Service Tax application on Flat Sale confirmed by High Court of Bombay

Property rates are all set to rise further says Adv. R. P. Rathod.

        Among all the other Negative News floating in the market, this is one such news which would further dissuade the buyers from purchasing flats in under construction buildings. The High Court of Judicature at Bombay has dismissed the Writ Petition (Tax) filed by the Maharashtra Chamber of Housing Industry (MCHI) challenging the levy of Service Tax on pre-construction period.

Adv. R. P. Rathod. states that the Service Tax on buildings came into force from Dt. 1st July 2010. Accordingly the flat buyers were required to pay approximately 2.5 per cent more as service tax on the total value. The sale of a unit in a Complex, as per the settled law of transfer of property is not a service, thus the said levy of Service tax on buildings was challenged before the Bombay High Court by the MCHI. The Bombay High Court had earlier passed an Interim Order staying the levy of Service Tax (Copy of the said Order is available for download at Service tax Stayed).

Adv. R. P. Rathod. further elucidates Facts of the Case:

He states that the Writ Petition was filed by the MCHI on 17th July, 2010. The Interim Stay on the matter was ordered by the then joint bench of Justice V C Daga and Justice S J Kathawala of the Bombay High Court.

The main point which the Writ Petition had challenged was the amendment to the Finance Act 1994 by the Finance Act 2010. The new act seeks to introduce a Service tax, or Deemed Tax on those commercial construction or residential complexes constructed before obtaining a Certificate of Completion. The writ challenged the constitutional validity of such an amendment. The petitioners also requested the Bombay High Court to prevent members of the Union of India from penalizing members of the Maharashtra Chamber of Housing Industry (MCHI) for undertaking transactions concerned with the various constructions, sale of these constructions or its development previously allowed under the Finance Act 1994.

The Bombay High Court granting the Interim Stay on 23rd July 2010 had ruled that the assessment of the situation will follow the due course of Law, but for the present, no coercive advances will be made by the respondents against the petitioners in matters relating to the collection of Service TaxAfter the Final hearing and Arguments the divisional bench of Justices D Y Chandrachud and A A Sayed passed the order on Friday the 20th January 2012., dismissing the writ petition filed by the MCHI & thereby vacating the earlier Stay order (Interim Relief) challenging the constitutional validity of the Centre to levy Service Tax.

Additional solicitor general Darius Khambata arguing the matter on behalf of Union of India & Ors referred to the Supreme Court Judgments to prove that construction was a Service activity and the Union government had the power to levy Service tax. He said as per the provisions of the Maharashtra Ownership of Flat Act 1963(MOFA), flats can be registered even prior to the completion of construction and therefore, all types of facilitation provided by the builder would definitely be considered as services.

The Service tax increases the cost of living spaces in the State and will deter & dissuade the buyers from booking a flat in under construction building. The cost of property in Mumbai & Thane is already Sky High. This levy of Service tax is bound to make the purchase of property a costly proposition says Adv. R. P. Rathod. He further states that though the matter was stayed by the Bombay High Court, the builders were still charging the buyers following an Interim Order of 2011.

He says that at present there are about 800 builders who are members of the MCHI and party to the plea. Following an Interim Court Order in 2011, MCHI members had deposited Rs 180 crore collected as Service Tax from buyers with the Court. Further the Builders say there is already a 30% drop in sales. More than 80% of apartments are booked while still being constructed. Now Buyers will have to pay more for property following the Bombay High Court order that said Service Tax is liable to be paid on construction of flats and other properties. This would further add the drop in their Sales Chart.

Adv. R. P. Rathod. further adds that as the flats purchase directly from builders will become more costly, there will be slowdown in sale of such flats. He further says that in the year 2012 the prospective flat buyers would rather show a preference for resale flats or rental premises.

Adv. R. P. Rathod. lays down a List of some of the Taxes, Expenses & Charges (approx), which you will have to pay before buying Flats from the Builders.

He says that, if you have finalized buying a Flat, think of the additional burden before finalizing the deal.

Value Added Tax
2.5 %
Loading Charges
35% to 45% depending on the builder & amenities.
[This would now be charged officially, as amenities and areas such as Letter box room, lobbies, flower beds, etc, post amendment to the DCR, are included in FSI Count, please read our Column: Builders will get upto 35% of extra FSI]
5% to 10% depending on the builder & parking space.

        Please do not forget to account the Income Tax which you might have paid while earning the money you plan to invest in House Property and Interest on Home Loan, if you have opted a Bank Loan concludes Adv. R. P. Rathod.