Service tax levied on under
construction property, especially in the recent times when real estate industry
is going through a difficult phase in India. There are speculations rife about
the possible impact of Budget 2013 on real estate in India and how the budget
is going to impact the home buyers and developers. There have been a lot of
expectations that the new union budget would turn the wheel of fortune for the
real estate industry. However, the budget
failed to bring in any significant cheers for the crisis laden realty in India
as abatement scheme has been modified.
Let’s see the recent implications
related to service tax on under construction property.
Service tax
Service tax is payable on services
provided by the service provider. The service provider collects the tax from
the consumer and deposits the same to the government. It is applicable to all the services except for
those mentioned in the Negative List of services.
The current rate of service tax is
12%. Education cess and senior and higher education tax is calculated on top of
the service tax rate and it makes effective the service tax stands at 12.36%.
Under
construction property
A property is termed “under construction” till the builder receives a
“completion certificate” from the relevant authorities. If the entire amount for the property
purchase is paid after the receipt of a completion certificate, there would be
no service tax levied on the purchase of the property.
Service tax
on under construction property
Service tax is levied on the services provided by developers in
case of projects offered for sales and when the payment is made before the
issuance of completion certificate. The developers had protested against
the issuance of any such service tax; however, court verdict went in favour of
the government and now service tax is liable on purchase of property under
construction.
It is the responsibility of
the developer to collect service tax from the customer and deposit it to the
government. However, due to imposition of service tax, the burden of
increased property price has to be borne by the buyer.
Exemption
from payment of service tax on construction
An exemption from payment of service tax on under construction
property is allowed in case of the following cases:
·
Construction of single residential unit
·
Construction of low cost houses up to carpet area of 60 sq meter
Single residential unit is defined as
a self contained residential unit designed to be used by one family only.
How to
calculate service tax on under construction property?
When you buy a house, you pay for two components:
·
Value of land
·
Construction offered by the developer (service provider)
Service tax is payable only in case of construction services and not on
the value of land. In cases where it becomes difficult to ascertain cost of
immovable property and service cost separately, government has come up with the
provision of abatement scheme where an amount is levied on the total amount.
Abatement
scheme
Earlier an abatement of 75% had been allowed by the government and service tax was levied on only 25% of the total purchase price
(including value of land). Hence, service tax of 12.36% is levied
on 25% of the total cost of purchasing an under construction property. It means
that a service tax of 3.09% is
levied on the total cost.
However, in budget 2013, abatement has been
reduced from 75% to 70% in case of flats above 2000 sq ft in size and costing Rs 1 crore and above. It
means that in case of flats seized above 2000 sq ft and costing above Rs 1
crore, service tax of 3.71% would be levied.
COMPUTATION OF SERVICE TAX ON UNDER
CONSTRUCTION PROPERTY
Particulars
|
Abatement
Allowed
|
Taxable
Component
|
Normal
Rate of Service Tax
|
Effective
Rate of Service Tax on Property
|
Flat
size over 2000sq ft
|
70%
|
30%
|
12.36%
|
3.71%
|
Sale
price of Flat over Rs1 Crore
|
70%
|
30%
|
12.36%
|
3.71%
|
In
all other cases except specifically exempted (as mentioned above)
|
75%
|
25%
|
12.36%
|
3.09%
|
The
ministry of finance vide notification no-9/2013 has re-confirmed that above
abatement provide for payment of service tax on property would can be availed
by the builder only.
The
service Tax so collected by the builders/real estate developers does not go in
their pockets and is deposited with the Govt. by the person collecting the same
before the due date of payment of service tax.
This Article is written by CMA Samir Biswal. He can be reached at cmasamirbiswal@gmail.com.
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