Accounting regulator ICAI has called for excluding land value from the proposed service tax on the realty sector, saying land is a state subject.

"When a prospective buyer makes an advance payment to the builder against booking of a specified unit in a building, that part also includes a price towards the land on which the building is being constructed and treating the entire amount being paid by the prospective buyer to the builder would amount to imposing a tax on transfer of land which is a state subject," ICAI said.

The Budget 2011 proposes to bring the realty sector, including new residential properties under service tax net.

In its post-budget recommendation on indirect tax, the Institute of Chartered Accountants of India (ICAI) suggested that the value of land based on municipal valuation be excluded from the payments made by the buyer as the "intention cannot be to tax the value of the land or the appreciation in the value of the land".

Finance Minister Pranab Mukherjee in the Budget 2010-11 brought construction of real estate complexes under the ambit of service tax unless the entire consideration for the property is paid after completion of construction.

"In the construction of complex services, it is being provided that unless the entire consideration for the property is paid after the completion of construction (i.e. After receipt of completion certificate from the competent authority), the activity of construction would be deemed to be a taxable service," said the Budget proposal.

Complex has been defined as buildings consisting of more than 12 residential units. Finance ministry officials later clarified that service tax of 10.3 per cent would be imposed on 33 per cent of the selling price of the property, which effectively means about 3.5 per cent of the total cost of the property.

Last week, CREDAI -- an apex body for realtors -- said it will consider taking the government to the court if its demand for excluding land cost from the proposed service tax on real estate complexes under construction is not met.

Not only developers, even the urban development ministry said it would soon approach the finance ministry seeking a review of the proposed service tax on real estate sector as it feels levy will hurt the sector, which is yet to recover from the global economic recession.