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May let you escape 3% service tax
March, 05th 2010

Those looking to buy a house would do well to book one before July, when the new service tax levy on construction service will come into effect. The cost of flats will go up 3.3% of the total purchase consideration once service tax begins to be levied on construction.

The government is considering exempting from tax flats booked before the notification of the expanded construction service, a finance ministry official told ET. There is a case for giving relief to buyers who booked their houses before the service is notified... We are examining it, he said.

So, a buyer who has booked a flat but will get possession only after the notification of the new service need not worry. A clarification to this effect may be issued when the tax is notified after the passage of the finance bill, he said.

The Union Budget proposes to expand the definition of construction service and levy tax on houses under construction as well. The new rule, which will come into effect when Parliament approves the budget, says service tax would be imposed if payments were made before the completion of construction.

Realty companies typically sell property before they begin construction and fear that the move will hit the sector hard as it would lead to a rise in home prices and depress demand.

The government must reconsider its decision to impose service tax on under-construction housing as the real estate industry is already paying 14-16% as indirect taxes. The current move will make affordable housing unaffordable in the future, said the DLF spokesperson.

The government plans to include charges such as development fee, parking fee and premium location charges usually paid at the time of completion of construction in the base price. Only 33% of the base price of the flat will be chargeable to service tax levied at the rate of 10%, taking the effective tax to 3.3%.

Since an amendment has been made in an existing service already under tax net, there are diverse views whether this will be operative from a specific date after notification or treated as a clarificatory amendment roping in construction-linked payment plans of houses under construction, said Anil Kumar, CEO and deputy managing director, Ansal API. If it is to be operative from a prospective date, booking a house in the next 3-4 months may result in savings of up to 4% for a customer, he added.

However, the government remains firm on levying the tax. Revenue secretary Sunil Mitra said the proposal would not hike prices by more than 3.5%, an increase that could be afforded by the customers.

Construction is a service. As a service, there is no reason why it should not be taxed, he said. It is only 3% or 3.5% that gets added up (for the buyer), Mr Mitra added.

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