Earlier service tax for construction was avoided as the builders argued to government that construction of building is not service but the nature of sale and hence requested to avoid service charge on construction activities. Government also came to the conclusion that any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax.

However, Budget 2010-11, contains a very significant proposal seeking to bring such construction activities under the tax net. As per the budget, construction would be deemed to be a taxable service if the building or complex is still under construction and approval from the concerned regulatory authority hasn’t yet been granted.

The impact of such changes was felt adversely and as a result, various Builder Lobbies across the country sought to take refuge in Courts. However, a series of poor rulings during the past one year have left the Builder Community with no option but to collect and pay Service Tax on sale of flats/shops/units to their purchasers.

Nearly two years after bringing in a law by deeming fiction holding that sale of flats/shops/units would amount to providing of service, the Government has woken up from their sleep and recently issued a Circular No. 151/02/2012 dated 10.02.2012 clarifying the manner of taxing various situations emerging from the practice prevailing in the construction industry.

The circular clarifies that construction service provided by the Builder/Developer is taxable in case any part of the payment/development rights of the land was received by the Builder/Developer before the issuance of Completion Certificate and the Service Tax would be required to be paid by Builder/Developer even for the flats given to the land owner which would be equal to the value of similar flats charged by the Builder/Developer to other purchasers.

Although these clarifications may ease the anxiety of the Builder Community and also result in avoiding litigations with the Government, its real long term effect needs to be watched and seen. The clarifications seem to have opened new areas of disputes and also have failed to take care of all divergent practices followed by the construction industry in India.

Redevelopment including slum rehabilitation projects: Generally in this model, land is owned by a Society, comprising members of the Society with each member entitled to his share by way of an apartment. When it becomes necessary after the lapse of a certain period, society or its flat owners may engage a Builder/Developer for undertaking redevelopment. Society/individual flat owners give ‘No Objection Certificate’ (NOC) or permission to the Builder/Developer, for redevelopment. The Builder/Developer makes new flats with same or different carpet area for original owners of flats and additionally may also be involved in one or more of the following:

(i) Construct some additional flats for sale to others; 

(ii) Arrange for rental accommodation or rent payments for society members/original owners for stay during the period of redevelopment; 

(iii) Pay an additional amount to the original owners of flats in the society. 

Clarification: Under this model, the Builder/Developer receives consideration for the construction service provided by him from two categories of service receivers. First category is the Society/Members of the Society who transfer Development Rights over the land (including the permission for additional number of flats), to the Builder/Developer. The second category of service receivers consist of buyers of flats other than the Society/Members. 


(i) Redevelopment undertaken by a 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. Construction of additional flats undertaken as part of the reconstruction, for sale to the second category of service receivers, will also not be a taxable service, during the period prior to 01/07/2010; 

(ii) For the period after 01/07/2010, construction service provided by the Builder/Developer to second category of service receivers is taxable in case any payment is made to the Builder/Developer before the issuance of Completion Certificate.