Buying that dream home may have just got cheaper. Property buyers dont have to fork out a service tax any more while buying a house. The finance ministry, in a circular dated 29 January, has exempted all builders of residential properties across the country from paying the service charge.

Earlier, developers would collect 3% service tax on the total value of the property from a buyer in an under construction project. For a Rs30 lakh apartment, a buyer would have had to pay an extra Rs90,000 as service tax.

Its a welcome move. In such bad times, it could boost sales for us because the benefits of the exemption are for real buyers, said Nayan Shah, joint secretary of the Maharashtra Chamber of Housing Industry.

The exemption is a potential boost to housing demand that has waned after economic growth started slowing, borrowing costs rose and credit became less readily available in 2008.

Its a benefit but the process of levying service tax is not transparent. Some builders show it as a separate tax and some do not, said Akshaya Kumar, CEO of Parklane Property Advisors. Kumar said that in the case of the latter, it is incorporated as a consolidated amount charged for the property.

Earlier attempts to revoke the tax were never followed through. In August 2007, a circular from the finance ministry excluded developers from collecting service tax from buyers because construction is done by employing direct labour.

Certain clauses in the circular were confusing. It said ready flats need not pay service tax whereas such flats had been already exempted from the tax. The new circular carries more clarity on the subject, said a Mumbai-based developer, who didnt want to be identified.
Builders charge a 4% value-added tax (that is levied by the state government), along with the service tax.

Service tax is charged as a one-time payment and its usually taken by the builder before the house keys are handed over to a buyer. Builders will continue to collect the 4-5% value-added tax that is levied by the respective state governments, said Shah.

The circular, however, makes an exception for cases where services of an interior designer or architect are hired independently in a project. Such service providers would then be liable to pay service tax.