Service Tax on Under Construction Property @3.09%

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Service Tax on under Construction Property is levied on the Services provided by Builders or Real Estate Developers or any other person, where Building Complexes, Civil Structure or part thereof are offered for sale but the Payment is received before the Issuance of Completion Certificate by a Competent Authority.

When the Service Tax on under construction property was first levied, many Real Estate Developers and Builders had appealed to the Courts against the applicability of Service Tax on Under Construction Property and the Court had also issued a Stay Order for the same. But, the Courts eventually decided in the favour of the Govt. as a result of which Service Tax on under Construction Property is now liable to be paid.

To remove confusions created by the Court Orders, the Govt while introducing the Negative List of Services (applicable from 1st July 2012), has very specifically in the definition of Service contained in Clause (44) of Section 65B of the Act stated that Service includes Declared Service. The Govt. has also mentioned the activities which would be considered as Declared Services and Construction of Complex, Building, Civil Structure or part thereof has been stated as a Declared Service.

In the light of the above, Service Tax on Construction is liable to be paid as per the Service Tax Rates in force.

service tax construction property Service Tax on Under Construction Property @3.09%

Exemption from Payment of Service Tax on Construction

The Ministry of Finance on 20th June 2012 issued a Mega Notification pertaining to exemption from applicability of Service Tax on many activities. As per this Notification No. 25/2012-Service Tax dated 20th June 2012, Exemption from Service Tax on Under Construction Property is available in circumstances pertaining to services provided in the following cases:-

  1. Construction of a Single Residential Unit*
  2. Construction of Low Cost Houses upto a carpet area of 60 sq. metres per house in a housing project approved by competent authority empowered under the “Scheme of Affordable Housing  in Partnership” framed by the Ministry of Housing and Urban Poverty Alleviation by the Govt. of India

*Please Note: Single Residential Unit has been defined as a self contained residential unit designed for use of a single family. If the house/complex has multiple floors/units and the title of each of the units/floors is capable of being transferred to another person by Mutation in land/municipal records, all the floors/units would be considered as separate single residential units and Service Tax on Construction would be levied on the same.

Service Tax on Under Constuction Property would be levied on all other cases except the one’s which have been mentioned above. The Computation of Service Tax on Under Construction property has been explained below.

Computation of Service Tax on Under Construction Property

At the time of sale of property, the amount paid by the purchaser to the Builder is for:-

  1. Value of Land
  2. Construction Service provided by the Builder/Developer

Service Tax can only be levied on Services and not on sale of goods/immovable property & therefore in the above case Service Tax won’t be levied on the Value of Land and would only be levied on the Construction Service provided by the Builder/Developer as per the rates in force which currently is 12.36% (incl. of Education Cess and SHEC)

The Service Tax on Construction would be levied as per the rates in force on the total value of services provided by the Builder/Developer provided the purchase price of land and the value of construction services are shown separately in the Invoice.

In cases where it is difficult to show the cost of goods/immovable property and the cost of services separately, the Govt issues an Abatement scheme wherein tax is levied on a small proportion of the Total Amount. Abatement Scheme has also been announced for the service of Construction of Building and as per Notification No. 26/2012-Service Tax dated 20/6/2012, an abatement of 75% is allowed and Service Tax would be levied only on 25% of the total purchase price (incl. of price paid for Land)

So Service Tax @ 12.36% on 25% of the Total Purchase price is levied on under Construction Property. In other words Service Tax @ 3.09% (25% of 12.36%) is levied on the total price paid for the purchase of an under construction property.

The Budget 2013 brought in an amendment to the above provisions and reduced the abatement from 75% to 70% for flats above 2000 sq. feet or costing Rs. 1 Crore and above. In such cases, the Service Tax shall be charged on 30% of the amount (70% abatement). In other words, Service Tax in such cases shall be charged @ 3.71%.

The above details on levy of service tax on property have been summarised in the table below

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 2000 sq ft 70% 30% 12.36% 3.71%
Sale price of Flat over Rs 1 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 the above abatement provided for payment of service tax on property would can be availed by the builder only if:-

  1. Cenvat Credit on inputs used for providing the service has not been availed
  2. Total amount charged includes the value of land and the value of land is not shown separately in the invoice.

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.

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Please Note: Some states also levy VAT on the Sale of under construction Property. This VAT is over and above the Service Tax on under construction property. Service Tax is levied by the Central Govt and therefore Service Tax on Construction is levied in all states.

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