Service tax
Service tax is payable on services provided by the service provider. The service provider collects the tax from the consumer and deposits the same to the government. It is applicable to all the services except for those mentioned in the Negative List of services.
The current rate of service tax is 12%. Education cess and senior and higher education tax is calculated on top of the service tax rate and it makes effective the service tax stands at 12.36%.
Therefore, Service Tax on Flats less than 2000 sq ft or less than Rs. 1 Crore - 3.09%
Service Tax on Flats more than 2000 sq ft or exceeding Rs. 1 Crore - 3.71%
How to calculate service tax on under construction property ?
When you buy a house, you pay for two components:
- Value of land
- Construction offered by the developer (service provider)
Service tax is payable only in case of construction services and not on the value of land. In cases where it becomes difficult to ascertain cost of immovable property and service cost separately, government has come up with the provision of abatement scheme where an amount is levied on the total amount.
Abatement scheme
Earlier an abatement of 75% had been allowed by the government and service tax was levied on only 25% of the total purchase price (including value of land). Hence, service tax of 12.36% is levied on 25% of the total cost of purchasing an under construction property. It means that a service tax of 3.09% is levied on the total cost.
However, in budget 2013, abatement has been reduced from 75% to 70% in case of flats above 2000 sq ft in size and costing Rs 1 crore and above. It means that in case of flats seized above 2000 sq ft and costing above Rs 1 crore, service tax of 3.71% would be levied.
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 thisNotification No. 25/2012-Service Tax dated 20th June 2012, Exemption fromService Tax on Under Construction Property is available in circumstances pertaining to services provided in the following cases:-
- Construction of a Single Residential Unit*
- 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:-
- Value of Land
- 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. ofEducation 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 perNotification 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:-
- Cenvat Credit on inputs used for providing the service has not been availed
- 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.
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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