Service Tax on Under construction residential bulding

Costs rise from today for buyers of under-construction properties due to the imposition of a service tax on builders.

Last week, the Central Board of Excise and Customs notified that a service tax of 10 per cent would be levied on the gross value of a housing property under construction from July 1. Only properties built under the Jawaharlal Nehru National Urban Renewal Mission and the Rajiv Awaas Yojana would not be taxed.

Earlier, the abatement for housing properties was 67 per cent (meaning, the tax used to be imposed on the remaining 33 per cent of the cost). However, the service tax was imposed on the contractor, not the builder, so the buyer didn’t come into the picture. Now, it is the builder who will have to pay, and the abatement has been made 75 per cent for single-agreement purchases (land and cost of construction combined) and 67 per cent on the cost of construction for dual agreement ones (the two separated).

Pass-on effect
Developers say they will pass on the service tax burden to buyers. “Buyers have to bear this additional cost to be levied. Though the effect is marginal, the purchasing power of buyers will come down with this,” said Abhisheck Lodha, managing director, Lodha Developers.

To explain, in cities like Mumbai, the buyer can sign an agreement inclusive of land and construction costs. For example, if you plan to book a property (under construction) worth Rs 50 lakh, you will now be levied 10 per cent service tax on 25 per cent of the gross value of the property, that is, on Rs 12.50 lakh. The tax: Rs 1.25 lakh.

However, the rate of taxation is slightly lower in case the builder-buyer duo get into two different agreements – one each for land and construction. “If the land cost is recovered separately, the abatement will be 67 per cent, that is, the service tax will be levied on the remaining 33 per cent,” said advocate Shailesh Sheth. And, 10 per cent rate will be applicable.

CA Kashish Mittal

kashish

Hema,

As per my view, you need not pay Service Tax on advance payment. Please request your builder to look at the following notification and if required, seek clarification.

Government of India
Ministry of Finance
(Department of Revenue)

New Delhi, the 28^th June, 2010

Notification No. 36/2010 - Service Tax

G.S.R. (E).- In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable services specified in clause (A) of section 76 of the Finance Act, 2010 (14 of 2010) other than services referred to in clause (zzc) and (zzzz) of sub-section (105) of section 65 of the Finance Act from so much of the service tax leviable thereon under section 66 of the Finance Act as is in excess of the service tax calculated on a value which is equivalent to the amount of advance payment received before the said appointed date.

Explanation.- For the purpose of this notification,

(i) “appointed date” means the 1st day of July, 2010;

(ii) “advance payment” means consideration received for the said taxable services to be provided.

2. This notification shall come into force on the date of its publication in the Official Gazette.

Hope this helps.

Thanks,

Ganesh

3. Tax levy on 8 new services to come into effect from July 1^st :

The Finance Ministry has specified July 1^st as the date from which service tax levy would be applicable on the eight new services brought under the tax net in Budget 2010-11. The major head in respect of new services have been allotted as “0044-Service Tax” and details regarding accounting code are available in the Circular No. 124/6/10-TRU, Dated 29.06.10.

So any payment you make after 1st July 2010 to your builder will attract service tax liability.

Since changes in the service tax are not retrospective, so you are not liable to pay since Aug 2009.