VAT on under construction property.

Q: Is this correct that all the buyers who bought under construction property between Jun 2006 to March 2010, will have to pay 5% VAT on agreement value plus an interest of 15% per annum?

Puneet Laskar,

9th January 2013

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Replies (5)

Thing to remember while you are buying property:- 1) 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.

2)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).

3) Service Tax is not applicable on single residential unit i.e. independent house, villa or bungalow.

4) Service Tax is not applicable for low cost housing with carpet area of up to 60 sq-mt.

Bhaskar Chandavarkar, Pune

17th August 2015

Comment

Good Evening Rajiv,
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.

Yes, Land cost is exempted from both these charges.

An exemption from payment of service tax on under construction property is allowed in case of the following cases: 1)Construction of single residential unit, 2)Construction of low cost houses up to carpet area of 60 sq. meter, 3)Single residential unit is defined as a self-contained residential unit designed to be used by one family only.

Balwinder Singh,

17th August 2015

Comment

@Arushisha,
VAT is decided by the respective state. According to the latest Maharashtra Value Added Tax (Amendments) Act of 2010, VAT is charged at around 5% of the construction-related services.

Sandeep Mhatre, Mumbai

17th August 2015

Comment

Hi Sandeep,
So, what is really an under construction property? Is land cost is exempted from both these charges? Is there any exemption from payment of service tax on construction?

Rajiv,

17th August 2015

Hi all,
According to Supreme Court VAT can not be imposed on buyers who have bought their property between June 2006 and March 2010. This has come as a shock to builders in the state who wanted 1% tax instead of 5% imposed by the state government in 2006. They were recovering the VAT amount from buyers.

Sandeep Mhatre, Mumbai

6th June 2014

Comment

Thanks for the valuable information Sandeep,
Even the court also directed the Maharashtra government to bring clarity in Rule 58 (1-A) — relating to VAT rules. We respect the Supreme Court verdict but we will study the judgment only after we get a copy. The taxes imposed by the government have always been passed on to the buyer. Why should we pay from our pocket?

Rakshit, Mumbai

6th June 2014

Well,
According to a recent decision by the Supreme Court, the sale of a property that is under construction would be liable to VAT. In the case of L&T v/s State of Karnataka, the apex court held that the pre-construction agreements for sale of immovable property would qualify as 'works contract' and, therefore, VAT would be payable on the transaction.

Sandeep Mhatre, Mumbai

6th June 2014

It seems that the judgement will push the states' VAT authorities to tax all transactions for properties that are under construction. This could also include the real estate transactions concluded in the past few years.

The judgement was straightforward by a larger bench of the Supreme Court, so the decision shall be considered the law of the land until it is disallow by a constitutional bench of the apex court.

Rakshit, Mumbai

6th June 2014

If govt ask to pay 5%+ int, this will be injustice for all the people who purchased property during said period. Because, govt has later realized that it is a exuberant amount they are charging and later on resorted to 1 % tax after 1 Apr 2010. So, why this injustice to the people who purchased in the that 4 year period? This is illogical and injustice.

Saran,

10th January 2013

Comment

Hi Saran,
Service Tax and Vat are applicable only for an under-construction property. Service tax, as decided by the central government, is payable on services provided by the service provider. The service provider collects the tax from the consumer and deposits the same to the government.

Sandeep Mhatre, Mumbai

17th August 2015

True Sandeep,
Effective 1st June 2015, the service tax is currently 14% of the 25% of the total agreement value for properties below Rs 1 cr or 2000 sq. ft. area in size. For properties exceeding or equal to Rs 1 crore or more than 2000 sq. ft. area, the service tax is 14% of 30% of the total agreement value.

Arushisha, Mumbai

17th August 2015