Service tax on property purchase and VAT are applicable solely for those properties that are booked when they are under construction. As a result, VAT on property purchase and service tax cannot be imposed on properties that are bought once the completion certification has been obtained by their developers. There is no VAT or service tax for buying resale properties.
Under-construction properties can be sub-divided into three components in terms of costs-
- Land cost- VAT/service tax is not applicable
- Cost of materials- As per the Supreme Court order in the Raheja Development Corporation vs. State of Karnataka case, this is part of the work contract and hence VAT is applicable
- Cost of construction- This takes labor charges into account and this can be a service provided by the developer to the buyer. As a result, service tax is applicable on this final component
The whole value stated in the agreement will not be taken as a service/work contract and as a result, service tax and VAT cannot be imposed on the whole value of the agreement. In case separate records are there for labor charges and material costs, taxes can be payable at current rates. However, since it is difficult to maintain such separate records, there are rules helping for a smoother way for calculation of VAT and service taxes.
As per the law, you can take 30% of the agreement value as the service component and service tax has to be paid on this component. As a result, the service tax comes to around 4.50% (30% of 15%) of the agreement value. Along with the construction cost, service tax also applies on the value of other services entirely including the garage provision, premium payable for higher floors and so on.
VAT is a state subject and several states have diverse laws for VAT. States like Maharashtra provide for VAT payments on the entire agreement value under the composition scheme. The rate under this scheme is 1% of the total agreement value likewise. The developer has the responsibility to deposit service tax and VAT with the Government but the cost is often recovered from the buyers of properties. It ultimately depends on the agreement that is signed between buyers and builders. In case you wish to avoid paying these taxes, make sure that this finds mention in your agreement with your builder.
There are exemptions where service tax does not apply on the building of a single residential unit like an independent villa, house or bungalow. There is no service tax in the affordable housing category and does not hence apply for homes with carpet areas up to 60 sq. metres per home in the housing community/complex. The Delhi High Court had delivered a judgment on the 3rd of June, 2016 where it stated that service tax was not valid on construction contracts where the land was also being transferred due to some technical issues present in the law. Builders cannot thus levy service tax on construction contracts where there is land transfer.