Read on and decide for yourself

Construction of residential complex was brought under service tax w.e.f.01.06.2005. Doubts have arisen regarding the applicability of service tax in a case where developer / builder/promoter enters into an agreement, with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment. The ‘Construction of Complex’ service has been defined under Section 65 (105)(zzzh) of the Finance Act as “any service provided or to be provided to any person, by any other person, in relation to construction of a complex”. The ‘Construction of Complex’ includes construction of a ‘new residential complex’. For this purpose, ‘residential complex’ means any complex of a building or buildings, having more than twelve residential units. A complex constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex intended for personal use as residence by such person has been excluded from the ambit of service tax.

2. A view has been expressed that once an agreement of sale is entered into with the buyer for a unit in a residential complex, he becomes the owner of the residential unit and subsequent activity of a builder for construction of residential unit is a service of ‘construction of residential complex’ to the customer and hence service tax would be applicable to it. A contrary view has been expressed arguing that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit, the transaction of sale is completed only after complete construction of the residential unit. Till the completion of the construction activity, the property belongs to the builder or promoter and any service provided by him towards construction is in the nature of self service. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of ‘residential complex’ as defined for the purposes of levy of service tax and hence construction of it would not attract service tax.

3. The matter has been examined by the Board. Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of ‘agreement to sell’. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.

4. All pending cases may be disposed of accordingly. Any decision by the Advance Ruling Authority in a specific case, which is contrary to the foregoing views, would have limited application to that case only. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.

(Gautam Bhattacharya)
Commissioner (Service Tax)

CBEC, New Delh
http://www.servicetax.gov.in/st-cirmainpg.htm

1. The Title Report – colloquially known as the ‘property card’ or in some places ’saat-bara’, this is an investigation into the title of the land over a period of 30 years. It ensures the marketability of the land in the hands of the original owner. Ask for the detailed report, not merely an abbreviated certificate. This should be prepared for the seller by his lawyer and should be checked by your lawyer. If the title is not clear, you can be evicted from the property at a later date.

2. Property Under Construction – If you are buying a new property, ask for an Allotment Letter or Development Agreement detailing the agreed price, payment and construction schedule, house plans, delivery date and builder’s liability in case of late completion or problems after possession. Make sure that the developer has clear title to the land, and that the relevant local authorities have approved the building plans. Once the construction is over, ask for the completion and occupation certificates, which indicate that the building has adhered to municipal requirements.

Some other costs you will incur: Society formation charge, deposit for electricity meter, stamp duty and registration charges.

3. Constructed property – Make sure that the seller has the title and possession of the property as well as the right to transfer the property. Check that the relevant approvals, if any, have been obtained from the land development/planning authority. Ensure that there are no tenants and get a declaration that the property was purchased from the seller’s funds and is not mortgaged. Get a ‘No Objection Certificate’ from the builder or society. Check whether dues such as property tax, society, water and electricity bills, etc. have been paid in full. Decide who will pay society transfer charges. Take possession of all relevant documents and also the original allotment letter, completion certificate, occupation certificate and all other documents given by the original builder.

4. Leasehold vs. Freehold – Most of the property in India is freehold, which means that ownership is transferable. In some specific areas such as Delhi, the government owns most of the land, some of which is leased out. This lease is transferable, provided permission is sought directly from the Central Government. In this case, you have to pay stamp duty and execute a memorandum of transfer. In the case of leasehold property, make sure that the ground rent has been settled up to date. Most transactions are done through Power of Attorney (POA), which does not confer a clear title to the buyer and it also ceases on the death of the seller. If you are entering into such a transaction, ensure that you have a general as well as special, irrevocable POA, which will allow you to transfer the property. However, buying properties involved in multiple POAs is fraught with difficulties.

5. Stamp Duty & Sale Deed – Stamp duty is a percentage of the transaction payable to the state government. It varies from state to state. The sale agreement should state who pays the stamp duty. If it is not included in the agreement, the buyer should make sure he/she pays the full amount and registers his/her name as the owner in the land revenue records. The final Sale Deed should be stamped and registered at the appropriate local area office.

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* Check that property has clear legal titles or not.

* Check that whether the developer has the right to transfer the properties. Has he taken transfer of property approvals from the statutory land development or planning authority or competent authority constituted under the Urban Land Ceiling and Regulation Act and the Income-Tax Act.

* Check that the developer has acquired approvals from the Municipal Corporation, Area Development Authorities, Electricity Boards, Water Supply & Sewage Boards.

* Scrutinize the contract and take help from legal experts before signing.

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