The Delhi High Court’s June 3 ruling that flat buyers will not be subjected to service tax by a builder/promoter/developer for acquiring a flat in a complex, which is under construction or development may prompt homebuyers to seek refund or relief.
However, experts feel the ruling will be challenged in the Supreme Court and builders may escalate the project cost to include the service tax component.
“The judgment is likely to be challenged by the government in the Supreme Court. In the case that it is upheld, it will mean that the buyer will have to not pay any service tax to the developer and concurrently the developer cannot charge the service tax to the consumer, though they will still be liable to pay the service tax to the government. There could be a situation, where the project cost is now escalated to include the service tax component without it being under a separate charge,” Rohan Sharma, associate director – research & real estate intelligence service, JLL India said.
The petition was filed against builder Sethi Group project Max Royal in Sector 76, Noida(Uttar Pradesh) in which petitioners have bought a flat.
Mudassir Zaidi, national director – residential agency, Knight Frank India, said there is uncertainty over the applicability of the ruling. “This decision is passed by Delhi High Court and will apply in Delhi. As for applicability in other states, the service tax authorities may litigate and it will be up to the respective State High Courts to take a view. If a verdict is passed by Supreme Court it shall be binding pan India,” Zaidi said.
The Delhi High Court Bench of Justices S Muralidhar and Vibhu Bakhru, however, ruled that service tax can still be levied on preferential location charges (PLC) that builders charge from buyers.
According to JLL, the judgment is based on a technicality where the High Court held that no service tax could not be charged on construction contracts involving sale of land (‘immovable property’), based on the fact that services cannot be independently defined in such contracts based on the current parent act, as land also forms a part of property sold to individuals. It has upheld the government’s right to frame service tax rules for immovable property transactions, while finding lacunae in the current act’s provisions as they does not define services for composite transactions such as sale of immovable property.
The bench also said if the petitioners paid any amount as service tax, then it should be examined and the money shall be refunded to them with 6 per cent interest.