermore, due to the shift in the basis of determination for tax levy and lack of adequate guidance under the new regime, the real estate sector could potentially face new legal issues, such as taxability of services for immovable properties outside India (when the service provider and property owner are in India), or the treatment of projects under composition scheme.

In a nutshell, while adopting the new tax regime, the real estate sector is still beset with questions that it hopes will be solved over time.