Delhi High Court has recently passed a contentious ruling on levying of Service Tax on under-construction properties. The judgement has left buyers across the country gasping for clarity. We spoke to experts to break down the complicated nuances of this verdict in order to understand its impact and consequences. Below is everything a home buyer needs to know.

Brief background of Service Tax

· This tax came into effect in 1994 and was introduced by the then Finance Minister Dr Manmohan Singh.

· It is payable on services provided by the service provider who then submits it to the Government of India.

· The applicable rate from June, 2016 is 15%.

Service Tax on sale of apartments

· Service tax is applicable on almost all services that a consumer avails, including buying an under-construction property.

· It is levied by the Central Government on the construction services offered by the developers to buyers.

· In the case of an under construction property, the developer is deemed to be the provider of construction services to the home buyer, and hence service tax is charged on the service portion included in the cost of construction.

· It is not charged on the entire value of the property but only to the extent of the service element involved in the cost of construction.

· For the purpose of calculation, 30% of the gross value of an under construction unit is taken.

· It is applicable on both commercial and residential properties.

What does the judgement say?

The Delhi High Court has held that service tax cannot be charged on under construction property in a complex, which includes builder flats, group housing flats and builder floors. The primary reason for this is that there is no clear cut mechanism for arriving at a value of service element involved in such transaction.

What was challenged and why?

The petitioners had challenged the demand of service tax on under construction property as well as service tax on ‘Preferential Location Charges’ or PLC.

Buyers stated that their agreement with the builder is a composite contract for the purchase of immovable property and that in the absence of specific provisions to ascertain what exactly constitutes service, the levy of service tax is unjustifiable.

What was upheld and what was struck down?

The provision regarding levying service tax on the Preferential Location Charges was held valid as it was a ‘service’ as per the court- Sec 65(105)(zzzzu) of Finance Act, 1994

But the court struck down the provision which provides for levying of service tax on buying of an under-construction immovable property- Explanation to Sec 65(105) (zzzh) for the reason that there was no valuation mechanism available in the legal provision for arriving at the value of service for payment of service tax.

Is there a cut-off date for the applicability of this order?

Though the judgement was given on purchases made before July, 2012, but in practice will apply to all transactions made after this verdict.

Does this judgement apply on other states also?

The position on this still demands clarity as the earlier judgements from Punjab & Haryana, Mumbai and Karnataka High Courts have upheld the levy of service tax on under-construction properties. Therefore, in the present scenario, the decision of Delhi High Court will not be applicable to other states.

What can follow?

The central government can challenge the judgement in Supreme Court or bring any amendment in the existing law to overrule the judgement and settle the ambiguities once and for all.

In case the Supreme Court decides in favour of the Delhi High Court judgement, the rule will become applicable on all states.

So, it entirely depends on what stance the Union Government decides to take.

What should home buyers do?

Since the judgement currently applies only to purchases made in the jurisdiction of Delhi High Court, the buyers who have bought homes in Delhi and paid Service Tax on it should immediately lodge a claim with the government for refund along with the interest.

PS. The Central Service Tax Department has already made up its mind to move to the Supreme Court. However, there is no official confirmation on this.

Neetika Bajaj, Assistant Editor, NDTV