Query
Facts of the case-
(1) It is in the context of the development agreement.
(2) Landowner and developer entered in to the development agreement before GST regime and rights in the flats were transferred on the signing date of development agreement.
(3) Service tax was levied but not paid.
(4) Almost 70% construction was done before the GST regime and balance of 30% was completed in GST regime.
(5) Occupancy certificate was received by the developer in GST regime and physical possession of agreed number of flats was transferred post-obtaining the occupancy certificate.
Query
To submit implication of GST and Service Tax.
These types of activities are to be examined in the light of transitional provisions as laid down under GST laws.
First view: transitional provisions
Miscellaneous transitional provisions
Section 142(11)(b)of CGST Act – Notwithstanding anything contained in section 13, no tax shall be payable on services under this Act to the extent the tax was leviable on the said services under Chapter V of the Finance Act, 1994 (32 of 1994).
Inference – It can be inferred from transitional provision that if the service tax is leviable on transfer of development rights then GST will not be leviable on the same.
So, here the need arises to check whether service tax is leviable on such transfer of development rights?
Provisions of service tax
Definition of Services [Section 65B(44)] – “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—
- an activity which constitutes merely,—
- a transfer of title in goods or immovable property by way of sale, gift or in any other manner; or
- such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution, or
- a transaction in money or actionable claim;
- a provision of service by an employee to the employer in the course of or in relation to his employment;
- fees taken in any Court or tribunal established under any law for the time being in force.
As the consideration is not defined in the Finance Act- Service Tax it is apt to borrow the meaning of consideration from the Indian Contract Act.
Definition of Consideration [Section 2(d) of Indian Contract Act] – When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.
Inference – In nutshell, Consideration means quid pro quo, i.e., something in return. It can be either monetary or non-monetary. In the instant case, providing the construction services by the builder to the landowner is also the consideration as against receiving the development rights.
As in the instant case, builder is providing the construction services in form of flats to the landowner as per the agreed ratio against the consideration in the form of land/ development rights so here it is important to understand whether GST will be levied or service tax will be levied on such services?
It may be noted that in service tax law or GST law, point of taxation rules or time of supply related provisions (respectively) decide when tax will be levied. Leviability is not just decided when the actual supply is made. So, here we are referring to the relevant provisions.
Determination of point of taxation [Rule – 3, Point of Taxation Rules, 2011] — For the purposes of these rules, unless otherwise provided, “point of taxation” shall be,—
- the time when the invoice for the service provided or agreed to be provided is issued:
Provided that where the invoice is not issued within the time period specified in rule 4A of the Service Tax Rules, 1994, the point of taxation shall be the date of completion of provision of the service; - in a case, where the person providing the service receives a payment before the time specified in clause (a), the time when he receives such payment, to the extent of such payment.
Inference – When the service provider receives the payment it is also a point of taxation in the service tax laws. Here the word ‘payment’ signifies the ‘consideration’. For builder the consideration is the development right being transferred by the landowner. It is further clarified by the Circular No. 151/2/2012-ST dated 10-2-12. (given below)
Clarification from Department
Circular No. 151/2/2012-ST dated 10-2-12 (Service Tax)
The circular issued by CBEC, about taxability of flats given to landlord, in its para 2(B) states that Service tax is liable to be paid by the builder/developer on the ‘construction service’ involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (e.g., allotment letter).
Inference – In service tax regime, point of taxation is attracted at the time when rights in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (e.g., allotment letter), which means that even if possession is transferred later on, the service tax shall be levied on the date of transferring the rights in the flat.
FAQs issued in respect of construction of residential complex by builders/developers may also be referred to in this regard.
CGST Act, 2017 – FAQ on GST in Respect of Construction of Residential Complex by Builders/Developers
FAQ (MEDIA & ENTERTAINMENT SECTORAL GROUP, HYDERABAD), DATED 28-6-2017
FAQ (11) – Whether the builders/developers are liable to pay tax again under GST in cases where the Service Tax had already been paid/payable on flats, as per earlier law?
Ans. 11:- No. In terms of Section 142 (11) (b) of the CGST Act, 2017, GST is not payable to the extent of the Service Tax paid/payable under the provisions of Chapter-V of the Finance Act, 1994. Nevertheless, the leviability of Service Tax on the subject services shall be determined by applying the Point of Taxation Rules, 2011 as per which if services have been provided or deemed to have been provided on or before 30-06-2017, no GST is payable on the same.
Interest related provision under service tax
Section 75 Interest on delayed payment of service tax
Every person liable to pay the tax in accordance with the provisions of section 68 or rules made thereunder, who fails to credit the tax or any part thereof to the account of the Central Government within the period prescribed, shall pay simple interest at such rate not below 10% and not exceeding 36% per annum, as is for the time being fixed by the Central Government, by notification in the Official Gazette for the period by which such crediting of the tax or any part thereof is delayed.
Provided that in the case of a service provider, whose value of taxable services provided in a financial year does not exceed INR 60 lakhs during any of the financial years covered by the notice or during the last preceding financial year, as the case may be, such rate of interest, shall be reduced by 3% per annum.
Revised Rate of Interest w.e.f. 1.10.2014
Vide Notification No.12/2014-ST, dated 11-7-2014, rate of interest to be charged on delayed payment of service tax has been enhanced w.e.f. 1.10.2014, based on period of delay. Thus, longer the delay period, higher would be the rate of interest payable. Accordingly, the rate of interest is as under:
| Sl. No. | Period of delay | Rate of Simple Interest Per Annum |
|---|---|---|
| 1. | Up to Six Months | 18% |
| 2. | More than six months and up to one year | 18% for the first six months of delay; 24% for delay beyond six months. |
| 3. | More than one year | 18% for the first six months of delay; 24% for period beyond six months up to one year; 30% for any delay beyond one year. |
Conclusion
1. Transferring the rights in the flats to the landowner by the builder triggers the taxability then itself (Point of Taxation) in service tax regime and even the physical possession is transferred in GST regime. So, the tax is to be paid in the service tax regime and is not to be paid in the GST law by virtue of section 142(11)(b) of the CGST Act, 2017.
2. It will not be regarded as supply in GST regime also; so no declaration shall be needed in GST returns.
3. Service tax is required to be paid along with interest as per section 75 of the Finance Act, 1994. Interest shall be calculated from the due date of such liability till the date of payment.