Service Tax Liability for Apartment

Hi,

I booked a flat on october 2009 and stil the construction is going on. Due to service tax amendment on last year

budget, we received an intimation from our builder saying that we need to pay the service tax. We have paid

90% of the amount on july 2010 and the remaining 10 % we have paid this year. But the flat handing over is yet

to be done, Most of the works are done, they are waiting for the completion certificate. Our project comes under

workers contract, and it consists of 60 flats.

We appointed a service tax consultant and he clearly told us that we are not liable to pay service tax , we conveyed

the same to the builder. They didnt accept initially but later they asked us to pay the service tax as a caution deposit,

this deposit will be an escrew account means both builder and buyer needs to sign to take the amount from this account. We clearly told them that we are not liable to pay service tax and will not pay the service tax, but builder is not accepting and want us to pay the service tax as a caution deposit. They also appeal to service tax that we are not liable, and if they accept then we will repay the amount to the buyers, or else if they want us to pay then the builder will pay it to the department.

Finally we are in a position to pay it as they are not handing over the key purposefully for paying the service tax. Please guide me on the applicability of service tax and how can we proceed on this.

Thanks

karthik

1. Service Tax on Under Construction Property

It should be noted that the service tax would be levied only on under construction property. A property is considered “under construction” till the builder receives a “completion certificate” from the relevant authorities.

Thus, if an amount for the purchase of a property is paid to the builder before he obtains a completion certificate, it would be subject to service tax. Only if the entire amount for the property purchase is paid after the receipt of a completion certificate, there would be no levy of the service tax.

Abatement allowed

But don’t get too shocked – you won’t pay service tax on the entire amount. 67% of the amount charged by the builder is considered to be cost of land, materials, etc. Only the remaining 33% amount is considered as “service” provided.

Therefore, you would pay 10.3% service tax only on 33% of the amount that you have paid. Thus, the effective rate of tax for you would be about 3.34% of the total amount paid by you.

What does it mean for you?

Most of us buy a house through a home loan. We book the house when the builder launches the scheme or when it is under construction, and make the payments based on the stage of the construction.

Effectively, it means that we make most of the payment before the builder gets the completion certificate! This means that the entire amount paid by us to the builder would be subject to service tax.

Who pays this tax?

It would be naive to assume that the builder would absorb this burden and pay the tax. Of course, the onus of paying this tax is on the builder. So, you would not have to go through the hassle of paying it.

However, ultimately this burden would be transferred to the home buyers in the form of higher price. Thus, its people like you and me who would end up paying this service tax.

Also, this tax would not be applicable to resale properties, as resale properties would essentially have obtained a completion certificate.