Service tax on free area given to members of society in redevelopment project
By CA Pathik Shah
In Mumbai, many building are becoming older than 35 to 40 years and such building require redevelopment. Also due to shortage of land, rising population innovative concept of redevelopment of old properties has brought in Mumbai. In such redevelopment, society appoints developer and developer construct new flats with modern amenities. Members of society gets newly constructed flat free of cost and also get rent allowances, corpus and other allowances. Accordingly such redevelopment transaction is barter transaction between society/ members and developer.
Prior to 1st July, 2012, The Central Board of Excise and Customs (CBEC), vide their circular has clarified that re-construction undertaken by a building society by directly engaging a builder/developer will not be chargeable to Service tax as it is meant for the personal use of the society/its members.
However, from 1st July, 2012, In new service tax legislation, if any activity carried out by a person for another for consideration and includes a declared service but not falling in negative list of service then such activity would be liable for service tax. In case of redevelopment, developer provides service of construction of flat and developer receives right for construction of additional saleable area which developer can sale to third party. In such case, such reconstruction activity provided by developer to society members would fulfill criteria of definition of service. Hence, such construction service provided by developer to society members and members receives free of cost area would be liable for service tax.
The Maharashtra Chamber of Housing Industry (MCHI) has sought clarification from the Service Tax Commissioner, Mumbai-I on the issue whether Builders/Developers are liable to Service tax in respect of rehab flats/units allotted to society members in redevelopment project. The Commissioner, vide his letter F.No.V/ST-I/Tech-II/463/11 dated 31-08-2012, clarified that Service tax is leviable on construction of such rehab flats/units/ free of cost area received by members.
In such case, developers have to pay service tax @ 4.944% on execution of development agreement with society for redevelopment of building. The value of development rights which is consideration received in kind by builder for construction of flats to members should be taken at stamp duty valuation. Such value would be liable to service tax @ 4.944% of value of development rights.