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Service tax haunts flat
May, 25th 2010

Already burdened by galloping property prices, flat buyers are now faced with another fait accompli. For the past one month, many city builders have been asking purchasers to start paying up the 2.5% service tax announced in the Union budget.

For example, if the value of the flat is shown as Rs 1 crore in the agreement, the buyer will now have to shell out an additional Rs 2.5 lakh as service tax.

Despite strong representations made to the Centre by those in the construction industry , the finance ministry is unmoved. Although the official notification from the ministry is expected any day now, market sources say that developers have informed buyers that the possession of their apartments would be held up in case they fail to cough up the amount.

The service tax will be charged on only those residential projects which are still under construction or where a completed building has not received its occupation certificate. A leading developer , not wishing to be identified, admitted that builders were telling buyers to pay this tax. It has created problems and led to bitterness . But the issue is out of our control, he said.

Buyers say they were not informed of the additional levy when they had booked the flats. They are fighting with builders but have little choice. As it is, they are forced to pay the builder hefty parking charges, society fees, development charges and various other hidden costs before he takes possession, said a market source.

Sunil Mantri, newly-elected president of the Maharashtra Chamber of Housing Industry (MCHI), said developers were collecting this tax and putting it in an ESCROW account. As and when the notification comes into force, we will adjust this amount. Today more than 80% of apartments are booked when they are still under construction, he said.

The Confederation of Real Estate Developers Associations of India (Credai) opposed the proposed service tax imposition, saying it would ultimately make buying houses more difficult. Credai has stated that such a move will lead to double taxation.

Credai chairman Kumar Gera said, It is the duty of the builder to collect this service tax from the purchaser and deposit it with the department . The developer is just a postman. It is ridiculous and makes a mockery of the governments thrust on making housing affordable.

Gera further added that the buyer was already burdened with other direct taxes like the stamp duty (5%) and registration charges (1%) on the total value of the flat. A 1% VAT is also in the pipeline. Besides this, the builder has to pay development charges to the local municipal body and this amount could range from anywhere between Rs 100 to Rs 200 a square foot in various towns and cities of the state.

A year ago, Credai had worked out a rough calculation on a pan-India basis to find out the quantum of tax collected by by the local authorities , the state government and the Centre. We found that on an average price of Rs 2,800 a square foot for a residential property, as much as Rs 850 goes towards various taxes, duties and levies, said Gera.

He added the service tax would not be levied with retrospective effect. For those who have booked their flats some time back, this tax will only have to be paid on the remaining instalments and not on the entire value of the flat, he said.

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