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Budget 2010-2011: Service Tax on Property / House / Apartments / Flats

Budget 2010 introduced service tax on construction of property by builders. What does it mean for you as a buyer? Would you have to pay Lakhs of rupees more? Find out what would be covered under this new provision.

Budget 2010 brought a rude shock to prospective home buyers. It stipulated that construction of house (in any form – apartment / flat / row house / etc) by a builder in a complex is a “service”, and introduced the service tax of 10.3% on such a service.

What does this mean to you as a home buyer? Would the builder pay the tax, or would you be paying this large sum as a buyer? If an apartment costs Rs. 30 Lakhs, does it mean you would have to pay Rs. 3.09 Lakhs more for it? What about the money paid for parking space? Would you pay tax even on that amount?

Let’s find out.

 

1. Service Tax on 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.

Thus, if an amount for the purchase of a property is paid to the builder before he obtains a completion certificate, it would be subject to service tax. Only 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.

Abatement allowed

But don’t get too shocked – you won’t pay service tax on the entire amount. 67% of the amount charged by the builder is considered to be cost of land, materials, etc. Only the remaining 33% amount is considered as “service” provided.

Therefore, you would pay 10.3% service tax only on 33% of the amount that you have paid. Thus, the effective rate of tax for you would be about 3.34% of the total amount paid by you.

What does it mean for you?

Most of us buy a house through a home loan. We 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.

Effectively, it means that we make most of the payment before the builder gets the completion certificate! This means that the entire amount paid by us to the builder would be subject to service tax.

Who pays this tax?

It would be naive to assume that the builder would absorb this burden and pay the tax. Of course, the onus of paying this tax is on the builder. So, you would not have to go through the hassle of paying it.

However, ultimately this burden would be transferred to the home buyers in the form of higher price. Thus, its people like you and me who would end up paying this service tax.

Also, this tax would not be applicable to resale properties, as resale properties would essentially have obtained a completion certificate.

Applicable Date

This provision would be applicable from 1st April, 2010.

 

2. Service Tax on Preferential Location Services and Internal & External Development of Complexes

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.

What does this cover?

  • 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)

Also, the service tax has also been levied on any amount spent by the builder for the development of the complex – like building internal roads, paving the garden, etc.

No service tax on amount paid for parking garage

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.

Applicable Date

The date for the applicability of this provision would be notified later. However, in all likelihood, it would be effective from 1st April, 2010.

 

Illustration / Example

Let’s say you are buying an apartment of 1000 sq. feet for Rs. 3,000 per sq. ft. You are also paying a floor rise of Rs. 100 for getting the apartment on the 5th floor. You are also buying a parking space for your car for Rs. 2 Lakhs. Thus, you are paying a total of Rs. 33 Lakhs to the builder.

Let’s say you have paid the whole amount to the builder by the time the last slab of the apartment is constructed. Thus, you have paid the entire amount before the builder has obtained the completion certificate.

How much service tax would the builder recover from you?

  • Rs. 2 Lakhs for parking space if not subject to service tax
  • The amount of Rs. 1 Lakh (Rs. 100 per sq. ft. * 1000 sq. ft.) is subject to service tax. Thus, service tax is Rs. 10,300
  • Out of the remaining Rs. 30 Lakhs paid for the house, Rs. 20,10,000 (or 67%) is treated as cost of land and materials, and therefore, does not attract any service tax
  • There is a service tax of 10.3% on the remaining amount of Rs. 9,90,000. This service tax amount is Rs. 1,01,970
  • Thus, the total service tax payable by you is Rs. 1,12,270 (Rs. 10,300 + Rs. 1,01,970)

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