Service Tax on Construction and Sale of Residential Property
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Service Tax on Construction and Sale of Residential Property

Comments(60) Sub Category:Property,Property Buying,Service Tax Posted On: Mar 11, 2010

As per the budget proposal for 2010-11, the finance ministry has suggested service tax on construction and sale of property. Service Tax is a tax levied on service providers in India. The objective behind levying service tax is to reduce the degree of intensity of taxation on manufacturing and trade without forcing the government to compromise on the revenue needs. As per the budget proposal, the finance ministry has suggested 10 per cent service tax on construction and sale of property.

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Argument on Service Tax

Earlier service tax for construction was avoided as the builders argued to government that construction of building is not service but the nature of sale and hence requested to avoid service charge on construction activities. Government also came to the conclusion that any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax.Government even allowed buyer or builder to claim refund of service tax. However, Budget 2010-11, contains a very significant proposal seeking to bring such construction activities under the tax net. As per the budget, construction would be deemed to be a taxable service if the building or complex is still under construction and approval from the concerned regulatory authority hasn’t yet been granted.

Definition of ‘construction of complex services’

As per the budget proposal, accordingly, an explanation has been inserted in the definition of ‘construction of complex services’. The explanation reads:“For the purpose of this sub-clause, the construction of a new building which is intended for sale, wholly or partly, by a builder or any person authorized by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or the person authorized by the builder before grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force ) shall be deemed to be service provided by the builder to the buyer.”

Increased time limit for the completion of projects

There are other positive measures that the Budget proposes such as allowing pending projects to be completed within a period of 5 years instead of 4 years, for claiming deduction of profits, as one time interim relief. Developers have welcomed the increased time limit for the completion of projects from four years to five years for claiming a deduction of their profits. On the other hand, two per cent increase in excise duty of cement and steel might not prove profitable for the real estate developers as the cost of construction would be expensive which will ultimately result in the increased cost of the project and hence the buyers will be affected.

Service Tax is levied only on 33 per cent of the value

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There seems to be a misunderstanding that the Budget proposal would lead to levy of service tax on the entire value of the consideration which is paid to the builder / developer. The developer / builder is required to pay service tax, and perhaps recover it from the buyers, only on the labor or services portion and not on the material portion of the sale consideration, since VAT in the form of the works contract tax is already applicable on that portion.

There is a false impression being created that prices will go up by 10 per cent but the fact is that 10 per cent service tax is levied only on 33 per cent of the value.The contractor is entitled to claim abatement to the extent of 67 per cent of the value of services rendered by him. It must also be understood that similar to the VAT, input tax credits could be available to offset these service taxes and hence the net effect of the tax could be lesser than the 3.4 per cent, since construction attracts service tax only on 33 per cent of the value.

Developers have welcomed the increased time limit for the completion of projects from four years to five years for claiming a deduction of their profits. The objective behind levying service tax is to reduce the degree of intensity of taxation on manufacturing and trade without forcing the government to compromise on the revenue needs. There is a false impression being created that prices will go up by 10 per cent but the net effect of the tax could be lesser than the 3.4 per cent. Abatement scheme, under notification number 1/2006 dated March 1, 2006, says that the contractor is entitled to claim abatement to the extent of 67 per cent of the value of services rendered by him.

Renting of property, rent of vacant land under agreement to undertake construction of building or other structures will be charged service tax.The common man will also be benefited by the continued subsidy of one per cent for affordable housing loans, which will help residential sector to grow. The government is considering for giving relief to buyers who booked their houses before the service is notified. So, a buyer who has booked a flat but will get possession only after the notification of the new service need not worry. The overall reaction on budget 2010 has been positive and the reaction from the real estate sector has been mixed. It is a growth oriented budget and growth in the economy always leads to growth in the real estate sector.

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60 Responses to “Service Tax on Construction and Sale of Residential Property”

  1. Sunil Rao says:

    What about VAt on residencial properties. Will it be applicable and to be born by Owner?

  2. How will this tax affect a citizen building a house for his/her own use or lease, if he/she uses a contractor to build it?

    • Rana Naresh says:

      Dear sir,

      I am Account in construction Compant as a Accountant Kindly Know me that the Construction of Apartement will by liable to pay servicetax, if Yes how many and what is calculate what abount our contractor Bill to pay service tax

  3. Sharad says:

    As the government is considering to give relief from service tax who booked the house before the service is notofied, does the booking means the registration of sale deed or only booking of house with builder.

