Service Tax On Purchase of Under Construction Property as per Budget 2010-11

The budget 2010-11 brought rude shocking and a lot of confusion to prospective home buyers. But don’t get too shocked, you won’t pay service tax on the entire amount. The budget has suggested 10 per cent service tax on construction. For the past one month, many city builders have been asking purchasers to start paying up the service tax. Buyers are shock and say they were not informed of the additional levy when they had booked the flats. As per the budget, the service tax will be charged on only those residential projects which are still under construction.

Under construction Property

It should be noted that the service tax would be levied only on under construction property. A property is considered “under construction” till the builder receives a “completion certificate” from the relevant authorities. If the entire amount for the property purchase is paid after the receipt of a completion certificate, there would be no levy of the service tax.

The obligation of paying service tax is on the builder. So, you would not have to go through the hassle of paying it. It is the duty of the builder to collect this service tax from the purchaser and deposit it with the department. However, ultimately this burden would be transferred to the home buyers in the form of higher price. This provision would be applicable from 1st April, 2010.

Abatement allowed

Budget 2010 brought a rude shock to prospective home buyers. But don’t get too shocked, you won’t pay service tax on the entire amount. 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. 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. Recently Finance Minister has rolled back Service Tax to 25% of the value.

No Service Tax on resale properties

Service Tax is applicable only on property under construction or where a completed building has not received its occupation certificate. As resale properties would essentially have obtained a completion certificate, this tax would not be applicable to resale properties. Service Tax would not be levied on parking lot. Many builders also sell parking space. It has been categorically mentioned in the budget that any amount paid for getting a parking slot allotted would not be subject to service tax.

Service tax rolled back

There was some relief for the real estate sector with the finance minister offering for partial roll back of service tax that was imposed on the sector during the budget. Finance minister has rolled back Service Tax to 25% from 33% in the April session when house discussed and passed the finance bill. Only days after the budget, ministries of urban development and housing had appealed to the finance ministry for a roll back of the proposed tax. According to analysts, the quantum of impact will not be very big. However, it might see developers shifting focus to affordable developments.

Service Tax on Preferential Location Services

The service tax has been levied on any amount spent by the builder for the development of the complex – like building internal roads, paving the garden, etc. Service tax of 10.3% has also been levied on any payment made by you to the builder for getting a preferential location for your house / flat.

• Any floor rise amount paid for getting an apartment on a higher floor
• Any amount paid to get an apartment / house with a specific number
• Any amount paid to get an apartment / house facing a specific amenity, say a swimming pool, lake, park, sea, etc
• Any amount paid to get an apartment / house facing a specific direction (maybe as per vaastu)

There is a false impression being created that 10 per cent service tax is levied on the entire value of the consideration which is paid to the builder / developer. Service tax is levied only on 33 per cent of the value. It should be noted that the service tax would be levied only on “under-construction property”. If the entire amount for the property purchase is paid after the receipt of a completion certificate, there would be no levy of the service tax. Service Tax would not be levied on parking lot and resale property. For those who have booked their flats some time back and paid amount based on the stage of the construction, the tax will only have to be paid on the remaining installments and not on the entire value of the flat.

Most of buyers buy a house through a home loan. They book the house when the builder launches the scheme or when it is under construction, and make the payments based on the stage of the construction. This means that they buyers make most of the payment before the builder gets the completion certificate. Thus, the entire amount paid by them to the builder would be subject to service tax. If the entire amount for the property purchase is paid after the receipt of a completion certificate, there would be no levy of the service tax.