Flats given to landowners to be valued at market rates for service tax: CBEC

In an effort to bring more clarity to real estate deals, the tax authorities have said that the value of flats given to a land owner by a property developer for levy of service tax will be equal to the price of flats sold to other buyers.

However, whether this would translate into a lower service tax burden on the property developer would depend on the value of land and prices of the flats.

The issue of the valuation of such flats has been a bone of contention since 2012, after the Central Board of Excise & Customs (CBEC) had released an Education Guide on Taxation of Services as well as a circular on the valuation of flats given by the developer to the land owner in lieu of the land or rights to develop it and construct apartments on it.

“In valuing the service of construction provided by a builder/developer to a landowner, who transfers his land or development rights to the builder, for getting, in return, constructed flats … the Service Tax assessing authorities should be guided by the Board Circular and not the Education Guide,” the CBEC has now said in a fresh clarification.

While the Education Guide had said that the value of construction service provided by the developer to the land owner will be the value of the land, the circular had said that as the value of the land may not be easily ascertainable the “value of these flats would be equal to the value of similar flats charged by the builder/developer to the other buyers”.

The issue was taken up after it was brought to the notice of the high-level committee set up by the Finance Ministry to interact with trade and industry and identify grey areas in taxation.

At the time, the divergence between the two documents was highlighted.

Tax experts welcomed the move and said it will bring more clarity and transparency in such real estate deals. But more importantly, the CBEC has also answered a wider question and indicated that the Education Guide is only an educational aid and is neither a department circular nor a manual.

“The Education Guide does not command legal backing and is not binding. The CBEC circulars will prevail over the Education Guide if there is a contradiction. So, for all situations, wherever the interpretation in the Education Guide is not aligned with legal provisions, the guide will not be binding on authorities and taxpayers,” said Anita Rastogi, Partner, PwC.

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