Service Tax And Your Dream House

Revisions in the service tax are expected to bring marginal relief to customers compared to the initial proposal
Siddharth Mehta and Priyajit Ghosh
The Union budget of the current year proposed to bring sale of property by a builder to a buyer within the ever-increasing service tax net. Recently, the Government got the proposal approved by the Lok Sabha with certain ‘relaxation’. So, one wonders what is this new tax apart from the existing stamp duty? When is this tax applicable? What is the new relaxation and whether the price of real-estate would further increase?
Initially, service tax was proposed to be imposed at the effective rate of 3.4 per cent on the sale price of the property in case any part of the price was received by the builder prior to issuance of ‘completion certificate’ by the concerned authorities. No service tax is proposed on sale of a completed property.
Apart from the service tax on basic construction price, various other charges such as preferential location charge or other development charges recovered by the builder were also proposed to be taxed at the general rate of 10.3 per cent.
While the proposals were pending approval of the Parliament , the builders realised various challenges, which were taken up with Finance Minister through their trade association.
The effective rate on the basic price was felt to be high since the amount on which the tax is proposed to be charged includes value of land on which no service tax should be applicable. The customers are already paying stamp duty ranging from 4 per cent to 12 per cent on the entire value of the property.
Further, divergent practices are followed in various states and authorities regarding the stage at which the ‘completion certificates’ are issued, posing challenges regarding uniformity of the levy.
The Finance Minister appears to have taken note of at least some of the issues.
Last week, while seeking approval of the budget pro- posals in the Lok Sabha, the effective tax rate on basic price was proposed to be lowered to 2.58 per cent by increasing the existing rate of deduction allowed for com- putation of service tax from 67 per cent to 75 per cent.
Complete waiver of service tax was proposed for certain low-cost housing projects for the urban poor. The finance minster also gave the assurance that procedural issues around the completion certificate would be simplified.
While this is a welcome step, a section of the real estate players still believe that there exists further room for reduction of the effective tax rate and sorting out other issues, for instance whether service tax would required to be paid in relation to the ongoing projects where at least a part of the sale price has been paid by the customers.
To conclude, while the final law is expected to bring some marginal relief to the customers over the initial proposal, the customers should be prepared to dig deeper into their pockets for their dream house.
Courtesy: HT Estate Dtd:-15-05-2010
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