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Construction of single residential unit – ST Exemption : 4, Sep 2012


Construction of single residential unit – ST Exemption

SEPTEMBER 04, 2012

By S Sivakumar

THE Government has been very kind enough to exempt the levy of service tax on construction of single residential units, otherwise than, as part of a residential complex, in terms of Item No. 14 of the mega notification 25/2012-ST dated 20.06.2012, which reads as under:

14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,-

(b) a single residential unit otherwise than as a part of a residential complex;

In terms of the definitions contained in the mega notification…

(zc) “residential complex” means any complex comprising of a building or buildings, having more than one single residential unit;

(ze) “single residential unit” means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family;

The Education Guide contains the following explanation on the subject matter:

“7.9.7 What is the service tax liability on construction of two – floor house constructed through a contractor? My contractor is demanding service tax. Is he right in doing so?

Service tax is payable on construction of a residential complex having more than one single residential unit. Single residential unit is defined in the notification and means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family . If each of the floors of your house is a single residential unit in terms of the definition, the contractor is rightly demanding service tax. If the title of each of floors is capable of being transferred to another person by mutation in land/ municipal records, both the floors may be considered as separate single residential units.”

A combined study of all of these provisions, throws up certain very interesting issues -

++ “Single residential unit” is defined to mean a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family. The exemption, it seems, is not available if the single residential unit is meant for more than one family. For example… if I and my brother, jointly construct a single residential unit, admeasuring, let’s say, 3,000 square feet, we would be denied the exemption, as this could be treated, as being constructed for the residential purposes of more than one family. The term ‘family’ has not been defined in the Finance Act, 1994 or in the mega notification and I presume, that this term will have to be interpreted in terms of its usage, in common parlance. My brother’s family and my family could be treated as two separate families and the service tax exemption can be denied to us, when we build a house meant for our joint residence. This seems rather unjust, coming especially at a time when the joint family system in India, is fast disappearing into oblivion.

Taking this forward… the views expressed in the Education Guide that, each floor of a house can be treated as a ‘residential unit’, if it “is capable of being transferred to another person by mutation in land/ municipal records, both the floors may be considered as separate single residential units” seems a bit far-fetched, as this could significantly reduce the exemption provided for single residential units. Based on this view, exemption would be sought to be denied to construction of bungalows, etc. with multiple floors. This is yet another case of the Education Code conflicting with the exemption notification.

Moving further…“residential unit” is now defined, under the new law, in a rather restricted manner, to mean any complex comprising of a building or buildings, having more than one single residential unit. Compare this, with the definition of “residential complex” under the old law, which is reproduced below:

“residential complex” means any complex comprising of -

(i) a building or buildings, having more than twelve residential units;

(ii) a common area; and

(iii) any one or more of facilities or services such as park, lift, parking space, community hall, common water supply or effluent treatment system,

located within a premises and the layout of such premises is approved by an authority under any law for the time being in force, but does not include a complex which is constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex is intended for personal use as residence by such person.

Explanation .- For the removal of doubts, it is hereby declared that for the purposes of this clause,-

(a) “personal use” includes permitting the complex for use as residence by another person on rent or without consideration;

(b) “residential unit” means a single house or a single apartment intended for use as a place of residence;

Since an exemption notification would have to be strictly interpreted, it would seem, per se,that construction of row houses, villas or individual houses, which form part of a gated community, might come under the service tax levy, with effect from 1-7-2012given the fact that the new definition of “residential complex” seems rather wide. The conditions related to approval of the layout, the need to have common area, etc. based on which, exemption could be claimed under the old law, are no longer relevant under the new law.

Before concluding …

The requirement that, for claiming exemption, the single residential unit should be meant for residential purposes of one family could create some practical issues, as we saw above.

Service tax cannot and should not be levied on subjective parameters…this is a sure way to ensure harassment arising, inter alia , of incorrect interpretation. How on earth can somebody meet the subjective requirement of a residential unit being “ designed for use, wholly or principally, for residential purposes for one family”… which cannot be proved on the basis of documentary evidence.

With the withdrawal of exemption to residential complexes having more than one residential unit, even smaller residential projects would come under the service tax net, which seems unjust.