Understanding Service Tax And VAT On Under-Construction Property

Rakesh (name changed) has always dreamt of owning his own home. Now with a salary increment, he was closer to realizing his dream. He shortlisted a few under construction properties that met his budget of 60 lakhs. However, as he readied himself to pay, he enquired about the actual cost of the apartment from the builder. The cost sheet supplied to him included two additional charges – VAT and Service Tax which he had no clue of.

Are you also unaware of these additional charges as Rakesh?

If your answer is yes, then you should know that Service Tax and VAT applies on all under construction property transactions. However, their actual value varies with states in which the property is being constructed.

Let us learn more about these taxes and the calculation behind them.

Service Tax
 Service tax is levied by the Central Government on the construction services offered by the builder to buyers. Presently the rate of service tax is 12%. Taxes like Education cess and higher education cess is calculated on top of the service tax which makes the effective rate of service tax to 12.36%.

Though it sounds simple, calculation of service tax is a bit complicated due to its applicability to various cost heads. The basic cost of the property you pay includes the cost of land and construction. Service tax is applied only on the construction component. As it is difficult to calculate land cost and construction cost separately for majority of the properties in the country, the government offers an abatement (relief) scheme. According to this scheme, relief is given on 75% of the value of the property. Service tax is charged only on the balance 25%. This effectively brings the service tax rate to 3.09% (12.36% * 25%). It is to be noted that abatement is reduced from 75% to 70% in case of flats having a carpet area of more than 2000 sq. ft or property value is Rs 1 crore or above. In all such cases, service tax of 3.71% would be levied. However, this abatement is not available on other cost items such as Preferred Location Charges ( PLC), Floor Rise Charges, initial maintenance charges and club house etc. In all these cases service tax is charged at a flat rate of 12.36%. EDC/IDC and lease rent to the extent paid to state government are excluded from service tax liability. Parking charges are exempted from the service tax ambit.

Service tax is payable only on property purchase directly from builders and is not required in case of resale property purchase as there is no service provided.

VAT 
VAT or Value Added Taxes are levied on the sale of goods (movable properties). For any sale to attract VAT, it should involve transfer of goods from a person to another. In case of under-construction properties, the transfer of goods applies to the transfer of ownership rights from the builder to you in the form of a sale agreement. This tax is governed under the ‘works contract’ in the VAT law. However, currently VAT is only applicable on properties bought in select states. For example, VAT is charged at the rate of 1% of “agreement value”in Mumbai and Pune and 5% in Bangalore. There is no VAT on properties bought in Noida-NCR, Chennai and Kolkata.

We hope that you would be clear on the aspects of Service Tax and VAT by now. In case you have any queries, please post it down in the comment box. We would definitely try to resolve them.

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