    • Rohit says:

      Hi,

      I have read a new paper(Rajasthan patrika) in which it is said that service tax is applicable for only those who will buy the flat after July 10.But if you have book before then Service tax is not applicable even if you get possession afterwards.

  4. vswaminathan says:

    http://www.taxguru.in/service-tax/book-under-construction-flat-before-july-2010-to-avoid-3-30-service-tax-on-agreement-value.html

    A look into the write-up @ the above link should enable one to have the doubts on the subject, if any, cleared on his own.

    What needs to be made a special note of are these: The budget proposal, from a long range point of view, especially from that of the buyers, may hopefully turn out to be a deterrent or strong dissuading factor against the long prevailing undesirable practice of builders / sellers collecting a substantial and significantly large portion of the agreed consideration amount in ‘advance’. To put it differently, those buyers who do mind saving on service tax would not be inclined or be so enthusiastic as to book in advance or make any payment before the completion of the construction and the issuance of clearances/ sanctions , including OC from BBMP. That means- the buyer would consider a sane and better alternative and opt to go in for purchase of ‘apartment’ only after the property is completely ready and available for ‘sale’; that is, same way as in regard to any other goods or property, across the counter.

    vswaminathan

  5. Anup Krishnankutty says:

    To purchase a FLAT itself is a very tough decision for a MEDIUM SIZE FAMILY. Now, if SERVICE TAX WILL BE LEVIED, then how can a person think about purchasing a house? NO…. SERVICE TAX should not come into effect.

  6. Ram says:

    Will service tax be implemented retrospectively or prospectively? For Example if Mr. X has made the payment before Budget and Completion Certificate is received after Budget or even 1st April,2010, then will Mr. X be required to pay service tax to the builder?

  7. dharmendra reddy says:

    SIR,

    Is my Service Tax or Registration charges will be increased if i registred t=my apartment after JUne 1st 2010. Kindly help in this regards.

    Dharmendra

  8. laxmikant says:

    plz say for me how to prosses for according for 1% vat for flat sale & service tax
    & which grade for applicable for vat or service tax

    how to working for two tax for company a/c

  9. Deepak says:

    The builder already charges enough , for the service he is doing . Govt. should restrict the builders (If they plan to go ahead with the bill ) not to pass this cost to the flat owners . Why should we pay it all ?

  10. Jay says:

    Will this affect NRI’s too? If yes, who in the world would invst? This is baseless and will further doom the real estate invesor community. Your words of wisdom would be appreciated.

  11. Leocera says:

    Those who have booked a flat in 2006 & paid all dues
    including Service tax & VAT, also registered the
    property, but not yet got the possesion, Can they
    claim the refund of ST & VAT from the builder or
    the Comm. Tax Deptt.

    leocera

  12. Ashish Kumar Jain says:

    It seems that government will keep on looting the innocent citizens without providing adequate amenities, facilities.

  13. Srinivas Kulkarni says:

    Does the service tax apply to resale of the property?Does property include garden area of the flat?Does the proposed tax apply to places of worship like temples,Masjids,churches,Gurudwaras etc?

  14. Mini says:

    Hi,

    I booked a Flat in chennai in june’09, at that time itself they added 2% of the total cost of apartment.

    Next month i s the registration stage. Can i know, is it applicable to pay 2% VAT for buying a new flat in chennai. plsadviceme.

    Advance Thanks

  15. somu says:

    I booked a flat in march 2008
    Made payments in instalments till march 2009
    Got my flat registered on 21 may 2009
    My builder is insisting me to pay service tax- stating builder has paid service tax in instalments based on my instalment payments .

    should i pay service tax
    if not what details/ proof i need to ask from my builder

  16. parth says:

    am looking for a reasale flat ..
    Its in vasant lawns..
    buying it from a investor.
    He has not taken the possesion of the flat. as he has kept 2% of the balance money.
    Now all the process for the buying the flat wil be done in this month itself.
    Just wanted to know that will the service tax/Vat will be applicable to me or no?

    do i have to pay for that one..

    regards
    parth

    • sunny says:

      Hello Parth,

      currently i am facing the same problem, which you already faced while buying a flat from the investor

      I have purchased a flat from investor, but the possession is not yet given by the builder.

      Builder has not yet collected the service tax/Vat from the investor.

      Agreement between builder and investor is reg. on Feb., 2009
      Agreement between investor and Me is reg. on Nov., 2011

      Just wanted to know that will the service tax/Vat will be applicable to me?

