Service Tax & VAT on under-construction property
Buying a property can be a tedious job and more so if one is not really familiar with the various costs he has to pay for his home. Service tax and VAT are just one of the many costs which a buyer has to pay in order to own his dream home. Service Tax rate is decided by the central government while VAT varies from state to state.
More importantly, Service Tax and VAT (value added tax) are paid only for under construction properties. And Land cost is exempted from both these charges.
So, what is really an under construction property?
A property is termed “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 service tax levied on the purchase of the property.
Service Tax Rate
Service tax is essentially payable on services provided by the service provider. The service provider collects the tax from the consumer and deposits the same to the government.
Effective 1st June 2015, the government levied a uniform service tax of 14 per cent on all services availed in India. Thus, for all under construction properties below Rs 1 crore or below 2000 sq. ft. area, the service tax applicable is 14 per cent of 25 per cent of the total agreement value. But for under construction properties that exceed or equal to Rs 1 crore or are over 2000 sq. ft. area, the service tax applicable is 14 per cent of the 30 per cent of the total agreement value.
Exemption from payment of service tax on construction
An exemption from payment of service tax on under construction property is allowed in case of the following cases:
- Construction of single residential unit
- Construction of low cost houses up to carpet area of 60 sq. meter
Single residential unit is defined as a self-contained residential unit designed to be used by one family only.
How to calculate service tax on under construction Property?
When you buy a house, you pay for two components:
- Value of land
- Construction offered by the developer (service provider)
Service tax is payable only in case of construction services and not on the value of land. In cases where it becomes difficult to ascertain cost of immovable property and service cost separately, government has come up with the provision of abatement scheme where an amount is levied on the total amount.
VAT charges
This charge varies from state to state. In Karnataka, the VAT is currently 5.5 % of the construction related services.
Did you know!
- VAT and Service Tax are not applicable on ready-to-move-in properties. For instance, if you have bought a property when it is almost ready-for possession, you must consider to postpone your sale agreement to be signed after completion certificate is issued. If you do so, then you will be saved from paying these charges.
- Builder has to issue 2 separate payment receipts i.e. one each for VAT (with Tax Invoice no and TIN) and Service Tax (with Tax Invoice No and ST registration no).
- Service Tax is not applicable on single residential unit i.e. independent house, villa or bungalow.
- Service Tax is not applicable for low cost housing with carpet area of up to 60 sq. m.
