Service Tax on Apartments in India / Union Budget 2012

Service tax for payments made to buildings and complexes under construction or awaiting approvals from the concerned authority has been raised to 12.36% in the Union Budget 2012-13 from the earlier 10.3% proposed in the Union Budget 2010.  Such buildings include constructions of any form including apartment complexes, row houses, flats, or even industrial and commercial complexes.

Likely questions in homeowner’s mind include, who will pay for this service tax (builder or buyer), whether payments made for amenities like parking spaces and preferred locations/Views would attract service tax or how much would be the service tax for other aspects such as apartment maintenance etc.  Let us clearly probe into what this situation would mean to you as a home buyer.

Service Tax is applicable for:

  1. Service Tax is levied on properties and buildings that are under construction.  It is the builders responsibility to pay the service tax to the government and the burden is passed on to the buyer. Any building is deemed complete only after the concerned authorities have issued a ‘completion certificate’ to its builder.
  2. Most buyers tend to book their houses when it is still under construction, viz., before the ‘completion certificate’ is issued to the builder.  Hence, all such amounts paid by the buyer will come under service tax perview. Note: Around 67% of your property price fall under cost of land, materials etc., which do not come under this service tax bracket.  Hence, you are required to pay service tax only against the rest of the 33% of the cost of your property to the builder.
  3. The Service Tax is also levied on any modifications within or outside the complexes, on complexes sold for their preferential location such as houses located at a higher floor or facing amenities such as lakes, swimming pool or a particular direction.  Following are the other amenities for which the service tax is levied for:
    1. Extra amount you would be paying the builder for availing such amenities.
    2. Costs incurred via additional developments done by the builder within the complex such as roads within the complex, landscaping or pavements etc.
  4. Maintenance charges, collected by Apartment Owners Association (on a monthly basis) from the owners of the apartments, if above a threshold attract service tax. As per the Union Budget 2010, service tax is applicable against a threshold of Rs.3000/month/member paid as maintenance charges by an apartment owner.  This service charge threshold has however been increased to Rs.5000/month/member.

Service Tax is exempted under the following situations:

  1. If you have paid the entire amount for your property to the builder after he has obtained the ‘completion certificate’.  However such cases are very rare because most buyers pay the entire amount before the ‘completion certificate’ is obtained by the builder.
  2. Service tax is not applicable to resale properties because, they would have already obtained the ‘completion certificate’.
  3. It has been quite positively stated in the budget that you are not required to pay a service tax amount for the parking space you buy.
  4. Service Tax exemption is provided to construction done under the Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaaz Yojana by notification no. 28/2010 dated 22nd June 2010.

There are several more questions that may arise in a home buyer’s mind regarding the service tax paid to the builder. Some of these questions include:

i.      Whether a service tax would be levied for amounts paid after reception of the ‘completion certificate’ by the builder?

ii.      If a buyer withdraws from the scheme, will the Service Tax amount paid be adjusted if the builder refunds an amount paid by the buyer thus far?

iii.      If there is no construction happening for a considerably significant period of time, will the builder refund the ST to the buyer at any point of time? Etc.

These questions are answered in the webpage, http://bit.ly/h7eU0z or http://taxguru.in/service-tax/faq-on-service-tax-on-construction-of-residential-commercial-premises.html.

Case Study – Service Tax on Apartment Purchase

Let us consider a typical example.  Assume that you buy a 1000 sq. feet apartment for Rs.4000 per sq. ft.  Let us also assume that you are paying Rs.100 per sq. ft. extra as a higher floor facility cost in the 7th floor.  Further, assume that you also buy a parking space for Rs.1 lakh.  The total cost of your apartment will be Rs.42 lakhs.  Assuming that you have paid the entire amount to your builder before he obtains his ‘completion certificate’, let us investigate the amount of service tax that the builder would be recovering from you:

  • Rs.1 lakh that you pay for your parking space is not subject to any service tax.
  • However, the amount of Rs.1 lakh that you pay for availing the higher floor amenity is subject to service tax, which comes up to Rs.12,360.
  • Out of rest of the 40 lakhs that you are paying for your apartment, 67% of the amount (Rs.26,80,000) is considered as material, land and other costs.  Hence this amount does not have any service tax levied.
  • A service tax is levied only on the remaining 33% (Rs.13,20,000).  This amounts to Rs.1,63,152.
  • Hence the total service tax that you would have to pay will be Rs.1,63,152 + Rs.12,360 = Rs.1,75,512.
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