  17. santosh Naktode says:

    Dear Sir,

    I am Santosh Naktode from Mumbai. I have booked a flat (under construction & position on April 2011) on 16 Feb 2010 and made 15% down payment to builder. Due some resons from builder side registration was not possible upto 31 April. But now registration stated and builder demanding the amount 3.58% of agreement value which he says that it is service tax and needs to be recovered from purchaser.

    Please guide me, is this amount really payable by me to builder or not? If it is to be payable by me to builder then please let us know the section/clause under which it applicable to me.

    Your reply in this regard is highly appriciated.

    Thanks,
    Santosh Naktode.
    Mb: +919323347371

  18. Sandip Nathavani says:

    I am Sandip Nathavani From Surat – Gujarat. I have booked a flat (under construction & position on April 2011) on Oct – 2009 and made 15% down payment to builder. Due some resons from builder side registration was not possible upto 31 April. But now registration stated and builder demanding the amount 3.58% of agreement value which he says that it is service tax and needs to be recovered from purchaser.

    Please guide me, is this amount really payable by me to builder or not? If it is to be payable by me to builder then please let us know the section/clause under which it applicable to me. also let me know that service tax percentage

    Your reply in this regard is highly appriciated.

  19. Raj says:

    GOI taxes the public indiscriminately. Yet no one protests. Everyone questions how does it affect me? Or how can I avoid paying this.

  20. Sridevi says:

    Hi, we are the developers i.e, we contract the project of construction of Houses to other contractors. while raising the invoices they already charge service tax @10.30% to us.which we pay also. now does this ammendment effect us? pls reply

  21. M.Subramanyam says:

    It is very unfair and the builders are ready to charge the residential aprtment buyers .Kindly give a solution for me , as I have booked a semi finished(80%finished)flat,
    with a sale agreement in April,2010. The sale agreement was not registered and also all
    the amounts by cheque before 01July,2010 for which the builder gave receipts. Only the
    apartment was registered and sale Deed executed ,only after 01July ,2010. The builder is
    demanding the Service tax@10.3% for the entire amount paid , even though it was paid before 01july, 2010. He is insisting on the registered sale deed date , which is after 01july,2010. If possible , kindl;y clarify. Thanks a lot.

  22. Ashish says:

    hi

    i have entered in a contract for purchase of flat in 2006 and my flat construction has been comleted before 1.7.2010 and last instalment called for that and i paid it in july 2010.

    whether service tax is applicable in this mater ?

  23. Ashish says:

    i have entered in a contact for purchase of flat in G.Noida in 2006. my flat construction has been completed and all payments has been made before 1.7.2010. (both event occured before effective date)

    i am not aware about the fact that builder has taken complition certificate(cc) from authority.

    in this whole matter wheter i am liable to pay service tax ?

    kindly let me know about the facts.

    thanxs

  24. Santosh Budhe says:

    I have booked a flat on 04.07.2010. Builder has said that with every payment i make i will have to pay service tax 2.575%. He is also asking for VAT @ 1% of property value. This is going to be a great burden for me. Am i liable to pay Service tax and VAT. Asked the builder whether he is going to keep the service tax amount with him or is he going to deposit the same. Reply he will deposit the same with ST department. If any such decision of ST not applicable is taken builder will refund service tax to us. Unable to understand please guide

    • Joy says:

      Hi Santosh, I am facing the same problem. Did you finally have to pay service tax & VAT.

    • Naresh Kadam says:

      Naresh Kadam.
      I am facing the same trouble.

    • Shantanu Jalgaonkar says:

      There are two different GR one from central govt for service tax and other is from state govt. for VAT. 
      You have to pay 2.575% on total amount which you have paid or to be paid to builder after 1 July 2010. All the amount paid earlier will not have any service tax. 
      Also you need to pay 1%VAT on agreement value if your sale agreement is done on or after 1 April 2010. If your agreement is earlier 1 April 2010 then no need to pay VAT.

  25. Hi, I’ve purchased Home in last year. I’ve made all payment on 28th June’2010.
    Now, Builder insisting for additional service tax (apprx 3%).
    Let me inform what are the criteria as per Govt Notification for such unforseen service tax.
    Also inform that i am eligible for that or not?
    Kindly revert.

    • Karthikcheers says:

      Hello Paresh
      I am also facing the same problemas you do.
      I made the cheque payment and registration on 30th June.
      Now the builders are asking for service tax from me.

