BUDGET - NEW SERVICES CARVED BUT BUILDERS WRECKED

[Dr. Sanjiv Agarwal]

When it came to service tax proposals, the Finance Minister started with a very hopeful note. He said that to augment more service tax revenue, he had two options- one, to raise the rate of service tax to 12% which he did not resorted to maintain the growth momentum and to bring convergence between goods tax and service tax.

He had a second option to bring all services under service tax net while he said, he was not opting for it at this stage (may be when GST comes). He said that he propose to bring certain services, hitherto untaxed into service tax net, besides some legislative changes to plug revenue leakage and distortions. He did not elaborated on these services or changes stating that he 'did not want to waste the precious time of the house' detailing them.

So what's there in the service tax proposals is much needed to be disclosed as most of us do not go through the budget papers. There are drastic and far reaching changes in service tax arena so much so that eight new services have been added. These include permitting commercial use or exploitation of events, intellectual property right services in relation to copy rights (includes cinematography , sound recording but excludes literary work), medical health checking, treatment and preventive care where payment is made by the employer (business entity) of patient or by insurance company directly to hospital under a cash less medi-claim policy (individual doctors not covered), maintenance of medical records of employees, services of electricity exchanges, promotion of brands of goods, services, events etc, games of chance/lottery and certain value added services of builders or developers. The tax on new services will come into force from a notified date after Bill is passed.

Not only this, the scope of certain existing services has been extended or enlarged. Now, all domestic air travel will attract service tax whether in economy class or any other class. Service tax of 10 percent will be levied on the basic fare of travel. Hitherto, only international travel in non economy class was only taxable. This will add up to cost of air travel which is already likely to be upward revised due to recent fuel price hike. In commercial coaching, all types of coaching provided for a consideration will be taxed, even if provided by a charitable or non-profit organization. This amendment has been made effective from July 2003. So service providers will have to pay tax alongwith interest from July 2003 onwards. Information technology software will now be taxable when used for non business purposes (say, personal use). Sponsorship of sports event has been made taxable which was till now exempt (Government may be hoping for big revenue from hosting common wealth games). The most controversial service of renting of immovable property has been made taxable with retrospective date, i.e., 1st June, 2007, inspite of Delhi high court stay and matter being subjudice before the Apex Court. A big blow has been given to builders and developers by taxing them if money is received from prospective buyers before completion of building or complex.

Institutions running vocational courses will also be adversely hit as exemption would only be available only for courses covered under Apprentices Act, 1961 and institutes affiliated to National Council for Vocational & Industrial Training. The exemption from service tax presently available to Group Personal Accident Insurance Scheme provided by Government of Rajasthan to its employees has been withdrawn.

On a positive note, only relief is that rate of that has not been liked. Also, it is now being provided tax no penalty shall be imposed where service tax alongwith interest has been paid before insurance of notice by department. This was being directed by appellate authorities till now. Most of the service tax provisions will directly or indirectly hit the service recipients or the common man.

Budget Demolishes Builders

If there is any one person or business who is most hit by this Budget is the Builders who may also be developers or promoters of immovable property projects- be it a commercial complex, mall, office complex, or even housing complexes.

While on one hand, various direct tax proposals such as hike in surcharge, hike in rate of minimum alternate tax (MAT), increase in duties on steel and cement (which comprise of over fifty percent of cost) and certain other indirect tax provisions will directly shoot up the cost and hit the bottom line, it will distort the economics of all ongoing projects as in reality sector, such projects do not get completed in one year or so. The ongoing inflation and price rise will also adversely impact the reality sector, which had just started recovering as demand will be hit.

In indirect taxes, service tax has virtually, brought the builders fraternity on their knees. Look at the proposed changes, how dreaded they are- firstly, for commercial construction related activities, the word 'service' has been deleted and all constriction will be deemed to be taxable services.

Secondly, in both type of constructions (commercial or residential), it has been provided that unless the entire consideration for the property is paid after the completion of construction will be considered as service and entire consideration will be taxed. Thus, booking amounts and advance payments to the builders before completion of the building will be taxed. It may be noted that in most of the cases, advance payments are received and also completion certificate is rarely obtained which is a 'must' now. Even where no advance payments are received but completion certificate is not obtained, service tax would be payable. This will also add to the cost of construction as builders will have to arrange for funds on loan and pay interest to fund the construction activities. Also, banks discourage the reality sector for bank finance as it requires higher provisioning of capital.

Thirdly, special services provided by builders/ developers to prospective buyers such as providing preferential location (sea facing, terrace, garden facing etc) or external or internal development of complex on extra charges or premium will now be taxed to service tax. This will cover both commercial and residential complexes. This would however exclude reserved parking charges. Thus builders will have to pay service tax on almost entire consideration received by them.

Lastly, renting of commercial property has been made a taxable event w. e. f. June 2007 despite the fact that high court stay is in operation and Government's appeal is pending before Supreme Court. Now, the 'renting' itself has been made taxable. Also vacant land leased for commercial operations has also been brought into service tax net.

Realty sector is thus into real troubles with service tax provisions.