Service tax and VAT are applicable, only on properties that are booked at under-construction stages. So, both these taxes cannot be levied on properties that are purchased, after the builder has obtained its completion certificate. Similarly, there is no service tax or VAT for completed properties that are purchased under resale.
Applicability of service tax and VAT On Property
An under-construction property can be divided into three parts, vis-à-vis its cost components. The first part is the cost of the land, on which neither VAT nor service tax is applicable. The second part is the cost of materials. According to the Supreme Court’s decision, in the case of Raheja Development Corporation vs the State of Karnataka, this can be deemed a part of the work contract and thus, is liable for VAT. The third part is the cost of construction, which largely involves labour charges and can be treated as a service that is rendered by the builder to the purchaser. Therefore, service tax can be levied on this component.
Basis of computation
As the entire value mentioned in the agreement cannot be treated as a work contract or services provided by the builder, therefore, VAT and service tax cannot be levied on the entire value of the agreement. If separate records are maintained, for material and labour charges, the tax at applicable rates can be paid. However, as it is not easy to maintain separate records, the rules provide a rational basis to calculate these taxes.
The law allows you to opt for 30% of the value of the agreement as the service component, and pay the service tax on that portion. Hence, the levy of service tax effectively comes to 4.50% (i.e., 30% of 15%) of the agreement value. In addition to the cost of construction, service tax is also applicable on the entire value of other services, such as the provision of the garage, premium for higher floors, etc.
Since VAT is a state subject, various states have their own laws for levying VAT. To overcome the difficulty in ascertaining the exact cost of materials in the agreement amount, states like Maharashtra provide for the payment of VAT on the entire value of the agreement, under a ‘composition scheme’. In Maharashtra, the rate of VAT under this composition scheme, is 1% of the total agreement value.
Who is liable to pay these taxes?
Although it is the responsibility of the builder to deposit the VAT and service tax with the government, builders often recover the cost from buyers. It ultimately depends on what the agreement between builder and the buyer provides. If you wish to avoid paying VAT and service tax, please ensure that the same is mentioned in your agreement with the builder.
Service tax is not applicable on the construction of a single residential unit – i.e. an independent house, villa or bungalow. Moreover, there is no service tax on the affordable housing segment. Hence, it is not applicable for housing with a carpet area of up to 60 sq metres per house in the housing complex. As the VAT depends on states’ laws, its application and exemption also vary from state to state.
Impact of a recent Delhi High Court judgement
The Delhi High Court, in a judgement delivered on June 3, 2016, held that the levy of service tax on construction contracts where land is also being transferred is not valid, in view of some technical infirmities in the law. The government is expected to move to the Supreme Court, as well as correct the legislative infirmity, so as to ensure that the service tax levy stays. As of now, the law as declared by the Delhi High Court, is that the builders cannot levy service tax on under-construction property with the transfer of land.
(The author is a taxation and home finance expert, with 30 years’ experience)