      Regards
      Karthik

      • Vilas G says:

        I think instead of paying the ST amount to Builder, you can pay it directly to “Prothonotary & Senior Master” by pay order. In this case if you are not liable for ST then you can claim for refund.

  26. Sakshijahari says:

    I have booked a flat in NOIDA for self-occupation in August 2009.  The Builder has been paid Rs.2 lacs thru bank for covered parking as he has insisted that it is mandatory.  However, it is learnt that the Supreme Court has in its recent ruling stated that one need not pay for covered parking as it comes along with the flat.  The flat is still under construction.
    Whether, I can get relief in the light of Apex Court Ruling cited above? Whether this amount can be adjusted against the balance amount to be paid at the time of taking possession? If the builder is adamant and refuses for adjustment, what is the course of action left for me?

  27. Anonymous says:

    Tax Advantage offer a quick and easy way for you to have your Tax Return prepared.

    [sub contractor tax]

  28. Praful dudharejia says:

    I have purchased property with 50% payment in April 2010 and rest in 13/08/2010 with completion certificate on 29/06/2010. I filed for refund for ST. I got show cause notice under rules of 2009. What I should answer?

  29. BlomstromRaithel says:

    I do not even know how I stopped up here, but I believe this put up is great. Cheers!

  30. Mozdzierz says:

    Thanks for another fantastic post. Where else may just anyone get this type of info in such a perfect way of writing? Thanks again!

  31. anbarasan mani says:

    I have booked under construction flat. But the work has not been started for past 2 years. So the builder has shifted to a new construction flat. I have made 20% payment of the flat cost before july 2010. But now the builder is asking for service tax. Should i need to pay or not. Please reply.

    Anbarasan mani

  32. santoshk says:

    I have purchased a flat before 02 months ie on 16/11/2011 for own use. Now i am going to sell them to create funds to pay my unexpectable expenses. Tell me which taxes will have to pay if i will sell the above flat..ie.service tax, vat,etc.

  33. Puneet says:

    Hi Team

    I need some clarification about these taxes if you can guide me.
    I had booked one flat on 20th January 2012 for which I have to pay 95% within month and rest of the amount at time of possession(2014). I’m going for 80% loan.
    Now could you guide me that when I have to pay for service tax/vat/stamp duty or if any other taxes.
    And also if having loan also involves any taxes or not??

    Regards
    Puneet

  34. Ashwini W says:

    Hi ,

    I have booked the flat in May 2010 which was under construnction.Now in next month i.e Feb 2012 I will be getting possession.Builder is asking for service tax. which is on Agrement amount(2.575 on 27% left amount),Development charge(10.3%) and Maintenance charge(10.3%).

    Kindly let me know how it is being calculated.

  35. Manish. Kurian says:

    I think this service tax and vat both should not be implemented for everybody by the Govt, exemption should be given to low housing schemes and also high end housing schemes, as alreday their is a heavy tax we are alreday paying like 5% Stamp Duty on the agreement value and again 1% Registration on the agreement value, this itself is too much, again their is a yearly property tax what we pay which becomes too too heavy for a Amm Admi.

    Again a amm admi takes a loan from the bank where as he has to shell out a heavy interest on the same and at times when Inflation is not in control he has to again shell out more amount, i think the finance minister should reconsider all these issues about a amm admi. Instead of focussing on service tax and vat isues, their are many other big issues which can be focussed, which is going unnoticed.

    Regards

    Manish. Kurian

  36. Sachin says:

    Hi,
    I did registration of my flat before 31st March 2010. I paid Rs75000 on 9th May 2010 and remaining amount Rs.60500 after July 2010. Now builder is asking for service tax on total Rs.135500 with the rate of 2.58% i.e.3496. Also they say if I pay after 31st Mar 2012 the service tax would be 3.10%.
    Please suggest weather I will be liable to pay the tax as I did registration before 31st March 2010. Also if I have to pay then according to circular service tax will applicable from 1st July 2010 so I paid Rs.75000 before that and remaining amount Rs.60500 in 2011.
    Please advice me.

    Thanks in advance.
    Sachin

  37. Manickam says:

    I have purchased an individual villa in a gated community with 12 such villas & 1 block with 6 flats is constructed. The land of my villa has been registered separately and construction agreement has been done with this builder. This community consists of 3 types of villa models, so the plan sent for approval consists of 4 villa’s per plan. In this case do I need to pay Service tax? Since as per plan it is only 4 villas, still do I have to pay the service tax, if so how much of the construction cost?

