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Construction - A taxing service

    G. Karthikeyan
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In the past few years, almost all of us have seen the heading Service Tax on the bills of various services. Now, it is a pervasive tax, applicable to all services except the few classified under the exempt or negative list of the Service Tax Act. The Act now covers even basic needs of food, shelter and clothing.

Beena decided to purchase a newly-constructed flat and made arrangements for the same. When the cost estimates came in she was surprised to see a huge component in terms of Service Tax (12.36 per cent). This unexpected escalation upset her investment plans, as she entered the world of Service Tax.

In the past few years, almost all of us have seen the heading Service Tax on the bills of various services. This is a relatively new tax - introduced in the year 1994 and applicable initially to only three services. Now, it is a pervasive tax, applicable to all services except the few classified under the exempt or negative list of the Service Tax Act. The Act now covers even basic needs of food, shelter and clothing.

The initial rate of five per cent on the value of the services used has escalated to 12.36 per cent. One only needs to look at certain statistics to realise the importance of this tax to the exchequer – Service Tax is expected to contribute 11.50 per cent of GDP during the fiscal 2012-13. Though Service Tax is an indirect tax, the burden is essentially passed on the common man and results in inflation. Let us now get into the impact of Service Tax on the housing sector, a basic requirement. Service Tax in the housing sector has created many a controversy in terms of levy and applicability. The current provisions state that it is applicable when two or more dwelling units are constructed. The definition of a dwelling unit is not specified in the Act. So a common sense inference would be to go by certain other norms such as two different electrical connections, water supply connections etc., (in the case of a two storey house). Of course, should you decide to build a huge single storey house, the question of Service Tax will not even arise and this is perhaps a major inequity – anyone buying a flat, let us say at Rs.40 lakh with a lesser square footage will end up in Service Tax liability while a single house with say Rs.1.5 crore need not pay Service Tax. As far as construction goes, Service Tax is imposed on the labour component alone. If a works contract is in place, abatement needs to be factored in i.e. 60 per cent of a works contract will be material component and 40 per cent will be considered labour and Service Tax will be applicable on the 40 per cent portion alone.Another fact to be considered is that Service Tax is applicable on low income housing also since the decision criteria is the number of dwelling units and not the cost. This is, of course, a sad situation since it puts the economically weaker section on the spot and adds to the money they must shell out to own a basic home.

Any tax, direct or indirect, must conform to the canons of equity and justice.

G. Karthikeyan,

Coimbatore-based Chartered Accountant


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