SERVICE TAX ON LUXURY HOUSING

There are changes in the Service Tax Act that will lead to an increase in the cost of housing. The government has planned to reduce the abatement rates for luxury apartments. In the Budget provisions for 2013-14, the rate of abatement on 2000 sqft plus apartments or houses costing Rs 1 crore and more has been reduced by five percent from 75 percent to 70 percent. This translates into an increase in service tax outflow. The net increase will be up to 0.8 percent.

Real estate developers who were paying 12.5 percent service tax on 25 percent of the value will now have to pay for 30 percent of the value. The effective service tax rate for developers will increase by 62 basis points to 3.70 percent of the property value. However, low cost housing is exempt from this move.

The rate of abatement or deduction is used in the calculation of service tax to be paid by developers. The reduction in abatement will result in higher input cost that will be considered for calculation of service tax. Lower the abatement, higher is the liability of service tax.

Presently, service tax has been levied on many real estate transactions. It is leviable on real estate agent services, works contract services, commercial or industrial construction services, construction services, commissioning and installation services, special services by builders, and renting of property services.

In addition to the imposition to tax on the sale of a flat by a developer before the completion of construction, service tax is also levied on the amount charged by builders/developers in respect of 'prime location', internal development, external development etc.

Special services:

There are some special services rendered by builders.

These include:

Preferential location: This means any location with the extra advantage that attracts extra payment over and above the basic sale price

Development charges: Internal or external development charges that are collected towards developing/maintaining parks, lying of sewerage and water pipelines, providing access roads, common lighting etc

Other charges: Charges such as fire-fighting installation charges and back-up power are also part of these special services.

Such charges for the other facilities do not form a part of the taxable value while arriving at tax on construction. Since these charges are in the nature of service provided by the builder to the buyer of the property, over and above the construction service, they were brought under 'special services provided by builder Charges excluded

These charges have been specifically excluded from the scope of this new service:

Charges for providing parking space

Development charges paid to the State government or local bodies

Any service provided by a resident welfare association or cooperative group housing society.

This Article has been written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com

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