  38. Srinivas N says:

    All,

    Its a very good information for the prospective buyers. Thanks for all those who took time to share their thoughts , helping others…

  39. KHALANE.K.P. says:

    I PURCHSH A NEW FLAT AT AMBERNATH RS.1800000 (DATE 24.04.2011) I WANT TO HOW MANY COST APPLY AGIANST SERVICE TAX AND VAT IF APPLICABALE PLEASE INFORM ME APPLICABLE AMOUNT

  40. Manoj Sharma says:

    I am a Mechanical line contractor in Maharashtra, I have done total work value of Rs. 33 lakhs in a year and received 10.3% service tax i.e Rs. 340000 as a Service tax from client but to heavy loss in business, I am unable to pay service tax.
    my firm is unregistered company but I have Service tax number.

    What can I do in this case.

    Is there any procedure to avoid Service tax?
    or
    Change in Service tax no. will make us avoid paying service tax?
    or
    If I change my firm name , than will It avoid paying Service tax?

    • Ram says:

      Mr Manoj, It is unfortunate that you suffered loss. But that cannot be the reason for non-payment of service tax (S.T) to the government. In the first place, this amount paid by your client belongs not to you but to the government. This is the amount you hold in trust on behalf of your client to be paid to the government. If you have not paid the amount received from your client, it amounts to breach of trust. Assume that you are a salaried-employee in a company which deducts tax at source (TDS) from your salary but the company says it will not pay the TDS to the government because it has posted lossed. Would you agree with the company’s contention? Non-payment of service tax by you is similar to non-payment of TDS by the company.

    • Ram says:

      Mr Manoj, It is unfortunate that you suffered loss. But that cannot be the reason for non-payment of service tax (S.T) to the government. In the first place, this amount paid by your client belongs not to you but to the government. This is the amount you hold in trust on behalf of your client to be paid to the government. If you have not paid the amount received from your client, it amounts to breach of trust. Assume that you are a salaried-employee in a company which deducts tax at source (TDS) from your salary but the company says it will not pay the TDS to the government because it has posted lossed. Would you agree with the company’s contention? Non-payment of service tax by you is similar to non-payment of TDS by the company.

  41. Nitin says:

    I wanted to take your advise on service tax and VAT rates on under construction property in Hyderabad.Could you please find out the prevailing rate of Service Tax and VAT on Agreement of Sale and Agreement of Construction.

    Here is the detailed scenario. I booked an under construction flat in July 2011. (Since it is under construction and the ST rule was levied since July 2010 – I have to pay Service tax).

    Total Cost of my flat – 52,00,000 (Fifty Two Laks)
    Agreement of Sale – 28,00,000 (Twenty Eight Lakhs) – this price includes the parking charges of 3,00,000/-
    Agreement of Construction – 24,00,000 (Twenty Four Laks)

    As per the the builder below is the calculation for burden of Registration,VAT and ST.

    On Agreement of Sale
    1) Stamp Duty – 7.5% of 28,00,000
    2) VAT – 1.25% 0f 28,00,000
    3) ST – 3.09% of 28,00,000 (this is the new ST tax rate for year 2012 – 12.36 % of 25% of Sale Agreement)

    On Construction Agreement
    4) VAT – 4% of 24,00,000
    5) ST – 4% of 24,00,000

    Please let me know if above calculation is right or else what should be the correct calculation.

    Thanks and Rgds,
    Nitin Jain

  42. zeroin says:

    Dear all Flat buyers \ investors\ Builders,

    For all the Querries and Questions related to Service Tax, please refer the URL, published by Under secretary of India, Tax Research Unit, New Delhi.

    http://www.servicetax.gov.in/circular/st-circular12/st-circ-151-2012.htm

    And

    http://www.servicetax.gov.in/st-rules.htm

  43. Furkan Ali says:

    Hi, I am living in Dubai since June 2002 and I bought a flat for personal use (my first home) (construction is not yet start will start soon) but builder is charging me service tax 3.09%, I want to make sure it is paybale or builder is charging me which is not really applicable for NRI because allof the payment will be done from NRE or NRI account.
    Please advice.

  44. Tasha says:

    A big Hello Friend, I am commenting from Orange Australia. We have had a lot of rain lately and I’ve only just been able to connect to the blogsphere Thanks so much for the interesting post. It helped me a lot with my university college assessment task. God Bless the internet !

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