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Service tax on under construction property is charged on 25% or 30% of its value
June, 21st 2016

The Delhi High Court, with regards to a recent case, ruled that service tax cannot be levied on under-construction flats in a housing project. A bench consisting of justices S. Muralidhar and Vibhu Bakhru passed the order in a case filed by home buyers who had entered into separate agreements with Sethi Buildwell Pvt. Ltd to buy apartments in a multi-storeyed group housing project developed by the builder in sector 76 in Noida, Uttar Pradesh. In its order, the court also said, “the government shall examine, whether the builder, in this case, has collected any service tax from the petitioners and if such amount has been deposited with it, the money shall be refunded to them with 6% per annum interest.” This ruling comes as a relief for home buyers as service tax increases the overall cost of a property by about 3.75-4.5%.

Here is how service tax is charged on the value of an under-construction property.

SERVICE TAX IMPLICATION

Typically, service tax is not charged on the entire value of the under-construction property. It is instead levied on a certain percentage of the total value, i.e., the cost of construction. Therefore, the cost of land is excluded. For an under-construction property costing less than Rs.1 crore, service tax is calculated on 25% of its gross value. And for a property that costs more than Rs.1 crore, service tax is levied on 30% of the value.

Given that service tax is charged only on the construction cost, the effective rate on the entire value of a property costing below Rs.1 crore is 3.75% (i.e., 15% * 25% of the property value), and for a property above Rs.1 crore, the effective rate is 4.5% (15% * 30% of the property value). Accordingly, if you are buying a property costing Rs.75 lakh, you will have to pay Rs.2.81 lakh (3.75% of Rs.75 lakh) as service tax. Similarly, if the value of the property is Rs.1.5 crore, service tax would be Rs. 6.75 lakh (4.5% of Rs.1.5 crore).

Do keep in mind that service tax will be levied on various other costs associated with buying a house. For instance, it will be levied on the brokerage you pay to a real estate agent or broker, legal fees paid to a lawyer, and if you take a home insurance policy, service tax will be levied on the premiums paid.

OTHER CHARGES

When purchasing a property, one does not just pay for the basic sale price. Along with basic sale price, there are various other costs and charges one has to pay. For instance, preference location charges, external development charges, interest-free maintenance deposit and so on. While stating that no service tax should be charged on under-construction properties, the Delhi High Court also stated that, “service tax could be levied on preferential location charges by the developer, because it was based on the preferences of customers and amounted to value addition.”

 
 
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