The Delhi High Court in the recent case of Suresh Kumar Bansal vs Union of India has held that no service tax can be levied on flats purchased prior to June 1, 2012, bringing much cheer to thousands of homebuyers across the country.
It is a common fact that developers across India charge service tax on construction of flats on a percentage of the total sale price of the flat. It is this very levy that was challenged before the High Court.
There were essentially two issues before the courts – whether the legislature is competent to levy service tax on sale of under-construction flats, and whether the service tax law provides for a proper measure (valuation) for service tax to be imposed on under-construction flats.
On the issue of levy, the court held that the Parliament is fully competent to levy service tax on sale of under-construction flats and the same cannot be disputed.
However, on the question of measure of tax, the court held that neither the Act nor the rules provide a machinery provision for determining the value of services to arrive at the measure of service tax for under-construction flats.
Thus, no service tax can be levied on such services. What’s more, the court went a step further and directed the government to refund the amount of service tax to the petitioners with interest after due scrutiny of whether tax has been actually deposited by the developers.
The High Court order is quite significant as it has opened a window of opportunity for flat buyers to approach the department seeking refund of service tax paid to developers. Given the above, the flat buyers may consider taking the following steps in order to obtain refund of the service tax paid to developers.
Form a group of residents interested in seeking the refund, and compute the service tax paid by each flat buyer
Collate the flat buyer agreement and invoices raised by the developer from time to time mentioning the service tax amount, and receipts confirming the payment of said invoices
Approach the developer with a copy of the High Court order and apprise them of the legal position
Ask for the copy of service tax returns filed by the developer during the relevant time along-with challans for deposit of tax
Get an undertaking/affidavit signed by the developer that entire service tax collected for the project has been duly deposited with the government
Approach the service tax authorities with the above documents and seek refund of the service tax amount
While the High Court directed the government to refund the service tax to the two petitioners in the case, for others, getting their money back may not be devoid of challenges.
For starters, the buyers may face stiff resistance from developers for providing the service tax returns and payment details. This is because generally, the returns filed by the developers would relate to multiple projects and identifying compliance against an individual project may not be possible. Further, providing returns and challans for scrutiny of the department officers may not be in the best interest for developers as it may lead to unrelated tax issues cropping up.
Even if the developer agrees to give the documents as mentioned above, the tax authorities may want a detailed break-up (project-wise/individual flat-wise) of the amount of service tax paid by the developer.
This can be a herculean task for developers filing single returns for multiple projects and in that case, flat buyers will need to work backwards with the developers to ascertain such amounts and get the same certified by a chartered accountant.
Also, given the wide ramifications of the decision, it is highly likely that the department may file an appeal before the Supreme Court and pending decision of the Supreme Court, deny the refund of service tax citing that the matter is sub judice.
For projects where the construction is still not complete, the homebuyers can explore the possibility of approaching the developer to adjust the amount of service tax paid between 2010 and 2012 against any future service tax liability on their flat. From a statutory stand point, such adjustment can be allowed.
While seeking refund from the service tax authorities may have its challenges, given that each flat buyer may be able get a refund of a substantial amount of money paid as service tax before year 2012, it may well be worth the effort to pursue the same after due legal consultation.
The author is tax partner, real estate practice, EY. Views expressed by the authors are personal