Now service tax for property under construction!

Will Vinod be charged a service tax on the entire amount he pays to the builder even if he pays 25 percent of the money after completion of construction? A property is treated as one under construction until the builder gets a completion certificate. So, any amount that Vinod pays to the builder before the latter gets a completion certificate is subject to service tax. If he pays 25 percent of the price after the builder gets completion certificate, then this portion will not be subject to 10.30 percent service tax.

Vinod is looking to buy an apartment. Since properties under construction generally cost lesser than equivalent properties that are in a ready- to- move condition, he has been searching for properties under construction to find a home that he likes and also one that fits his budget! However, he recently came to know that ‘under construction properties’ will now cost more. The reason – new service tax levied on such properties in the budget of 2010 -2011. After a reasonable amount of research, this is what he found:

Rule on service tax levied on under construction properties

This year’s budget has introduced a new service tax on properties that are under construction. Apartments, row houses or flats- any property under construction will be subject to 10.30 percent service tax. This is because the real estate developer / builder is considered to be offering services to the property buyers by constructing the property. However, since there is a considerable amount of material and also the cost of land that constitutes the total cost of the property, the service tax is not levied on the entire selling price of property. The idea is to tax the labor portion of the cost only.   Further, the tax is levied on the builder. Naturally, the cost will roll down to the customers by means of a price rise.

33 percent of the price is treated to be labor and 67 percent is considered to be the cost of land and materials. Hence the service tax of 10.30 percent is levied on 33 percent of the selling price of property. So, if Vinod buys an apartment for Rs. 50L. He will pay tax on 33 percent of Rs. 50L, i.e., Rs. 16.50L. The amount of service tax will come to Rs. 1.70L (10.30 percent of Rs.16.50L)

Further, certain additional services rendered by the builder, like selling a house on a desired floor or an apartment that has a specified house number or selling a house which faces the direction or amenity as desired by the buyer etc are also subject to service tax. Therefore, if Vinod wants a pool facing apartment, he pays an extra amount to get this apartment and also pays service tax on this extra cost.  So, if Vinod pays an additional Rs.2.0L to get the pool facing apartment, he will have to pay an additional amount of Rs.0.21L towards service tax.

Vinod also wants to know if he will have to pay extra service tax to get parking garage space allotted to him. To his pleasure, this is not a taxable service!

Will Vinod be charged a service tax on the entire amount he pays to the builder even if he pays 25 percent of the money after completion of construction? A property is treated as one under construction until the builder gets a completion certificate. So, any amount that Vinod pays to the builder before the latter gets a completion certificate is subject to service tax. If he pays 25 percent of the price after the builder gets completion certificate, then this portion will not be subject to 10.30 percent service tax.

Since April 1, 2010, the builder has the responsibility of paying service tax and the buyers will have to bear the burden of this additional cost. The rise in purchase price of the property due to the levy of service tax is only an addition to the costs involved in buying properties under construction. For example, Vinod will have to hire a lawyer to verify the builder’s financial standing and the legal status of the property under construction.  Financial institutions that lend money to the builder are a good source to verify the builder’s financial condition. Vinod also has to verify that the property under construction is legal – the land is not allocated as agricultural land, whether the urban land ceiling ‘No objection certificate’ has been taken, if required, whether an approved construction plan is ready etc.  Stamp duty and registration charges also constitute a considerable chunk of cost involved in purchasing a home.

The municipal tax levied on new construction properties is higher as compared to old properties.  The routine maintenance charges are also much higher on new construction properties. Further Vinod will also have to study the gross pricing of the property in detail to understand the charges levied by the builder. With an construction in progress property, Vinod  is also taking the risk that construction may not be completed or not completed in due time. Therefore, it is important to verify the builder’s reputation before investing in a property still under construction.

On the other hand, Vinod will have the advantage of higher capital appreciation on the property as such properties are available at lower costs than properties whose construction is complete.