When are Service tax and VATs levied on the Property?
May 17, 2017 Legal Guidance
Properties that are booked while under construction can only be charged for the service tax and VAT. These taxes cannot be levied on the properties for which the builder has already obtained a completion certificate. Service tax and VAT are not levied for the properties which are resold.
Under construction property can be charged only for the properties under construction.
The under construction property can be divided into three parts;
1. The cost of land:
Neither service tax nor VAT is applicable for this.
2. The cost of materials:
According to Supreme Court’s decision, the cost of materials is under the cost of construction. Hence, VAT is levied on it.
3. Construction cost:
Since construction incurs a huge labour cost. Hence, both service tax and VAT is levied on it.
Since the property contract cannot be treated as a whole work contract, therefore, service tax and vat cannot be levied on the whole contract. But if the separate data is maintained regarding the services and other costs then it can be levied on those expenses. Though it is difficult to maintain a separate record for the same, rules are provided to calculate these taxes.
The law allows you to opt for 30 percent of the value of the agreement as a service component and the service tax is payable on that portion. Hence, the service tax comes around 4.5 percent of the agreement value. Service taxes are also applicable for services like parking, property on the higher floor etc.
VATs are different in every state based on the cost of raw materials.
The agreement of paying VAT is between the builder and the buyer. Generally, a builder is supposed to pay the service tax and VAT and they incur the same cost from the buyer by adding it to the cost. If the buyer does not want to pay for VAT and service tax, make sure it is mentioned in the agreement with the builder.
There are few exemptions to the service tax. The service tax cannot be levied on the independent property under construction like and independent house or bungalow. Service tax is not applicable for the property under affordable segment; hence it is not applicable for the properties smaller that 60 sq. ft. VATs vary from state to state and so does its application and exemption.
As for now according to the law passed by the Delhi High Court on June 3rd 2016, the builder cannot charge service tax for the properties under construction with the transfer of land.
Under construction property can be charged only for the properties under construction.
The under construction property can be divided into three parts;
1. The cost of land:
Neither service tax nor VAT is applicable for this.
2. The cost of materials:
According to Supreme Court’s decision, the cost of materials is under the cost of construction. Hence, VAT is levied on it.
3. Construction cost:
Since construction incurs a huge labour cost. Hence, both service tax and VAT is levied on it.
Since the property contract cannot be treated as a whole work contract, therefore, service tax and vat cannot be levied on the whole contract. But if the separate data is maintained regarding the services and other costs then it can be levied on those expenses. Though it is difficult to maintain a separate record for the same, rules are provided to calculate these taxes.
The law allows you to opt for 30 percent of the value of the agreement as a service component and the service tax is payable on that portion. Hence, the service tax comes around 4.5 percent of the agreement value. Service taxes are also applicable for services like parking, property on the higher floor etc.
VATs are different in every state based on the cost of raw materials.
The agreement of paying VAT is between the builder and the buyer. Generally, a builder is supposed to pay the service tax and VAT and they incur the same cost from the buyer by adding it to the cost. If the buyer does not want to pay for VAT and service tax, make sure it is mentioned in the agreement with the builder.
There are few exemptions to the service tax. The service tax cannot be levied on the independent property under construction like and independent house or bungalow. Service tax is not applicable for the property under affordable segment; hence it is not applicable for the properties smaller that 60 sq. ft. VATs vary from state to state and so does its application and exemption.
As for now according to the law passed by the Delhi High Court on June 3rd 2016, the builder cannot charge service tax for the properties under construction with the transfer of land.
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