HC stays service tax on housing deals

The Bombay High Court has granted an interim stay on the service tax levied on buildings under construction.

Admitting a Maharashtra Chamber of Housing Industries petition, a division bench comprising justices V C Daga and S J Kathawala said, ''In our opinion, sale of flats is not a service; it is a simple transaction of goods.''

With a service tax in force from 1 July, if the value of the flat is Rs1 crore in the agreement, the home buyer will have to shell out Rs2.5 lakh as service tax,'' said Sunil Mantri, president of MCHI, an umbrella organisation of 500 developers. The matter has been posted for hearing on 3 August.

The MCHI and others challenged the constitutional validity of the Finance Act 2010, which sought to introduce the concept of service tax on under-construction buildings. But the MCHI contended that the sale of a unit, as per the settled laws dealing with transfer of property, could not be deemed a service.

"Sale by the builder should not be treated as a service, as service tax is levied ultimately on the property," said MCHI senior advocate Rafique Dada of Parimal K Shroff & Co.

In its interim order, the HC stated, "No coercive steps shall be taken against the petitioner for the recovery of service tax in relation to the provisions in question ... but assessment may proceed in accordance with the law." This allows the government to carry on service-tax assessment.

Mantri expressed satisfaction over the court's ruling which he said was in the interest of the common man. "Any such levy will increase the cost of the flat and ultimately the buyer will have to bear the brunt," he said.

Flat buyers now have to pay approximately 2.5 per cent of the deal price as service tax on the total value of their flat.