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Service tax on land development

Pragya (CHARTERED ACCOUNTANT) (104 Points)

17 February 2016

Hi,

One of my client has land for which he has entered into an agreement with a builder. According to which builder will construct 50 flats on the land and he will retain 40% flats with him as a consideration.

Since consideration is in kind, the market value of flats (i.e. 40% of total flats) would be considered as value of service including service tax.

In this case market value is Rs. 4400/- per square feet.

Since my client has 7115 square feet share, his share of service received comes to Rs. 3.13 Crores (7115*4400).

Now my question is, can we deduct value of land from the consideration of Rs. 3.13 Crores. Because we have taken only development service and sale value of flat includes value of land also. is this logic is acceptable? Or is there any other way to save tax or reduce tax? Please reply urgently.

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7 Replies

CA Prakash N (Head - Indirect Tax (GST & FTP)) (373 Points)
Replied 17 February 2016

Dear Pragya, In my point of view, you are required take a expert opinion before discharging service tax. Because of following reasons 1. There is no clear picture, to tax on landlords share (when and on what value) 2. Recently CBEC issued a clarifications with respect to Circular 151/2/2012 dated 10.02.2012 vs. Education Guide. Where education guide say value to be considered for payment of ST shall be VALUE OF LAND but circulars says that we should consider SIMILAR FLAT VALUE. But this clarifications may not be valid as refrerred circular was issued prior to 01.07.2012. To answer your question "whether can I take land deduction?" It depends on valuation you would adopt 1. 26/2012 abatement scheme- ST to be paid on 25% of total consideration inclding land value. 2. Works contract valuation - ST to be paid on 40% of Construction cost (excluding land value). In both option, You can avail credit on input services and capital goods.

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ketan (Chartered Accountants) (29 Points)
Replied 18 February 2016

If land Lord sell his portion after oc then question of stax

Pragya (CHARTERED ACCOUNTANT) (104 Points)
Replied 18 February 2016

Hi Prakash,

Thanks for your reply. Regarding valuation again I have a doubt-

1. We can take value after abatement of 75%.

2. Or instead of taking abatement benefit can we claim land dedcution ?

Pragya (CHARTERED ACCOUNTANT) (104 Points)
Replied 18 February 2016

Hello Ketan,

Sorry but I did not get you. Please explain.

ketan (Chartered Accountants) (29 Points)
Replied 18 February 2016

If possible tell land lord to sell his portion after Receiving occupancy certificate then no question of service tax

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CA Prakash N (Head - Indirect Tax (GST & FTP)) (373 Points)
Replied 18 February 2016

Dear Pragya, Before taking decision on valuation, we have to work out total ST payable in both cases, then take whichever is beneficial to you. I could share a format for calculation of ST tomorrow.

CA Prakash N (Head - Indirect Tax (GST & FTP)) (373 Points)
Replied 19 February 2016

there are 3 category of transations.

1. Construction service provided by developer/builder for consideration of land

2. Builders sells his part of flats to his customers

3. Land owner sells his part of flats to his customers.

If we are taking about 1st transaction, then developer is liable to pay service tax by collecting the same from land owner adopting any one valuation option told earlier. For this, there is question of flats completed before or after.

However, in last 2 transactions, if we sell flats before completion - service tax will be applicable.

If we sell after completion (sale of immovable property) - No ST payable.

/articles/service-tax-implications-on-land-development-agreements-between-landlord-and-developers-26220.asp