Service Tax and VAT on under-construction flat/ unit

Introduction

Service Tax and VAT on construction services have created lots of buzz among the property buyers. To me this is undue hardship on those who are buying residential property for the purpose of residence and not as an investment. These kind of cess/ levy discourages people or put it this way since home is one of the fundamental and basic requirement and one has to have it even though various cess/ duties are levied which may be a significant amount when it is calculated on price of House/ Flat. Top of it some of the State governments are collecting VAT also. Although residential property is immoveable property and does not fall under the definition of Goods yet the VAT has been imposed. The government has to admit the prices of flats/ houses built by various private sector builders/ construction companies have poor quality construction and high in price in other words not a true value of money. Government instead of focusing on bringing guidelines for quality construction at affordable price putting the load on buyers of the property. Also, most of the builders are not clear what exactly the computation is, for the purpose of service tax and collecting amount from the buyers with a considerable amount of margin so that they do not fall short of their liability. There are some builders who collected ST & VAT in 2010 and didn’t keep the amount in escrow account but used the amount of ST / VAT collected as a source of finance and now depositing to the credit of Government since the ST and VAT was challenged and was pending with the court.

Anyways, I am making an attempt to make the little clear. Of course my views are not final authority and views of LCI experts are most welcome. Also readers are advised to consult their CA or Advocate before challenging your builder yet the article shall help to give you the insight on ST and VAT on under construction property and one put this strongly before builder.

1. SERVICE TAX:

In the Finance Act, 2010 the definition of Commercial or Industrial Construction Service [Sec. 65 (25b) read with Sec. 65 (105) (zzq)] and construction of Residential Complex [Sec. 65 (30a) read with Sec. 65 (zzzh)] amended by the Central Government. Since this is central act this applies to all.

The scope is expanded to cover sale of flats/units under construction. Builders/developers are held responsible to pay service tax on payment towards sale consideration received before the grant of completion certificate by the competent authorities for such flats/units. In other words if a builder/ developer receives the Entire Sale consideration after Issue of Completion Certificate then his NOT liable to pay ST since it will be as sale of product and there is no service provided by the builder to the buyer.

Relaxation on Rate of Service Tax:

The general rate of service tax is 12.36% (earlier 10.30%) which becomes significant amount when calculated on price of flat/ house hence it was decided to grant relaxation in the rate of service tax on under construction flat/ unit. After the Budget was introduced the idea of Service Tax was criticised that the tax liability on construction sector has been tightened at a time when the sector is recovering after recession. After considering this, the relaxation available for construction of industrial or commercial complex extended to residential complex. The relaxation is offered to the tune of 75% of the applicable rate. This means the tax incidence will be the rate of service tax applied on 25 % of gross value of commercial or residential complex or unit, broadly representing the service component in the construction, subject to conditions (Refer Notification 29/2010-Service Tax, dated 22^nd June 2010).  It is pertinent to note that 75% abatement will be applicable only if the gross value of commercial or residential complex or unit includes cost of land. Otherwise the existing rate of abatement of 67% would continue to apply.

For e.g: If the agreement value of the flat sold under construction is Rs. 30,00,000 then the Service Tax @ 10.3% comes to 3,09000 but payable is @ 25% which is Rs 77,250.00 or in other words 25% of 10.3% which comes to 2.575% and the amount of Service Tax payable is 2.575% of 30 Lacs which comes to 77,250.00

Encapsulate:

The Service Tax is effective from 1.07.2010. Then the rate of ST was 10.3% now it has been enhanced to 12.36%. Those who purchased flat/ unit in the apartment in the year 2010 and registered after 1.7.2010 will have to pay service tax @ 2.575% since the rate has been increased to 12.36% wef 1.4.2012 those who have registered their flat/ unit after 1.4.12 will have to pay 3.09%  of the agreement value.

2. VAT on purchase of Flat in Maharashtra:

Maharashtra government passed a notification where in they have imposed VAT on sale of under construction property along with land or interest in land all the residential property purchased on and after 1.4.2010. Since this notification is brought by state government it applies to all the transaction executed and registered in the state of Maharashtra. This is not something new, as most of the people thin, earlier (before 1.4.2010) the rate of VATax was 5% but the amount of land was to be deducted now it has made 1% including cost of land. To continue with our example the amount of VAT, on a flat which has registered value of 30,00,000 registered after 1.4.2010, shall be Rs, 30,000.00

In brief the overall impact of ST and VAT for those who are residing in the state of Maharashtra will be 4.09% of the agreement value if registered after 1.4.2.12 prior to that it shall be 3.575% from 1.7.2010.

In the given example of Rs.30,00,000 value of flat, the additional cost by way of service tax will be Rs.77,250.00 and by way of VAT will be Rs. 30,000 making it a total of Rs.1,07,250.

TIPS

Now a tip to make you happy, you can avoid ST and VAT on purchase of under construction property. All you need is to purchase flat/ unit only after the builder obtains Certificate of Completion from the Competent Authority in other words purchase flat which is ‘ready for possession’. HAPPY? 

Now think practically, the flat which is ‘ready for possession’ will cost you more since builders sell these flats at highest price. For instance if you purchase a flat which is under construction the price is say Rs. 30 lacs and adding ST and VAT it will cost you approx Rs. 31.08 lacs whereas if you purchase the same flat as ‘Ready for Possession’, say after 2-3 years, may cost you somewhere 33 -35 lacs or even more (function of time and demand).

Even a layman can understand it’s better to pay ST and VAT rather than paying in the pocket of builder / Construction Company.

Hope this will clarify the doubts to large extent and help you while purchasing flat/ unit.

Do share your views on this article.

CA Vikash Dwivedi

Email: ca.vkd@rediffmail.com