We often see the service tax figure on the demand letters sent by the builder on an under construction property (as shown in figure below). Many people are unaware of these taxes while negotiating prices of flats with the property owner. At that time all are interested to know only the per square feet rate only. However these taxes are extra charges involve in buying an under construction property. Please note that there is no service tax levied in buying/selling of ‘constructed property’. Therefore it is necessary to know and understand how to calculate service tax on under construction property. This will help in arranging required money for the property or deciding home loan amount while going for Home loan on the property.
At first have a look on the demand letters sent by builders where the service tax values are indicated. If you are able to see the service tax value and the ‘demanded amount’ and try to figure out the S.T % value then, you will notice that the service tax value is changing from previous dates to later dates. This is because the government has announced the rate change and the builder consequently asking S.T on those rates. This will increase the cost of home during the period of construction. Therefore it is important to understand the how service tax calculation goes for under construction property.
Who Collects Service Tax on Under Construction Property
Construction of residential building, complexes and civil structures are considered as declared services in India, these services are liable for service taxes. Service taxes are payable by the service provider to the Govt. of India, i.e Service tax is collected by central Govt. Service provider transfer the burden of these taxes on buyer’s head, therefore during each demand of payment they add the service charges with the demanded amount. Many buyers feel irritated to see the extra amount. But as per finance act of Govt. of India it is mandatory to pay the service tax. The rate of these taxes may changes as per the budget announcement every year. Therefore this part (taxes) of total Property cost is variable and may change during the payment schedule of your property.
Calculation of Service Tax with Effect 1st June 2016
Service tax is calculated on the total value of construction services provided by the service provider. For an under construction building it is considered that 30% of total property cost comes under construction services and 70 % is labour and material cost. In terms of tax law and current ruling it is said that 70% abatement is allowed on under construction property.
Now as on 1st June 2016, the rate of service tax is increased to 15%. Therefore the service tax is 15% of service cost of construction, and 70% abatement is allowed on under construction property, which implies service tax on construction is 15% of 30 % of total cost i.e 4.5% of the property cost.
For Example, suppose the demand on a particular schedule payment is Rs. 250000. The Service tax rate as per finance Act is 15% and the abatement allowed is 70% , then the service tax payable is 15 x 0.30=4.5% of the demand amount i.e Rs.11250.
The Govt. may change the service tax rate and the abatement allowed on under construction property as per the finance Act at that time. Earlier the service tax was 14%, then from 15th Nov 2015,Central Govt. decided to impose a Swach Bharat Cess (SBC) of 0.5% on all taxable services in India. Therefore the service tax becomes 14.5%. Govt. also reduced the abatement allowed on under construction property from 75% to 70% from 1st April 2016. Therefore the construction services becomes 30% of total property cost. Later a Krishi Kalyan Cess of 0.5% is imposed on the services with effect from 1st June 2016, which increased the service tax rate to 15%.
Service tax on under construction property before 15th Nov 2015= @3.5% [14% x 25%]
Service tax on under construction property after 15th Nov 2015= @3.625% [14.5% x 25%]
Service tax on under construction property after 1st April 2016= @4.35% [14.5% x 30%]
Service tax on under construction property after 1st June firstname.lastname@example.org% [15% x 30%]
Since for under construction property the payment schedule is agreed by the buyer and seller in the beginning itself, and the payments are made accordingly. Therefore the taxes are calculated for each payment as per the prevailing tax law at that time.