Costs rise from today for buyers of under-construction properties due to the imposition of a service tax on builders.
Last week, the Central Board of Excise and Customs notified that a service tax of 10 per cent would be levied on the gross value of a housing property under construction from July 1. Only properties built under the Jawaharlal Nehru National Urban Renewal Mission and the Rajiv Awaas Yojana would not be taxed.
Earlier, the abatement for housing properties was 67 per cent (meaning, the tax used to be imposed on the remaining 33 per cent of the cost). However, the service tax was imposed on the contractor, not the builder, so the buyer didn’t come into the picture. Now, it is the builder who will have to pay, and the abatement has been made 75 per cent for single-agreement purchases (land and cost of construction combined) and 67 per cent on the cost of construction for dual agreement ones (the two separated).
Pass-on effect
Developers say they will pass on the service tax burden to buyers. “Buyers have to bear this additional cost to be levied. Though the effect is marginal, the purchasing power of buyers will come down with this,” said Abhisheck Lodha, managing director, Lodha Developers.
To explain, in cities like Mumbai, the buyer can sign an agreement inclusive of land and construction costs. For example, if you plan to book a property (under construction) worth Rs 50 lakh, you will now be levied 10 per cent service tax on 25 per cent of the gross value of the property, that is, on Rs 12.50 lakh. The tax: Rs 1.25 lakh.
However, the rate of taxation is slightly lower in case the builder-buyer duo get into two different agreements – one each for land and construction. “If the land cost is recovered separately, the abatement will be 67 per cent, that is, the service tax will be levied on the remaining 33 per cent,” said advocate Shailesh Sheth. And, 10 per cent rate will be applicable.
CA Kashish Mittal
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