Transfer of a completed immovable property's title is free from service tax

Q: If you are buying an under-construction property from a developer, in such a case, the developer is considered to be the provider of construction services to the home buyer.

Kaushik Bardia,

29th October 2015

Real estate News in Mumbai

occupancy certificate

bmc

completion certificate

brihanmumbai municipal corporation

transfer of a completed immovable property

transfer under construction property

ministry of finance

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Replies (7)

Thanks Sunil,
I heard that as service tax is charged only on the construction cost, the effective rate of service tax on the entire value of a property below Rs.1 crore is 3.50% (14% on 25% of property value) and 4.2% (14% on 30% of property value) for the a property valued above Rs.1 crore. Is it true?

Diwakar Shetty,

2nd November 2015

Comment

Well Diwakar,
For the purpose of calculation, 25% of the gross value of an under construction unit is considered as the cost of construction and service tax is charged on that amount. If the gross property value is higher than Rs.1 crore, service tax will be charged on 30% of the gross value.

Sunil Joshi, Mumbai

1st November 2015

Comment

@Sunil,
But it is very difficult to separate the construction cost of a single unit within a residential project or a building? How can you separate it?

Diwakar Shetty,

31st October 2015

Comment

Hi Diwakar,
A home buyer need not pay service tax on charges related to external and internal development (EDC and IDC) as these are collected by the developer and paid to the government authority for the related service provided by them. Affordable housing or low-cost housing where the carpet area is less than 60 sq. mt. (about 640 sq. ft) per house in approved housing projects is exempt from service tax.

Sunil Joshi, Mumbai

30th October 2015

Comment

Hello Lekshmi,
If you are buying an under-construction property from a developer, in such a case, the developer is deemed considered to be the provider of construction services to the home buyer. So, service tax is charged to the home buyer on the cost of construction. It is not charged on the entire value of the property, but only on the cost of construction; land cost is excluded.

Sunil Joshi, Mumbai

29th October 2015

Comment

Thanks Sunil,
What are the other cost that attract Service Tax?

Lekshmi,

29th October 2015

Look Lekshmi,
Apart from the basic cost of the unit, a home buyer also has to pay additional charges such as for preferential location, club membership, rain water harvesting and others. If a home buyer takes services of a property agent or lawyer, their fees too attracts service tax. If taking a home loan, service tax is charged on the home loan processing fee. Home insurance premium, too, has it.

Sunil Joshi, Mumbai

29th October 2015

Thanks once again,
What is exempt from Service Tax?

Diwakar Shetty,

29th October 2015

Right Pranab,
I have seen that in many projects, the developer may get the occupancy certificate phase-wise, and the completion certificate once the whole project is completed.

Such disputes were more common in the jurisdiction of Municipal Corporation of Greater Mumbai, i.e., BMC. Therefore, the ministry specially brought this clarification to the tax authorities in Mumbai on 23 October 2015.

Miraniyatin, Mumbai

29th October 2015

Comment

Hi everybody,
When do we need to pay the Service Tax? It should be charged on the cost of construction or the entire value of the property?

Lekshmi,

29th October 2015

Yes, there was a long debate around when a developer should charge service tax to a home buyer while selling the property and when the property is being constructed, or even after it is finished and occupancy certificates received.

Resolving the issue, the Ministry of Finance issued a circular on 26 October 2015, declaring that developers should not charge service tax on sale of flats and apartments once occupancy certificate is received but completion certificate is not.

Praveen Modi, Mumbai

29th October 2015

Comment

It's a good decision Praveen. Sale of flats/apartments etc., where the whole consideration is received after issue of occupancy certificate by Brihanmumbai Municipal Corporation (BMC), leading to a only transfer of title in immovable property, falls outside the definition of ''Service" provided in Section 65B (44) of the Finance Act, 1994, and therefore, it is not taxable.

Pranab Malakar,

29th October 2015