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Buying under construction flat will attract service tax on payment made before completion of construction

The Budget proposals have thrown up a dampener for the housing industry. Construction services have now been brought under the ambit of the service tax in an unexpected move that would raise cost of apartments that are still under construction. As per the Budget proposal, the finance ministry has suggested that construction would be deemed to be a taxable service if the building or complex is still under construction and approval from the concerned regulatory authority — which in most cases is the resident municipal authority — hasn’t yet been granted. The levy would cover all construction of complex service or commercial or industrial construction services, the Finance Bill suggested.

The service tax levy would be 10.3% and would also apply to additional services such as those offering preferential locations for flats in multi-storey buildings where flats in each floor are priced at a premium due to their location. This too has been described as a service and hence taxable, according to the proposal which was tabled in Parliament on Friday by finance minister Pranab Mukherjee. The premium is typically levied on categories such as flats or apartments that are above a certain floor rise or have other high value locations such as being in front of a garden or a sea or any other preferred locality.

“The proposal is to tax construction if the entire payment for the flat is made before completion of construction,” said consulting firm RSM Astute executive director K H Viswanathan. “This would increase the cost of the apartment and may discourage potential buyers.” The service tax would be 10% on 33% of the price of the apartment, while on the remaining 67%, tax won’t be levied.

Till now, for all apartments under construction, customers paid in instalments based on plinth level construction and also on the progress in building activity. Banks too lent money to the customers according to the requirement of the builder. Now most developers would ask customers to pay the entire value of the building if they sought to lock in at a certain value. This would mean paying the entire sum before the construction. Typically, in cities such as Mumbai, where there is a pressure on space and hence apartments and flats are much sought after, customers booking for flats in an under-construction building, is very common. “The service tax and excise duty hike on cement would increase the overall cost of apartment by about 10%,” said Dharmesh Jain, managing director of Nirmal Lifestyles, a Mumbai-based developer. “It’s a negative step and we are considering to meet the finance minister to plead for a relook on this measure,” he added.

But there are other positive measures that the Budget proposes such as allowing pending projects to be completed within a period of 5 years instead of 4 years, for claiming deduction of profits, as one time interim relief. There is also a suggestion that the commercial area included in a housing project would now be 3% of the aggregate built-up area of the housing project or 5,000 sq. ft, whichever is higher, compared to the existing limit of 2% and 2,000 sq.ft. respectively. This would help developers and real estate companies to make their projects more viable.

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0 Comments

  1. Murugan says:

    I have purchased Apartment which is under construction,and also not issued completion certificate by builder and also no hand over happened.Apartment cost around 5600000 including car parking-150000,Land-2600000,EB-75000,Registration-150000,etc..There is no swimming pool and no amenities.

    Builder is asking me to pay service tax Rs.1,20,000.Do i have to pay these charges because service tax is applicable if builder provides a services,He sold a property how it would consider as service.

    Could you please clarify my doubt.

    Murugan

  2. VSP says:

    I booked flat in oct 2011 and registration done in Jan 2012 and My flat value is 13,50,0000 . match 2013 Builder demand service tax & vat . it is applicable for service tax. & how many % service tax & vat please reply because i am confused.

  3. ashish kayare says:

    Dear Sir

    I had purchased a flat in Aurangabad ( M.S.) Aug 2008 and builder has given me a intimatin latter recently in month of sept 2012.,regarding service tax.

    While purchasing the flat, I paid some amount in advace by cheque and got this flat is in ready puggestion after 2 month , due to bank loan processing it takes 2 months & paid balance amount by bank,Is it consider as a ready puggestion or under construction. and pls tell me what should I have to do in such case .pls suggest
    Will it be consider a ready pugestion or under construction.
    If it consider ready puggestin than do we need to pay service tax?

    Waiting for your reply
    Regards
    Ashish k

  4. janardan r jadhav says:

     I have purchase anew flat under construction in kalyan of rupees 2244500/- and ihave paid stil now Rs.986500/- & now builder demanding me service tax of 3.09 on paid amount . please tell me fact of s.tax

  5. Hasan Israr says:

    i purchase a flat and ma agreement was in november 2010 but postion was nt taken till now but now builder is saing to pay service tax in april 2012 my flat value on agreement is 9 lakh 5 thousand nly please suggest me nw much service tax we pay 
    mumbra thane

  6. Dhananjay Bhogle says:

    please suggest me how to calculate service tax and vat on property under construction purchase agreement done on 7th April 2010 ,
    flat cost =1428750, if possesion date is 23-march-2012 , then how much service tax do i need to pay .

  7. Hiren Monpara says:

    Please let me know whether I can claim rebate on service tax paid to the builder?
    If so, under which section I should claim it?
    I am salaried person.

  8. Pandey says:

    what if the first installment for the flat was paid before the said service tax was brought into enforcement. Is the tax still liable?

  9. Anju Panwar says:

    This is like a vicious circle wherein we pay taxes on every thing we use or buy, out of the money which we earn & already been taxed (even before we receive it in form of TDS)

  10. Sunil says:

    The govt is all set to loot the common man. they have no other work than burdening the common man with tax..phew..fed up of staying in such a country

  11. Yogesh says:

    This is how the government is stealing common mans hard earned money. I am saying stealing because already the government considers Flat as a commodity and its a sale. So they charge the Stamp duty + registration which is equivalent of a sales tax. I don’t get it how this can be double taxed as a sale as well as a service. Tomorrow they will say that you have to pay service tax on say elctronics, because apart from the sale they are also giving you some service.

    ….and with all the money that they collect, they build bridges to no where at cost with is twice than what US or other developed nations pay, even when the labor cost in India is 1/10th. Finally they pass most of the back money into their swiss bank accounts. Oh yes the bridges are actually paid for by the toll that we pay and will keep paying for generations.

    Even the relief that you are talking about in the article is for the developer and not the end coustomer. The developers are not going to pass that back especially in high demand markets like Mumbai.

    I support your movement Anna. I want my money to pay good salaries and benefits to the soldiers who defend our freedom and the cops that protect us. I don;t want the money to go to your swiss bank accounts.

  12. deepak says:

    I have withdrawn for the booking amount which i paid to the builder. the amount is rs.1,50,000/- . the builder is saying he will deduct the service tax proportionately.
    is this justified. plz clarify as i have not even purchased the flat.

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